Equity Analysis /

Digital Banking: Best growth prospects are in Uganda, Tanzania, Bangladesh

  • We survey the digital banking landscape in frontier and small EM

  • Mutually beneficial coexistence with mobile money is possible

  • Digital banking (including mobile money) already accounts for 46% of transaction value for customer-driven transactions

Rahul Shah
Rahul Shah

Head of Financials Equity Research

Nkemdilim Nwadialor
Rohit Kumar
Tellimer Research
13 May 2019
Published by

We survey the digital banking landscape in frontier and small EM: Kenya and Zimbabwe banks appear to provide the most sophisticated digital banking offerings, while Pakistan and Sri Lanka currently lag. Looking ahead, we think Uganda, Tanzania, Bangladesh and Pakistan have strongest growth potential. In these markets, digital infrastructure (such as mobile phone and internet penetration) is strong, cash remains an important transaction medium and digital banking penetration is low. We highlight SBU UG, NMB TZ, BRAC BD, and UBL PA as providing good exposure to rising digital banking penetration in these markets.

We examine four key top-down determinants of digital banking growth: Existing digital banking penetration, digital infrastructure, traditional banking penetration and cash usage (Table 1). We use the data to help rank our covered markets in terms of future growth potential: Uganda, Tanzania, Bangladesh and Pakistan score most highly on this basis.

Digital banking (including mobile money) already accounts for 46% of transaction value for customer-driven transactions; the remainder are still principally paper-based, branch-oriented transactions. However, there is a wide spread in values across our universe; 90% of transaction value in Zimbabwe is processed electronically, compared with only 19% in Bangladesh. 

There are four main ways digital banking can generate value: While the initial impact can be negative, as low-cost electronic banking cannibalises traditional fee streams, the experience in the most advanced markets (e.g. Kenya) suggests a more positive longer-term story. Firstly, operating efficiency can be improved, as the need for human intervention and physical infrastructure (branches, ATMs, call centres) is reduced. Secondly, transaction volumes tend to increase (due to lower unit costs and greater convenience), which can help drive fee income. Digitalisation also contributes to greater financial inclusion, which can increase the availability of cheap deposits. Lastly, digital banking can support greater customer engagement, boosting customer retention and cross-sell rates.

Mutually beneficial coexistence with mobile money is possible. The experience in Kenya and Zimbabwe suggests that mobile money (dominated by telcos) and digital banking can co-exist; both are still primarily taking market share from cash-based transactions rather than each other. Ultimately, however, an end-game scenario is likely to play out. To help maximise scale/network benefits, industry players are likely to keep fees low and invest heavily in customer acquisition/product enhancements. 

Top stock picks: Among our larger cap coverage, we prefer KNCB KN (strong retail franchise, sector-leading technology adaptation), MBB VN (strong margins and asset quality), UBL PA (strong medium-term earnings growth, branchless banking leader) and ZENITH NL (healthy capital ratios, rising technology adoption). Small cap names we favour include BRAC BD (superior corporate governance, strong balance sheet, market-leading mobile money platform), CIEB EY (above average margins and strong retail franchise), GCB GN (high loan growth, expected synergies from recent mergers) and HNB SL (superior margins and asset quality).