Africa Finance Forum Blog
Africa represents a small percentage of the global investment banking business, but the activity is expected to expand in the years to come in view of already apparent economic opportunities.
According to Thomson Reuters, the commissions generated by investment banking activities in Africa amounted to $318 million in 2013, of which $232 million was in South Africa alone. This is modest when compared to the levels in the rest of the world, which generated $82.6 billion in commissions in the same year, returning to its levels of 2007. Globally, the five largest investment banks are based in the United States, and their market share increased by 2.5% in 2013. JP Morgan is the leading global investment bank, generating $6.4 billion in commission (7.8% of the total), followed by Bank of America Merrill Lynch ($5.8 billion), Goldman Sachs ($5.1 billion), Morgan Stanley ($4.7 billion) and Citi ($4.2 billion). The investment banks operate mainly with major clients (companies, investors and governments) providing advisory services (mergers and acquisitions), intermediation (loans) and long term financing operations (IPO, issuing of debt in the form of bonds). Here, we distinguish between corporate finance, global capital markets and structured finance operations.
The continent's outlook for economic growth makes it an attractive place for investment banks
The continent's economic growth quite logically feeds financing operations, the development of the capital markets, and advisory services, all areas of which investment banks are actively involved in. Many activities will require the intervention of investment banks with the arrival of multinationals, the restructuring of the banking and telecommunications sectors, the exploitation of new mining deposits and the launch of major public investment programmes.
Africa, like the rest of the world, is experiencing a change in its strategy to financing for development. Traditional donor interventions are often inadequate to meet the financing needs for infrastructure, while the traditional means of mobilising resources at the country level (taxation, etc.) face major challenges. As a result, the continent is increasingly turning towards local and global capital markets to access new financial sources.
The world leaders in corporate banking (BNPP, SGCIB, Natixis, HSBC, Citibank and Standard Chartered) as well as investment banking (Rothschild, JP Morgan, Goldman Sachs, Deutsche Bank and Crédit Suisse) are very active on the continent. Alongside them, local players such as Standard Bank, Rand Merchant Bank, Renaissance Capital, EFG Hermes and Attijari Finances Corp are well established. These are followed by new players who have recently entered the market, including United Bank for Africa (UBA), First Bank of Nigeria (FBN) and Ecobank, all of which have created their own specialised subsidiaries (UBA Capital, FBN Capital and Ecobank Capital). Currently, African banks dominate the mobilisation of funds in local currency.
In order to adapt to market changes and the new opportunities presented, many banks have announced the repositioning of their investment banking activity in markets outside South Africa. Nedbank, for example, merged its corporate and investment businesses, while Standard Chartered Bank redeployed in Africa, and Barclays Africa has announced that it has high expectations of its African markets outside of South Africa, which remains the most attractive location to date.
Today, we observe that the international banks in Africa carry out their investment banking activities in Anglophone and Francophone countries, unlike the retail-banking sector where we see a certain linguistic preference in their regional expansion strategies.
Mergers and acquisitions (M&A)
The volume of announced M&A deals in the continent increased by 30% between the first half of 2012 and 2013. According to Mergermarket Group, M&As targeting sub-Saharan African companies totalled $26.7 billion in 2013, an increase of 20% over 2012. The traditionally targeted companies in natural resources, minerals, oil, gas and infrastructure were replaced in 2014 by targets in the telecommunications, media, banking, insurance and consumer goods sectors. 2013 was marked by a record level of operations, with the sale of 28.6% of ENI East Africa to the Chinese company CNPC for $4.2 billion, and the acquisition of 20% of the Rovuma Offshore Area 1 Block (off the coast of Mozambique) by Indian company ONGC Videsh for a total of approximately $5 billion. Alongside conventional industrial investments, private equity operations are expanding through funds such as Helios, Emerging Capital Partners, Abraaj and African Infrastructure Investment Managers (AIIM). In the first eleven months of 2014, the share of M&As carried out inside the African markets reached $29.2 billion for 413 operations, whereas M&A operations targeting Africa amounted to $40.7 billion for a total 730 operations. There were some major market operations in late 2014, such as the takeover of Pepkor, a south African retailing giant, by Steinhoff for $5.7 billion, in Chad, the state bought Chevron assets ($1.3 billion), the takeover of the South African and Nigerian assets of Lafarge by Lafarge Wapco (now known as Lafarge Africa Plc) for $1.35 billion, or the sale of several oil wells to Nigeria for $5 billion by Shell.
A necessary rationalisation
According to Konrad Reuss, in charge of the sub-Saharan Africa department at Standard&Poors, "the heady days of international bonds issued by new players or from frontier markets, such as those of the African countries over the past two years, are over. The periods when we witnessed oversubscription are no longer with us". The reduction of the quantitative easing policy of the US administration is also partly responsible. The new policy is changing the bond issue conditions for countries whose economies are in difficulty, according to S&P, which is anticipating an increase in the cost of eurobonds. For Miguel Azevedo, "The Africa of the past was more a land of pioneers and adventurers. Today, the major players are returning. It is becoming much more mainstream". Recent history has shown that governmental agencies are ready to intervene in Africa (World Bank, AFD, AfDB, EIB, KfW, etc.), as the risks in Africa are not, in the end, much higher than in other places (the United States or Europe). The profitability level remains very attractive for projects to be funded on the continent.
