East African banks need robust IT infrastructure

September 8, 2013

Banks in the East Africa are experiencing significant growth of business and according to international rating agencies, region’s banks are some of the most robust in sub Saharan Africa. However, despite the huge potential growth ahead, banks and other financial institutions in the five member states of East African Community’s that include Kenya, Tanzania, Uganda, Rwanda and Burundi have failed to keep up with the development in information technology and are risking losing market shares to more technologically adept foreign controlled competitors. Although the amount of IT spending by banks and financial institutions in Uganda, Kenya and Tanzania is commendable, it is not yet at par with Nigeria and South Africa peers and they lack an innovative edge worth a mention. Estimated amount of cumulative spending for new IT equipment among East African banks and financial institutions is expected to hit $1.2 billion this year, out of total IT budget of between $4.5 billion. It is very clear banks and other financial firms have done very little in coming up with new or innovative ideas. Multiple researches have shown that everybody is doing the same thing from Kenya, to Tanzania, from Burundi to Uganda and Rwanda.

International ratings agencies have recently said that incase of an economic slowdown in the East Africa, it will weigh heavily on the regional banks’ operating environment and is likely to damage their credit profiles to any great extent. At the moment, the key reason for the credit resilience is that most major banks now have very low net open positions on their foreign-currency loans. The low level of East African banks unhedged foreign currency exposure limits the potential risk of capital impairment from respective local currencies. Lenders in East Africa are in dire need for better application of technology to enable them better engage with consumers and deliver products that are accurately targeted at the huge number of the unbanked population said to be close to 70% of the adult population in the region. East Africa’s financial institutions are as good as any other institution in Africa and rock solid fundamentals but that has made them “idea and innovation importers” effectively making them copycats.

A research conducted by an international firm revealed that duplication of banking services and products in the region is second to none in the world. Hardly can one differentiate banking products in Uganda with those in Kenya or Tanzania. Another big problem is that none of the East African banks have a dynamic data repository from which information can be extracted to identify and know everything about the consumers. The region’s money institutions are at risk of losing their share to foreign players that have more dynamic model of IT infrastructure that can be deployed anytime and anywhere in the five countries that make up East African Community. Another reason why banks and financial institutions in the region need to embrace alternative revenue avenues is the latest Statistics that indicated earnings and asset quality in East African banks are bound to come under pressure as some country faces their slowest rate of economic expansion since the global economy recession crisis five years ago.

A higher cost of funds and lower loan demand should hold back profit growth and more loans could turn sour from decelerating activity, lower commodity prices, a weaker local currencies and higher interest rates that were witnessed in 2011-2012 in Uganda, Kenya and Tanzania. The resulting increase in loan loss provisioning could weigh further on profitability and this is the reason why coming up with innovative and cutting edge solutions will cushion the region’s banks from losses. Me think technology application is the best way for East African banks and financial organizations to gain access to the next generation of consumers in a regional block of 135 million and where only less a quarter have formal banking access. For East African Community, the idea is to create quality growth and to ensure that quality of growth, there is no doubt implementation of robust payment systems is an important factor in supporting financial and monetary system stability in the region. I strongly believe that technology application can help the payment system run more efficiently and provide security to financial transactions. At the moment, there are few if any financial and banking institutions that standout as leading examples.

Contador Harrison