McKinsey & Company published its 2023 Global Banking Annual Review which unpacks the shifts in balance sheet, transactions, and distribution that have seen banks shift to capital-light nontraditional institutions and other parts of the market, a shift the consulting company calls the ‘Great Banking Transition’.
Globally, financial institutions are generating the highest profits in more than a decade, resulting in about US $400 trillion in assets and US $6.8 trillion in revenue in 2022. This upturn rosefrom the improvement in net interest margins that boosted the sector’s profits by about US $280 billion in 2022 and lifted return on equity (ROE) to 12 percent in 2022 and an expected 13 percent in 2023, compared with an average of just 9 percent since 2010.
Africa’s banking sector generated $22.3 billion in net profits in 2022, with an average growth of about 8 percent annually since 2021. Africa also outperformed the global trend with ROE of 15 percent recorded in 2022 and 16 percent in 2023, with some African banks amongst the most profitable. Higher interest rates across most of the continent ended years-long trend of margin compression.
Kenya’s banking sector generated around $1.5 billion in profits in 2022 with similar ROE of 19 percent in 2022 and 2023.
A notable aspect of this broader move to a concentration of global banking growth in specific geographic pockets is the dynamism of financial institutions in economies around the Indian Ocean, called the Indo-Crescent region. About 8 percent of global banking assets and 51 percent of the top-performing financial institutions globally can now be found here, including advanced economies, such as Australia and Singapore, and developing markets like Kenya, Mozambique and Tanzania.
“Kenya has become a testing ground for a deeper reinvention of banking. The superior performance is enabled by several factors, including higher GDP and population growth as well as breakthrough disruptions, partnerships, ecosystem plays, and cost-efficient service delivery mode, in part provided by fintechs and telcos” says Carolyne Gathinji, an associate partner in McKinsey’s Nairobi office.
Banking sectors in Asia, Latin America, the Middle East and Africa are growing revenue faster as a whole than those in developed markets, and this trend is expected to continue over the coming years. Kenya has played a big role in this success story.
“Kenya’s banks have already shown their capacity to benefit from the rise of digital technologies. The years ahead will be very exciting for institutions that can reexamine their businesses and identify relative competitive advantages in optimizing their balance sheet given regional scale, facilitating swift transactions, and implementing even lower-cost distribution models,” says Gathinji.
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