African banking: The productivity opportunity

African banks can increase their productivity to enhance competitiveness, build resilience, and deliver new value to customers—even in the face of a tightening global business environment.

In 2022, African banks are showing growth despite significant headwinds, including macroeconomic uncertainty. Revenues have recovered and are now higher than prepandemic levels, driven by sustained volume increases, higher interest rates, and stable risk costs. 1 However, in all African geographies except Kenya, banking return on equity (ROE) still remains one to two percentage points (pp) below pre-COVID-19 levels, despite a strong rebound in 2021 (Exhibit 1).

Banking profitability has decreased by an average of –2.6 percentage points in Africa since 2016.
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Part of the reason for this is that many of the downward pressures on ROE in African banking predate the pandemic. To return to profitability, banks may therefore need to look deeper to address productivity blocks within the sector. In this article, we identify six focus areas where better resource allocation could help turn the corner on productivity and deliver new value to customers.

The declining profitability of African banks is a long-term trend

Since 2016, profitability in Africa’s five biggest banking markets (Egypt, Kenya, Morocco, Nigeria, and South Africa) has been on a steady decline, decreasing by an average of two pp over the past six years. Egypt has experienced the steepest decline (–9.5 pp), followed by South Africa (–2.7 pp). Coming off of a low base, Nigeria is the only major African economy that has seen an increase in banking ROE since 2016 (3.6 pp), driven by a decline in risk costs following Nigeria’s economic reforms following the 2016 recession, a partial recovery of oil prices, early easing of COVID-19 restrictions and Central Bank of Nigeria (CBN) forbearance measures. 2

This downward drift in profitability could be attributed to a fall in net interest income (NII) in a decreasing interest rate environment, and declining fee margins due to increased competition and digitization. Meanwhile, operating costs have stayed constant. For example, in Morocco, average operating costs from 2016 to 2021 remained at around 2.3 percent, but NII declined from 2.0 percent to 1.8 percent, while impairments remained constant at 0.7 percent. This has helped drive down the return on average equity from 9.2 percent in 2016 to 7.1 percent in 2021. 3

ROE increased by 3.5 pp in 2021, compared with 2020, as credit losses were less severe than many banks had made provision for and countries started to rebuild in the wake of the pandemic. 4 However, it is likely that African banks’ profitability challenges are here to stay. McKinsey analysis has shown that banks in most African markets have high cost-to-income (C/I) ratios, along with low banking penetration, compared with benchmark emerging markets in the Middle East, Eastern Europe, Southeast Asia, and Latin America (Exhibit 2). A low C/I ratio is considered to be a strong indicator of profitability potential.

African banks have high cost-to-income ratios compared with emerging market benchmarks.
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African banks are costly to run, with an average cost-to-asset ratio of between 4 and 5 percent, almost twice as high as the global average. 5 At the same time, the economic environment within which many African banks operate, often characterized by lower market maturity in terms of diversification and sophistication, means that the revenue pool is of subaverage scale, especially in a decreasing interest rate environment. This suggests that banks may need to review their cost base and operating models, especially if they want to increase access to the banking system in a cost-efficient manner—a necessary condition for driving much-needed financial inclusion. Around 50 percent of Africa’s population remains unbanked or underbanked. 6

Additional interconnected factors that stand in the way of ROE recovery include the uncertainty of the economic outlook, rising competition from disruptors, increased demand from customers for flexible and digital services, and high capital expenditure requirements to keep up with fast-evolving digital and talent requirements. Banking regulations in each country, especially with regard to capital, are also still evolving, which can create additional considerations for banks and could impact capital, cost, and ultimately ROE. For example, the progressive ramp-up of Basel II, Basel III, and IFRS 9 to strengthen the banking sector may place increasing pressure on capital requirements. IFRS 9, for example, requires that banks hold additional capital to cover their risk portfolio, which could increase the cost of capital and reduce profitability.

Furthermore, necessary measures to strengthen privacy, increase consumer protection, enhance environmental, social, and governance (ESG) implementation, and detect early suspicious activity, such as anti-money laundering, provide banks with a clear opportunity to deliver authentic and differentiated products and services to their clients. However, these shifts could also lead to a rise in back- and middle-office costs associated with tracking and reporting lending activities.

Unlocking the productivity potential: Six impact areas to better allocate banks’ resources

A previous McKinsey analysis suggested that African banks may need to achieve productivity gains of between 25 and 30 percent if they are to restore prepandemic profitability. 7 In many respects, the pandemic and a tightening global economy have already prompted most banks to begin this journey. To help accelerate progress, six productivity streams have been identified that could be considered as part of a holistic response to the productivity opportunity: retail, central and back office, support functions, IT, real estate, and procurement.

