The British bank Barclays has had operations in parts of Africa for a century.
The UK lender has a 62.3 per cent share in its African operations — 1,267 branches across 12 African countries, including Kenya, Ghana, Tanzania, Mozambique and Uganda. Barclays Africa is the entity that controls these operations, and it holds a 68.5 per cent stake in Barclays Bank of Kenya (BBK).
As the UK banking giant revealed an after-tax loss of $549 million (Sh55.6 billion), its CEO, Jes Staley, confirmed the pending sale of its stake in Barclays Africa. The sale, subject to shareholder and regulatory approval, would reduce its interest in Barclays Africa to a non-controlling, non-consolidated position over the next two to three years.
Mr Staley, who took office in December, hinted that the lender would be looking to concentrate on its core operations in the US and UK.
The chief executive also announced plans to increase the bank’s investment in education and skills development across Africa.
Barclays employs 42,000 people across Africa. Its largest Africa unit is in South Africa, but the lender also has a substantial presence in East Africa, with 769,000 customers in Kenya (its second-largest Africa market), 561,000 in Tanzania and 136,000 in Uganda.
So what does a sale imply for the banking sector and for Africa as an investment destination?
To understand this, we need to know that while strategy reflects more on barriers to entry, there are equally tough barriers to exit. In fact, there is a close relationship between exit and entry barriers, and depending on the industry, exit barriers may be more punitive than entry ones.
Take, for instance, the barriers of exit in a legal marriage. They tend to be more punitive than entry ones — assuming there are any. One Facebook post put it this way: “A wedding ring is the smallest handcuff ever made ... So think deeply, choose your prison mate carefully and sentence yourself wisely to avoid a prison break.”
Barriers to exit
This analogy demonstrates why companies need to contemplate their exit strategy just as much as their entry.
So what are the barriers to exit?
These are the obstacles in the path of a firm that wants to leave a given market or industrial sector, country or region, like Africa for Barclays.
These obstacles often carry a financial cost, which may prohibit a firm from exiting, and include the following.
1. High investment in non-transferable fixed assets. This is particularly common for manufacturing companies that invest heavily in capital equipment specific to one task.
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2. High redundancy costs. If a company has a large number of employees or employees on high salaries or contracts with employees that stipulate high redundancy payments, then the firm may face significant costs if it wishes to leave the market.
3. Other closure costs. These include contract contingencies with suppliers or buyers, and any penalty costs incurred in cutting short tenancy agreements.
4. Potential upturn. Firms may be influenced by the potential of an upturn in their market that may reverse their current financial situation. Consequently, if the barriers of exit are significant, a firm may be forced to continue competing in a market, as the costs of leaving may be higher than those incurred if it stays.
Nevertheless, as more firms are forced to stay in a market, competition increases within that market. This negatively affects all players and may lower profits.
For Barclays to make the decision it has to sell its stake in Africa, the cost of exit is lower than the cost of staying.
In this regard, Barclays’ exit spells good news for the continent — investors will find the African banking sector attractive due to its low exit barriers. This presents a great opportunity for the African economy.
The writer is senior lecturer, strategy and competitiveness, and academic director, MBA programmes, Strathmore University.