A report by the African Development Bank suggests that private commercial banks like the First National Bank, Barclays and Standard Chartered are more operationally efficient than the state owned National Development Bank and the Botswana Building Society. However, says the report, even the commercial banks are not operating at maximum efficiency.
“In Africa, there is evidence that, foreign and private owned banks are more efficient than their public counterparts. It is also evident that banks could save from 20 percent to 30 percent of their total cost if they were operating efficiently,” says the African Development Bank (AfDB).
To get an insight into how African banks compare to banks in other regions in terms of efficiency, the researchers used overhead costs as a percentage of total assets as a proxy for operational efficiency. The results showed that operating expenses account for 5.4 percent of total assets in sub-Saharan Africa, whereas in North Africa, they account for 1.7 percent, close to the overhead cost of OECD countries of 1.5 percent.
“There is little variation in efficiency among the other sub-regions where overhead costs hovers close to six percent of total assets, higher than in Latin America and the Caribbean (4%) and low-income groups excluding Africa (4.7%). Another ratio of efficiency measure is the cost-to-income ratio. A lower value is generally associated with a more efficient business model. Using this measure of efficiency, the researchers observed that, on average, West African banks are relatively less efficient. Banks in the region spend slightly more to generate extra income relative to those in other sub regions. The average cost-to-income ratio for the West African region is 61 percent compared with a low of 48 percent for North Africa.
While the researchers could not pinpoint clear evidence of the factors that drive banking efficiency, they speculate that the excess operating cost of banks in sub-Saharan Africa (in West Africa in particular) could partly be the result of external factors unrelated to banking structures.
“In regions where business regulations and procedures are inefficient, banks incur substantial day-to-day operational expenses. Sub-Sahara African banks, like other non-banking institutions, have to deal with inefficient overall business environment and legal institutions, and relatively weak public infrastructures such as irregularities in electricity,” says AfDB mentioning an endemic problem in Botswana.
According to the 2015/2016 edition of the Rand Merchant Bank’s ‘Where to Invest in Africa’ report, electricity outages in Botswana average 10.3 hours a month. Botswana also comes out very badly in the latest Global Competitiveness Report where it placed 127th and scored 2.4. These figures were calculated on the basis of how respondents (Botswana businesspeople) answered the question: “In your country, how would you assess the reliability of the electricity supply (lack of interruptions and lack of voltage fluctuations)? On a scale where 1 represented “not reliable at all” and 7 “extremely reliable”, the country scored 2.4.
In the AfDB study, the researchers considered the relationship between banks overhead costs and the time required to obtain electricity, used as a proxy for the business environment in which banks operate. They observed a positive correlation between the average overhead costs and the time to obtain electricity within Sub Saharan Africa and its sub regions.
“It is not surprising that even in South Africa, where the financial sector and the banking system are relatively more matured than in the rest of the region, overhead costs over total assets are high and not substantially different from what prevails in East African region,” the bank says.