If African banks are able to prioritize their productivity in these six areas, they could help optimize their cost base, better allocate financial resources to fuel growth areas, and partially counter ROE erosion. There is also an opportunity to pass on these gains to consumers and assist governments in the drive to advance financial inclusion, which is a priority in many African countries. This would ultimately strengthen their role in rebuilding African economies in the postpandemic era.

Retail: Embracing the ‘phygital’ reality

Global customer interactions in banking grew by 11 percent between 2016 and 2021, driven by mobile; about 70 percent of all bank interactions today are via mobile, with only about 20 percent of customers indicating that they prefer face-to-face contact for dialogue, social, or expertise reasons, and about 30 percent seeking end-to-end integrated experiences that solve all their banking needs. 8

The next technology horizon in banking has become a reality much faster than anticipated. Banks that are leading in this space are developing frequent customer engagement outside of traditional channels, providing customers with ease and convenience and taking advantage of AI for ultra-personalization—which is necessary to compete in cluttered markets—while reducing cost to serve.

International indicators show that as digital markets develop, the gap between best- and worst-performing banks opens up—with digital leaders achieving four times better performance than laggards. 9 For African banking, our analysis finds that digital adoption is between 20 to 30 percent; however, it could be higher. In Latin America and Asia, for example, digital adoption is around 50 percent while in other global markets it is as high as 72 percent. 10 As service and sales in digital channels continue to gain prominence globally alongside the more traditional physical channels, there are two key levers African banks could consider to drive further digital adoption and embrace the “phygital” reality.

As a starting point, traditional banks could reassess their channel strategy and move toward integrated channels, providing a fully blended digital and human experience, with mobile as the “connective tissue.” This is likely to require adjusting the physical footprint of the bank and limiting it to “bank hubs” that focus on advice, sales, and brand experience, hosting voice, video, and in person. For example, a traditional European bank has managed to reduce branch transactions by about 70 percent and now serves around 90 percent of active digital customers and hosts more than 60 percent of advisory meetings remotely.

Second, banks could enhance their B2C offerings by streamlining and digitizing their end-to-end processes to improve operational efficiency. Our analysis shows that this could result in a 25 to 30 percent reduction in journey cost to serve across branches, contact centers, and vendors and operations and enable the redistribution of activities to prioritize customer-facing sales and care. For example, a European bank that went through a tech-enabled transformation of its customer care achieved 25 percent improved productivity, among other key performance indicators, through digitization and adopting AI including cognitive agent, digital assistant, advanced-analytics-driven coaching, robotic process automation (RPA), and identification and verification (ID&V) robot.

To develop their digital channels and drive automation of processes, African banks could focus on four pillars: developing superior technical capabilities and functionalities for their digital channels; developing frictionless registration and recovery processes; driving awareness of digital-channel benefits through effective campaigns tailored to specific microsegments of customers; and adopting a pervasive approach to customer education and support across digital channels (for example, through demos, real-time “webchat” support, and natural-language queries for functionality search) and physical channels (for example, by deploying digital experts across branches). This could be supported with automation of processes and paired with effective employee training in both customer and non-customer-facing positions.

African banks may need to resist the temptation to focus their energies and investments on only the first pillar. In our experience, many banks in emerging markets tend to focus excessively on their capabilities at the early stage of their digital-development journey, while underestimating their competitive position, and fail to tackle gaps in other enablers. The few banks that focus holistically on all pillars and enablers of digital-channel growth are more likely to take a leadership position.

Central and back office: Considering a path to zero operations

Non-client-facing support teams could also benefit from streamlined and simplified processes. At a basic level, banks can take steps to adopt lean ways of working and rationalize processes to save time and costs, while refocusing on more value-adding activities.

One of the key trends shaping the future of central and back office is the hyperdigitization of work. Research suggests that there is more than 50 percent automation potential across selling, general, and administrative (SG&A) functions and 40 to 60 percent cost-savings potential from using automation in these functions. Leading banks are increasingly moving toward zero-based operations with the implementation of automation and digitization across the banking value chain. 11 Despite several years of investment in lean, digital, and automation, McKinsey analysis estimates that a significant part of the banking value chain remains dependent on manual tasks, driving 60 to 70 percent of costs.

Specific steps some banks have adopted include reimagining central and back-office processes as end-to-end digital workflows that enable straight-through processing and eliminate exceptions; using advanced analytics and richer, external data to improve forecasting and inform decisions; leveraging automated AI-driven operations and augmented capabilities; and adopting more agile operating models to deliver a superior service to consumers while driving significant cost reductions.

For example, banks we’ve worked with have successfully leveraged machine learning for fraud prevention, applied Smart Optical Character Recognition (OCR) to extract and replace London Interbank Offered Rate–related data from investment contracts toward complying with changing regulations at scale and at speed. This has led, in some cases, to a 96 percent reduction in processing time. Others have enabled an end-to-end, zero-based redesign of customer order processes, leading to a 50 percent cost reduction through document digitization tech partnerships.

