WHAT DO BANKS DO?
Fundamentally, banks allow consumers to save their money and lend money to those who need it and can pay it back. Many people save some of their income because it provides security if the future is uncertain or they may be saving it for their children. Consumers have an incentive to save their money in a bank account, rather than keep it at home, because banks pay an interest rate. Paying interest means that a percentage of your money kept in the bank will be added on in a year’s time.
For example, if you save $100 in the bank, an interest rate of 5% would mean that the next year you can take out $105. Keeping your money at home would keep the amount at $100.
So, what does the bank do with your money?
The bank then lends it to people who need it and they believe can pay it back. When someone applies for a loan, banks ask many questions about their current level of wealth and income and predicted future income to determine whether the person can pay it back. This process is very important because if many of the banks loans are not repaid, the bank makes a loss and cannot function anymore so the economy cannot benefit from their activity.
The most important loans benefitting the economy are to companies who apply for loans so that they can invest. This investment grows their company so that they can produce more goods and services. If many loans are given to companies, there can be many investments made boosting the economy overall.
Therefore, when banks function properly and lend to the right people, it benefits the consumer who increases their wealth from interest rates. It benefits companies who can access money to borrow and invest. Finally, it benefits the whole economy as money is being allocated in areas of the economy which can increase output.
HOW IS BANKING LIKELY TO GROW IN AFRICA
The use of banks has been relatively low in Africa compared to the rest of the world but is growing slowly. This growth is likely to be for two main reasons. First, there has been much heavier investment recently in the financial sector overall. Second, incomes are growing in Africa meaning that there is more disposable income to save. However, the growth of banks is still relatively slow in Africa compared to the rest of the financial sector growth.
One area that financial services is growing very successfully in Africa is in mobile payments. The ability to send money between phones is convenient for customers and has been established in Africa for many years with 68% of Kenyans making a mobile payment in 2012. Digital payment companies such as Interswitch in Nigeria and M-Pesa in Kenya have been providing their service very successfully.
Banks are likely to follow this trend and focus on releasing digital mobile banking services. For example, Standard Chartered released an online banking platform in 2016 targeting countries like Nigeria, Ghana, and Kenya. If commercial banks can grow in the same way as mobile payment in Africa, and if they can operate successfully lending to profitable, thriving companies, it is likely to improve the economy overall.