Dr Estelle Brack Estelle Brack is an economist, specialising in banking and finance in developed and in developing countries.
The speakers were :
- Samuel Bryan, Technical Director, Nexus Carbon for Development
- Séverin Cabannes, Deputy Chief Executive Officer, Société Générale
- Christine Fedigan, climate advisor, GDF SUEZ
- Pierre Forestier, Head of the Climate Change Division, Agence Française de Développement
- Tosi MPANU-MPANU, expert in sustainable development and climate finance who served as the Chair of the African Group of Negotiators (AGN) at the Durban Summit (2011)
The challenges of climate finance
Climate finance aims to reduce the scale of future climate change. It focuses on investments that have benefits in terms of adaptation, mitigation and sequestration."Investment needs in terms of greenhouse gas reduction are estimated at some USD 1,500bn a year and at approximately USD 500bn for adaptation" in all sectors: energy, infrastructure, equipment and services (Pierre Forestier).
Despite a general increase in awareness, the needs are still far from being met, especially because it is sometimes difficult to evaluate the effectiveness of climate investments: "When investments are made in the context of climate finance, we are faced with a more qualitative than quantitative dimension" (Tosi Mpanu-Mpanu). Consequently, there is a twofold challenge: develop climate finance and strike a balance between the four financing flows - international public financing, international private financing, national public financing and national private financing.
Mechanisms to develop climate finance already in place
One of the most well known is the carbon market, which is divided into two submarkets: the regulatory market and the voluntary market. The first makes it possible to use the greenhouse gas emission reductions from virtuous projects to sell them to companies that have emission limits. To date, it has not achieved its objectives. The second was created by companies which are seeking to have responsible practices on their own initiative. This voluntary market is doing better because it is possible to measure its "very concrete development benefits" and because "the prices are very stable." (Samuel Bryan).
The CDM (Clean Development Mechanism) is another driver of action. It allows industrialized countries to finance projects that reduce or avoid emissions in developing countries and are rewarded with carbon credits. In return, the countries benefit from transfers of skills and technologies, while contributing to international efforts to reduce emissions. The number of projects - 7,000 - demonstrates the success of the CDM. Unfortunately, Western countries are pulling out of this mechanism due to the fall in the price of the ton of carbon.
Finally, the Green Fund, ratified at the Cancun Conference in 2010, should in principle be capitalized with USD 100bn a year by 2020 in order to support developing countries in the implementation of climate projects. "In the climate negotiations, the African Group considers that it would be necessary to mobilize USD 14bn in 2014. Today it has reached about USD 1bn. We are therefore far off the mark. If developing countries come to Paris in 2015 to subscribe to the agreement, the international community will need to provide financing" (Tosi Mpanu-Mpanu).
Read the rest of article here.
This blog was originally posted on Ideas for Development.
Happy New Year to you and your loved ones! 2014 was an important year for the MFW4A Partnership Secretariat, characterised by substantive progress in the implementation of our 2012 - 2014 Strategy and our move from the African Development Bank's (AfDB) temporary home in Tunis to the Bank's statutory headquarters in Abidjan. The move was made possible thanks to the resilience and goodwill of our staff who worked hard to ensure business continuity.
The third Partnership Forum in Dakar, Senegal, in June 2014 was a significant milestone for us. The event provided a unique opportunity for African opinion leaders, financial sector stakeholders and development partners to take stock of progress in Africa's financial systems, share experiences, exchange best practices, and discuss innovative approaches to challenges facing African financial systems. All of us at the Partnership Secretariat are grateful for your enthusiastic support as evidenced by the participation of more than 350 delegates from over 40 countries. Our thanks also go to the Organising Committee for putting together such a rich event. You can view a selection of photos from the Forum on Flickr, and download the full Forum report from our website.
In 2014, the Secretariat placed special emphasis on its work with African financial sector stakeholders. The Advisory Council was revamped and reconstituted as a smaller body with a mandate to provide advice and effectively support and contribute to the Partnership's strategic objectives. We look forward to engaging with our new Advisory Council members in 2015. Last year also saw the establishment of the African Pension Funds Network (APFN), a platform for the exchange of knowledge and expertise amongst industry participants across the continent. The network already counts several achievements, including the release of a joint publication Pension Funds and Private Equity: Unlocking Africa's Potential, with the Commonwealth Secretariat and the Emerging Markets Private Equity Association (EMPEA).