Adopting technology and digitizing operations has additional benefits beyond cost efficiencies, including faster service through a significant reduction in processing time per order and payment, improved quality through prevention of payment-processing errors, and increased employee and customer satisfaction as employees shift their focus to higher customer-facing value-added tasks.

Support functions: Moving from transactional to value-added partner

To increase the effectiveness of support functions, a few strategic priorities could be considered. First, as with other functions, banks could consider adopting lean ways of working as a basic building block. Second, embedding an outward-looking and commercially focused orientation in support functions could help banks anticipate and respond more quickly to a rapidly evolving environment.

Banks could also deploy digital and analytics technologies to generate relevant insights for the business, for example, by identifying the right markers and drivers of sales performance to improve sales force effectiveness; assessing sales drivers to enhance the prediction accuracy and frequency of project revenues to improve resource planning through advanced analytics; identifying critical roles that create the most value and generating more targeted recruiting for those roles; and automating resumé screening to drive yield.

Strong automation, workflow, and data management practices are also key to driving efficiency in the new operating reality. For example, our analysis finds that automating the HR onboarding process could reduce the time to onboard new hires from 30 days to just one day with more than 90 percent of tasks being completely automated. Teams could expedite journal entries and reconciliations and reduce calculation errors through machine learning such as use-of-transaction matching bots and data extraction bots.

Lastly, legacy technology and operating models can be costly to maintain, can slow down decision making, and can blur accountability. African banks may be able to limit these constraints and shift their organizations from siloed structures toward a more cohesive organization made up of customer-journey-aligned, self-managed, and cross-skilled teams and flatter and centralized operations to unlock productivity gains. For example, a European bank that leveraged analytics at scale and developed an aggressive stance toward reporting automation—upgrading reporting and support function capabilities by streamlining and automating production—achieved an €800million impact.

To achieve these kinds of gains, banks could have operations placed into a shared service center, making it easier to determine which activities can be safely outsourced or nearshored to enable scale and optimize efficiency. Another consideration could be improving business agility by using flexible project-based resources that can quickly be redeployed between initiatives to deliver new capabilities and support changing business priorities.

IT: An opportunity to accelerate technology adoption

The accelerated shift toward digital shows how technology has an essential role to play in helping banks deliver improvements across all functions and processes. As such, banks may need to invest in technology in a more intentional way. A McKinsey analysis of financial-sector players in 2020 found that technology-mature banks are spending, on average, twice as much of their IT budget on business improvements, such as transitioning to the cloud and automating the testing environment, than on administrative functions, compared to banks that are not as advanced in their technology journey. This, in turn, enables tech-mature banks to create greater value for consumers. Tech-mature banks are also investing proportionately more in engineering roles with a focus on coding (Exhibit 3).

Tech-mature African banks are investing more in business improvements and coding skills than traditional banks are.
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Getting the basics right here could include incorporating a disciplined projects pipeline and prioritizing IT projects based on a fair assessment of realistic delivery capabilities. This could be achieved by introducing return on investment as a KPI and also putting a hard cap on the possible number of IT inflight projects. Banks could also consider using common functionality, reducing the size of testing environments, and removing multiple testing environments to rationalize the IT environment. A review of existing long-term contracts and converting time and material contracts into managed services could also contribute to productivity gains.

To move to the next level, IT banking departments may want to consider accelerating their migration of applications and infrastructure to the cloud.

To move to the next level, IT banking departments may want to consider accelerating their migration of applications and infrastructure to the cloud. Cloud-enabled technology has now reached a tipping point, and McKinsey analysis indicates that banks could double the productivity of their IT engine by deploying newer-age technology platforms. 12 Additionally, by automating infrastructure deployment and switching to a DevOps model that automates manual tasks and enables the management of complex environments at scale, teams can rapidly and reliably implement and innovate for their customers.

Real estate: Flexibility is the new watchword

The COVID-19 pandemic has transformed the way people live and work and has turned hybrid working into the norm. This provides African banks with an opportunity to rethink their use of physical assets. At a basic level, banks could consider renegotiating branch leases, especially as many African markets continue with an oversupply of professional leases—the pandemic has exacerbated this. At the same time, banks could look to better use low-utilization real-estate assets in their portfolios.

