(Ecofin Agency) - The wave of mergers and acquisitions in sub-Saharan Africa’s banking sector is set to continue over the next two years, rating agency Moody’s observed in a report issued July 4.

“The number of small banks is declining, while the largest are growing steadily, producing banks with stronger credit profiles. We expect this trend to continue,” according to the agency.

Although the sector is significantly improving in the region, economic growth in Angola, Nigeria and South Africa remains sluggish; a situation that limits growth possibilities for banks.

At the same time, regulatory transformations are taking place in almost all countries and sub-regions of sub-Saharan Africa. Banks are now required to provide more equity capital. However, with markets’ complexity and competition, banks now seek growth through consolidations.

Ghana is one of the countries that experienced acceleration in mergers and acquisitions in the banking sector. From 34 banks previously, the country now has 23 banks as at January 4 this year. Kenya, South Africa, Tanzania and Nigeria also took the path. Such prospects are also expected in the WAEMU, where the process of implementing the Basel II/Basel III rules has begun and is expected to gradually be stricter in terms of minimum capital.

Analysis and strategic consulting firm Finactu, in a report published early January 2019, explained that the capital gap to be mobilized was approaching XOF1,000 billion. And according to experts, this amount will be hard to get. An alternative solution would be the mergers and acquisitions option, which however does not seem to work well in a still weak financial environment.

According to Moody's, mergers will only be positive for the banks that consider this option. “Consolidation is increasing economies of scale and improving income stability due to geographical and product diversification. It is also reducing the number of very small, weak banks, making the aggregate credit profiles of African banking systems more resilient to the challenges in the operating environment.”

Idriss Linge