G7 bankers complain about QE destroying net interest margins. They should try a spell in a frontier market where sovereign borrowing may be deterring depositors, writes Brian Caplen.

Top-tier banks in frontier markets are some of the best-managed in the world – they have to be. As well as macroeconomic and political challenges, they may have to work with currencies that are not fully convertible, yield curves that are only partially formed and governments that tap the markets so generously that banks cannot compete for savers.

Kenya, Nigeria and Egypt are all markets where government paper has recently yielded more than deposit rates and in Kenya the gap has been as wide as 15%, according to investment bank Exotix Capital, which specialises in emerging markets. The risk for Kenyan banks is that savers put funds directly into government paper while doing their transactions on alternative platforms such as MPesa, and so have no need of a bank.

But there is an upside to all this. It makes the top banks in these markets that survive all the challenges very attractive to investors. Exotix CEO Duncan Wales says: “Top banks in emerging markets that have critical mass, good quality management and infrastructure are highly attractive. In some respects they don’t have it as easy as banks in developed countries – government policy and currency issues can be a challenge – but coping with complexity makes them resilient.” 

Equity Bank in Kenya, Zenith and GT Bank in Nigeria, and CIB in Egypt are all examples of banks thriving despite – or maybe because of – the tough environments in which they operate.

CEOs of emerging market banks often start their careers in international banks to gain broad experience. Maybe it’s time the traffic also went the other way, with G7 CEOs spending time in Africa to learn about the challenges of operating there. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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