Baker McKenzie’s Global Transactions Forecast, developed in association with Oxford Economics, predicts that financial sector M&A in Africa and the Middle East will drop to 9 billion USD in 2018, down sharply from 29.5 billion USD in 2017. This higher amount in 2017 was the result of one megadeal that inflated 2017’s deal total: the 14 billion USD 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 will rise slightly to 10.3 billion USD before dropping to 6.6 billion USD in 2020.
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. The willingness and ability of governments to reform their legislation so that it is more investor friendly, and to tackle bloated fiscal balances, is key to future growth in the 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 USD in 2018, up 25% from 462 billion USD 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 that will drive M&A activity across the global financial sector throughout 2018 and beyond.
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.
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.
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. This increasing demand will most likely lead to solid growth in the sector beyond the next few years.