Law firm Baker McKenzie’s global transactions forecast predicts that the value of financial sector mergers and acquisitions (M&A) in Africa and the Middle East will drop to $9-billion in 2018, down sharply from $29.5-billion in 2017.

The forecast, compiled in association with Oxford Economics and published on Wednesday, shows that 2017’s higher deal value was the result of one megadeal – the $14-billion merger of the National Bank of Abu Dhabi and First Gulf Bank – that inflated the year’s total.

Deal activity in the financial sector is expected to rise again to $10.3-billion in 2019, before dropping to $6.6-billion in 2020.

“The decrease in M&A in the financial services sector in Africa is mainly owing to economic and political instability, a lack of diversification, the risk of corruption and generally poor business climates across the region,” said Baker McKenzie financial industry group head Wildu du Plessis.

He added that the willingness and ability of governments in Africa to reform legislation, so that it is more investor friendly, is key to future growth in the sector.

Additionally, 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 information technology (IT) systems and find new ways to grow their customer bases.

Globally, the forecast anticipated that M&A values in the financial sector will rise to $616-billion in 2018, up 25% from $462-billion in 2017. The forecast also showed that ultralow 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.

TECH SOLUTION

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,” Du Plessis pointed out.

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.

Baker McKenzie financial institutions group global chairperson Jeremy Pitts commented that legacy IT systems constrain the ability of incumbent banks to innovate as these systems are incompatible with the demands of artificial intelligence and big data.

“New entrants have a serious advantage, so alliances between incumbent banks and fintech start-ups are often the best solution,” he added.

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.

Baker McKenzie’s 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.

“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 concluded.