For decades Africa was widely regarded as an economic basket case, bedeviled by government corruption, red tape, dysfunctional social policies, under-investment, lofty debt levels, and widespread poverty. Today, however, Africa is being seen in a far more flattering light: as the only continent in which economic growth is both above-average and accelerating. As a result the former economic basket case is being transformed into a magnet for global capital -- "a hot destination for money," as The Wall Street Journal puts it.

In the past three years Africa’s economy on average has been expanding in a range of 5-6% annually, in line with the emerging nations’ economic growth, in the estimation of UBS Investment Research. In Angola, Sudan, and Equatorial Guinea, the growth rate has been much higher, about 10%.

Although Africa is still an economic lightweight in relative terms (its gross domestic product amounts to less than 4% of the world’s total), it nonetheless has gained considerable heft. Among the catalysts that have contributed to Africa’s growing economic substantiality: soaring demand for its huge cache of commodities, especially from China and India; increased domestic and foreign investment in business and infrastructure; more enlightened government policies (although even the most pro-Africa business analysts concede that much additional progress, especially in human rights, is needed to make the climate for commerce truly hospitable on a broad scale); greater fiscal prudence; and the benign ripple effects from a humming global economy.

All of this has helped to foster a healthy, fast-growing African banking market. (As analysts, we find it refreshing, in light of all the current U.S. financial-services woe resulting from the subprime-mortgage meltdown, to apply the words "fast-growing" and "banking" in the same phrase; lately they have seemed like contradictions in terms.)

African banks in aggregate may grow by more than 20% annually over the next five years, predicts Development Finance International, a business-consulting firm. China, for one, is investing in Africa as an ascending force in banking. In October, Industrial & Commercial Bank of China, China’s biggest bank by market capitalization, acquired a 20% interest in Standard Bank Group, South Africa’s biggest bank, for $5.5 billion. From its export of manufactured goods, China has amassed a fortune in currency reserves (estimated at more than $370 billion) and is now looking to invest that money where it can earn above-average returns.

We think Africa’s banking market may prove a lucrative place for China (and others) to invest for these reasons:

• The earnings of the best banks doing business in Africa have grown at escalating double-digit annual rates in the past three years.
  
  
• In contrast to many Western banks facing a credit crunch, African banks generally have strong capital ratios. The balance sheets of African banks are largely free of the collateralized debt obligations and bad subprime loans -- instruments that have been called today’s "financial weapons of mass destruction" -- plaguing their counterparts in the West. As a result African banks have an opportunity to become more significant players in global banking -- "go-to guys for financial heavyweights the world over," in the words of BusinessWeek.
  
  
• Africa has a rising consumer class that’s using banking services at an unprecedented level. More than 100 million Africans (about 10% of the population) buy goods and services exceeding $2,400 per year, according to UBS. In South Africa, for instance, a growing middle class is driving increases in consumption of about 5% annually.

• South Africa will host the FIFA World Cup soccer championship in 2010, and African banks are helping to finance the multibillion-dollar upgrading and expansion of the country’s infrastructure needed for the event.
  
  
• Corporate banking is benefiting from a steady rise in investments and capital spending, to an amount equivalent to 20% of Africa’s gross domestic product, according to the International Monetary Fund. In South Africa, which has Africa’s most diverse economy, corporate loan growth is increasing more than 30% annually.

As we see it, a financial-transaction-processing firm, Net 1 UEPS Technologies (market capitalization: $1.8 billion), and two banks, Standard Bank Group ($22 billion) and Standard Chartered ($55 billion), have particularly good business prospects and leading market shares in Africa. Net 1 and Standard Bank Group are based in Johannesburg, South Africa, and Standard Chartered is headquartered in London.

Net 1 UEPS Technologies’ success to date can primarily be explained by this statistic: more than 80% of Africa’s adult population earn less than $4 per day, and their modest incomes make it largely unfeasible for them to use traditional banking services. As a result most of them receive wages, social-benefit payments, and loans in cash and buy everything with cash. For its part, Net 1 has succeeded by providing smart-card technologies that serve as a substitute for cash to the "unbanked" and "under-banked" African people. In essence, Net 1’s smart cards enable organizations to pay cashless wages and benefits and consumers to make cashless purchases and other financial transactions without patronizing a bank.

Net 1’s smart cards and UEPS (Universal Electronic Payment System) offer two prime advantages. One, they are cost-effective; employers, for instance, pay fees of 2-3% of an employee’s salary to issue the cards, compared with the 3-5% cost of distributing wages in cash. And two, they are secure; consumers are protected in the event of the loss or theft of the cards, and fraud -- a huge problem in Africa’s social-service system -- is prevented by the use of a digital fingerprint system that verifies the identity of consumers before card transactions can be made. Those advantages should translate into Net 1’s earnings per share growing at a compound annual rate of 15% through 2012, Morgan Stanley estimates. The company also does business in 12 nations outside Africa and plans to compete in India, Brazil, Mexico, and Indonesia in the next two years.

Standard Bank Group has the second-biggest commercial banking business in South Africa and is thus well-positioned to benefit from the increasing tilt of the country’s economy toward the public/corporate sector and away from the consumer sector. Standard Bank’s corporate services account for 46% of its profits, and it has well-established relationships in the private sector: it does business with the New Partnership for Africa’s Development, three African infrastructure authorities, and the South African government’s Accelerated and Shared Growth Initiative, among others.

Those relationships were partly responsible for Standard Bank winning the Emerging Markets Bank of the Year Award from The Banker, a British financial publication, earlier in the month. For instance, the bank underwrote the $500-million Gautrain rail project, the largest public-private infrastructure project ever financed in Africa.

Standard Bank operates in 18 African countries and 21 other countries. It has more branches -- about 980 -- than any other bank in Africa and issues the most credit cards and the second-highest number of mortgages in South Africa. As a result of a savvy partnership with IBTC Bank in Nigeria, Standard Bank may generate profits there equaling those of all its other African businesses combined, according to UBS. We think the bank’s earnings per share could soar by at least 20% in 2008 over the previous year.

Standard Chartered is a global bank with a solid franchise in Africa; it derives more than 90% of its profits from Africa, Asia, and the Middle East. Its consumer-banking business serves more than 14 million customers worldwide, up from 7 million in 2001. Its commercial business ranks among the most profitable in banking. (Interestingly, Standard Chartered partly owned Standard Bank until 1987.)

To capitalize on the mounting flow of trade between Africa and China (which Industrial & Commercial Bank of China estimates will increase from $9 billion in 2006 to $100 billion in 2010), Standard Chartered established a China-Africa Trade Corridor service, which helps small and mid-sized businesses from both continents that seek to expand abroad. Indeed, in its mind’s eye, Standard Chartered sees itself as the only international bank with a strong presence in both Asia and sub-Saharan Africa, and as being increasingly instrumental in fostering trade and investment between the two regions. Its operating income in Africa was $640 million last year, a 16% increase from 2005. The bank’s presence is especially strong in Nigeria, where its before-tax profits have doubled for three consecutive years.

The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change. They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios. Earnings growth may not result in an increase in share price. Past performance is no guarantee of future results.

Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm that manages more than $27 billion in stocks in separately managed accounts and mutual funds for institutions and individuals, as of September 30, 2007.

As of November 30, 2007, Turner held in client accounts 13,619 shares of Standard Bank Group, 1.0 million shares of Net 1 UEPS Technologies, and 6,439 shares of Standard Chartered.