Impact Investing can actually save retail banks in Africa

Banks in Nigeria, Africa’s most populous country,need to look towards developing economic infrastructure in trans-urban areas

In 2017, 15% of Africa’s adult population earned above $5,000 annually. That’s 140 million people above the age of 18 each earning more than N150,000 monthly across 54 countries. This large low-income population adversely affects an already faltering banking system in Africa, particularly noticeable in the top 5 markets that generate about 68% of the total banking revenue pool on the continent; South Africa, Nigeria, Egypt, Angola and Morocco. Coupled with a low credit bureau coverage and a reluctance to invest in the consumer sector shown particularly in the Nigerian space, it is safe to assume that the banking sector in the world’s second largest continent might run into a little trouble in the future.
The silver lining is African retail banks have begun to recognize the need for a sustainable unity between society and business. Hence numerous Corporate Social Responsibility schemes have been inaugurated in the past few years. However, banks can also be doing more to protect their life spans by paying more attention to investment windows.
Impact investment is generally regarded as the act of directing capital towards enterprises that generate social and/or environmental benefits. Many potential investors globally do not recognize the economic benefits behind this activity and when they do, they usually dismiss them under the notions of non-scalability, high risk, low liquidity and a tough exit strategy. However, for African retail banks, impact investing could be the magic wand to make a large low-income population less of an institutional void and as a direct effect, expand their target markets and revenue pools.
Impact investing usually works in two broad categories. Social enterprises are for-profit or nonprofit organizations who prioritise generating positive social impact. Impact-oriented companies,on the other hand, seek market-rate returns on investment using business models that are designed to solve social problems. For an industry with a major focus on returns like retail banking, it is more advisable to identify well-defined offerrings that guarantee not only sustainable financial returns but will also help to eradicate-or at least considerably reduce- income disparity among Africans.
A starting point would be an opportunity to invest in economic infrastructure in trans-urban locations across Nigeria, especially in the South West and the East. Currently, there is a gaping institutional void in trans-urban and rural Nigeria. Office headquarters and branches, manufacturing companies, entertainment establishments and countless other economic organizations are primarily located in metropolitan areas. Hence, the cities attract more human capital from rural and trans-urban locations and continue to grow in population. A good example of this trend is Lagos, Nigeria. These migrants go on to survive on meagre incomes in huge cities where they need twice that amount to simply survive.
Now let’s imagine these people didn’t have to leave their homes because they had all the opportunities that they seek in cities right at their doorsteps. This kind of development would attract human capital out of cities, like Lagos and Ibadan, resulting in a more even population distribution. With lower population density in the urban areas, standard of living will improve in those places. This means the residents will earn more than they used to. The direct effect will be a reduction in cost of living as a result of reduced demand for amenities. They also have more money to spend and invest.The same goes for the residents of the 'refurbished' rural areas. That is definitely good news for retail banks.
Is this idea philantropical? Of course, people will be presented with more opportunities to develop personally and professionally,earn a more decent living and have better lives. Social benefit, check.
Is it profitable? Definitely. The untapped potential in trans-urban locations across Nigeria will yield a staggering amount of profit for investors. Financial returns, also check.
Will more people earn more money? Yes, and they will also have more money to spend. Retail banks 1, large low-income population 0.
It’s an all round win-win.

References

• Mutsa Chironga, Luis Cunha, Hilary De Grandis, and Mayowa Kuyoro, Roaring to life: Growth and Innovation in African retail banking, Mckinsey&Company Global Banking, Feb 2018, mckinsey.org
• Vivek Pandit, and Toshan Tamhane, A closer look at impact investing, Mckinsey Quarterly, Feb 2018, mckinsey.org
• Jonathan Goodall, and Aditya Sanphvi, How Impact Investing can reach the mainstream, McKinsey&Company Sustainability and Resource Productivity, Nov 2016, mckinsey.org

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