Next-generation ways for banks to drive productivity in this area could include reconsidering their allocation of square meterage among their full-time-equivalent employees. For example, banks could offer employees more workplace flexibility with an opportunity to work from home. Cloud platform migration, among other things, has enabled one European bank to introduce a work-from-home/anywhere policy for its contact center employees. Such shifts in working conditions have the potential to offer employees a better work–life balance, a more tailored employee experience, and could have a positive impact on diversity, equity, and inclusion efforts as well as performance. 13

Procurement: Digital collaboration and advanced analytics

Next-generation procurement improvements could include a focus on the acceleration of automation and digital collaboration. Investing in digital capabilities allows banks to automate processes and create transparency. For example, a “control tower” for the procurement function that captures and shares data could help to drive 100 percent visibility across the organization. This, in turn, could enhance efficiency, leading to shorter cycle times and contributing to tighter controls and compliance scalability with the option for immediate decision making on spend requests. Ultimately, this could help to embed a stronger culture of accountability within the organization.

Digitizing stakeholder management and collaboration could also drive value by improving service levels of the procurement function as well as those of external vendors. For example, payment processes can be automated using AI techniques such as optical character recognition (OCR) and natural-language processing to process vendors’ invoices. The payment process can then be automated with RPA. Leveraging machine learning in addressing external spend leads to lower purchase cost in addition to enhancement of internal operations. Our research suggests that using machine learning in software procurement projects to identify the should-cost and complexity can lead to a 10 to 30 percent reduction in purchase cost and a 60 to 90 percent reduction in schedule slip. Additionally, it can decrease time to market by 5 to 10 percent. Machine learning can also be used to identify levers to improve the cost of cash management across branches and ATMs. Deploying machine learning can help banks determine the optimal levels of cash required in branches and ATMs to minimize the opportunity cost of cash and avoid overstocking or stock-out, improve demand forecasting, and determine the optimal number of shipments required per day. By using machine learning and advanced analytics, one African bank has been able to reduce its average daily cash stock by 26 percent while maintaining other operational costs.

Three enablers to unlock productivity

Across the board, we believe there are three fundamental enablers that can drive these shifts: organizational simplification and a shift toward agility, cultural change, and performance infrastructure.

Organizational simplification and a shift toward agility

Future growth is likely to be inextricably linked to a bank’s ability to adapt quickly to rapid industry changes while putting its customers at the core of its businesses. This would likely require that banks shift their operating model to create faster and more agile structures that allow them to focus their efforts on meeting customer expectations for more digital, seamless, and multiaccess experiences, while providing fast and reliable responses at key touchpoints, such as sales.

An agile structure could also support ongoing transformation, build resilience, and boost innovation. Launching a new product in traditional structures can take several weeks to months and involve at least six different departments before it reaches the market. For example, a new digital product request is likely to first be analyzed by a central project team, then assigned to a business analyst to identify requirements, develop a business case, put the product into the pipeline, and allocate IT resources. In the meantime, product teams could be building pricing models and marketers designing launch campaigns. 14

By contrast, a permanent, small, cross-functional, and agile team consisting of multiple product specialists, a marketer, a customer journey design expert, a data scientist, and several software developers could allow for faster syndication and decision making, more innovation, and increased speed to market. This team could additionally maintain the product after launch, collect customer feedback, improve customer journeys, and aim to improve sales until other strategic priorities emerge.

Several banks have started to organize their teams into tribes like this that consist of a combination of product specialists, customer journey designers, and software developers. These small groups are dedicated to delivering on a shared purpose and customer outcome and are entrusted with the resources, collaboration tools, and approval rights needed to create a high-quality customer experience, especially in the omnichannel environment. 15

Cultural change

The shift toward agile ways of working is likely to require a cultural change across the organization—away from an authoritative and hierarchical structure toward one of empowered teams. Teams may need to be supported to be more accountable for their spend and to move from siloed engagement to strong collaboration, adopting an action-oriented mindset of testing and quickly iterating. This could have added benefits of reducing duplication, increasing employee satisfaction, boosting productivity, and ultimately improving customer experience.

Performance infrastructure

In order to achieve a productivity step-up, banks may need to put in place a solid performance infrastructure. Rigorous performance management infrastructure can serve as a “single source of truth” on progress, impact, and accountabilities through tracking, monitoring, and reporting to create transparency and enable fact-based decision making. To be effective, there may need to be alignment across business units and support units around a common impact tracking methodology and taxonomy to guide the organization toward an aspirational goal. Additionally, performance infrastructure could be digitized to allow for more efficient data management, tracking, and optimizing of the team bandwidth required to achieve productivity gains.


A turnaround is much needed to put African banks on a more positive trajectory in this time of macro uncertainty, and banks already have the building blocks for what is required. Despite delivering challenges to the banking system, the COVID-19 pandemic has also helped push banks to transform their operations and services at an unprecedented rate. Banks have seen what’s possible and understand better where their weaknesses are. Furthermore, the projects, tools, and technologies to move the needle on productivity are available, especially in light of what market leaders have achieved. The remaining question is: Are banking industry leaders ready to seize the opportunity to continue this transformation and give the productivity challenge the management attention it commands?

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