By Dipo Olowookere
A new report has warned that the financial sector M&A in Africa and the Middle East will experience a drop of about 69.5 percent in 2018 to $9 billion from $29.5 billion recorded in 2017.
The report, conducted by Baker McKenzie’s Global Transactions Forecast in conjunction with Oxford Economics, explained that the higher amount in 2017 was the result of one megadeal that inflated 2017’s deal total: the $14 billion merger of the National Bank of Abu Dhabi and First Gulf Bank.
In 2019, the Forecast predicts deal activity in the region’s financial sector to increase slightly to $10.3 billion before dropping to $6.6 billion in 2020.
According to the Head of the Financial Industry Group at Baker McKenzie in Johannesburg, Mr Wildu du Plessis, “The decrease in M&A in the financial services sector in Africa is due mainly to economic and political instability, a lack of diversification, the risk of corruption and generally poor business climates across the region.”
He explained further that, “The willingness and ability of governments to reform their legislation so that it is more investor friendly, and to deal with bloated fiscal balances, is key to future growth in sector.
“In addition, growth in financial services in Africa is dependent on investment in technology and innovation as financial services organisations such as banks and insurance companies look to upgrade their IT systems and find news way to grow their customer bases.”
Globally, the Forecast anticipates that M&A values in the financial sector will rise to $616 billion in 2018, up 25 percent from $462 billion in 2017.
The Forecast shows that ultra-low interest rates, tech enabled disruption and regulatory pressure, all of which have squeezed profitability and increased costs, have created an environment which will drive M&A activity across the global financial sector throughout 2018 and beyond, Baker McKenzie said in an emailed statement to Business Post on Wednesday.
One recurring theme across banks, insurers and asset managers is the challenge of upgrading legacy systems designed for the age before artificial intelligence and machine learning, and before the tech titans based in Silicon Valley and increasingly China were targeting profitable financial services products using state-of-the-art digital technology.
Part of the solution to this challenge will come from fintechs, which bring their expertise in digital customer experience and new tech solutions that enable the incumbents to tackle old problems such as payment methods and swift product recognition matched to client needs.
Most established financial institutions are fully aware of the enormity of the task of developing these upgrades internally, preferring to acquire or partner with fintechs as a means of survival.
“Legacy IT systems constrain the ability of incumbent banks to innovate as these system are incompatible with the demands of artificial intelligence and big data,” says Jeremy Pitts, global chair of Baker McKenzie’s Financial Institutions Group. “New entrants have a serious advantage, so alliances between incumbent banks and fintech start-ups are often the best solution.”
“The same demand for technology innovation and the upgrading of legacy IT systems is driving deal activity in the financial sector in Africa. However, the opportunities presented by the rapidly developing financial services sector are driving outbound, and not inbound, investment. Our recent Technology Sector Forecast showed that the growing need for technology innovation in the financial sector in Africa has seen domestic banks make significant investments in offshore technology companies,” notes du Plessis.
“The expanding middle class in Africa also presents many opportunities for growth in the financial sector. Increased access to mobile and online banking, as well as the development of fintech, has meant that previously unbanked and uninsured populations on the continent are now able to access financial products and services.
“The vast potential for future growth is spurring the financial sector’s investment in technology companies. This increasing demand will most likely lead to solid growth in the sector beyond the next few years,” du Plessis adds.
Adedapo Adesanya