We also continued to strengthen our existing networks, including the Community of African Banking Supervisors (CABS), whose 2014-2016 work plan and budget was endorsed by the Association of African Central Banks (AACB) Bureau. In agricultural finance, we supported the Comprehensive Africa Agricultural Development Program (CAADP) through institutional support projects. We hired an agricultural finance expert with the support of GIZ to help with the policy process in the CAADP implementation. GIZ also funded a study to review the status of agricultural finance policy coordination across five African countries. You can download the Synthesis Report in both English and French.
Another cornerstone of our success in 2014 was our commitment to support regional and pan-African networks. We launched programmes to support the Conference Interafricaine des Marches d'Assurance (CIMA), the insurance regulator covering 14 francophone countries in West and Central Africa; and, the Conseil Régional de l'Epargne Publique et des Marchés Financiers (CREMPF) the capital markets regulator for the West African Monetary Union (WAMU), to raise funding for their respective market development strategies.
We also continued to coordinate donors' efforts to support financial sector development. The Housing Finance Donor Working Group (DWG) initiated discussions on the launch of a training programme for the francophone participants, in collaboration with Cape Town University and under the leadership of the Agence Française de Développement (AFD). Moreover, work plans were endorsed for both the Digital Finance and Remittances DWGs with plans to launch joint donor interventions in 2015 that respond to the priorities of Africa's financial sectors.
Our website was upgraded in 2014 to provide an enhanced browsing experience. The high and continuously increasing usage of the website, blogs, social media, newsletters, press digests, and the knowledge centre that houses publications confirm the value of MFW4A's knowledge products and services. We have also developed an Online Collaborative Platform (OCP) designed to facilitate interactions among MFW4A working group members, foster knowledge sharing and promote peer-to-peer learning. Last but not least, we have been maintaining a comprehensive Donor Projects' Database that is proving useful for our stakeholders seeking information on financial sector related projects in Africa.
Our Annual Supervisory Committee (SC) Meeting was held in December 2014, hosted by the German Federal Ministry of Economic Cooperation and Development (BMZ) in their headquarters in Bonn, Germany. MFW4A SC members, staff, and some Advisory Council members discussed the Partnership's new three-year Strategy, expected to be endorsed at the end of January, 2015. The 2015-2017 Strategy will put the Secretariat and the Partnership in a stronger position to deliver the change that Africa's financial sector needs. Specifically, the Strategy aims to:
- Transform MFW4A from a partnership of donors to a partnership between donors and African financial sector stakeholders;
- Elevate the Partnership from its current position of a knowledge hub into an effective catalyst for positive change in the financial sector landscape; and
- Ensure long-term financial sustainability for the Partnership and the Secretariat.
The achievements of the MFW4A Partnership Secretariat are the result of hard work and commitment of our partners and African financial sector stakeholders. I would like to extend my heartfelt appreciation for all of your support and engagement with our vision. MFW4A has become a key voice on financial sector development in Africa, and a lot of the interaction and the sharing of the knowledge and experiences in the field stem from the Partnerships' initiatives. Let's continue to keep this positive momentum going!
MFW4A Partnership Coordinator
Crowdfunding - think Kickstarter, Indiegogo or Kiva - is popular and growing. About a year ago, infoDev, a global innovation and entrepreneurship program in the Trade and Competitiveness Global Practice, released a report titled 'Crowdfunding's Potential for the Developing World' in which it explored what crowdfunding, on a larger scale, could mean for high-potential enterprises in developing countries. The study quantified for the first time the value of crowdfunding, estimating a global market of $96 billion by 2025 - 1.8 times today's global venture capital industry. The study outlined specific recommendations for policymakers and business accelerators that focus on high growth entrepreneurs and innovative ways of access to finance.
Now, almost a year later, infoDev is seeing the first results of the pilots it is putting in place to test the viability of crowdfunding within its network of incubators. With the support of Crowdfund Capital Advisors, infoDev's Kenya Climate Innovation Center (KCIC) is implementing the Crowdfund Investing Pilot, a project designed to mentor and train six carefully selected Kenyan startups on crowdfunding and online fundraising campaigns.
With the six entrepreneurs already working on their campaigns, it's time to reflect on a few key recommendations of the report.
Recommendation 1: make sure companies are ready to crowdfund. Identifying companies suitable for crowdfunding is key to the success of every support program. In order to "vet" businesses, it might be useful to employ a number of different methodologies, such as concept and marketing competitions, online surveys, and in-depth interview with the candidate entrepreneurs.
Reality: In Kenya, infoDev devised the Crowdfunding Readiness Survey to screen companies by interest, capacity and capability for participation in the pilot. This selection mechanism examined the profile of the company's management team, legal status, maturity, business model (including value chain), current accounts, capital needs, crowdfunding aspirations, and social media presence.
The difficult part was to make a selection in a standardized way. The selection process could only provide the selection panel with a 'raw' indication of the entrepreneurs' readiness and was necessarily augmented by additional evaluation methods. Out of the 73 companies that are currently working with the Kenya CIC, 16 were invited to a pitch competition. By observing other factors, such as personality, presentation and communications skills, the project team was able to make a more accurate decision on which entrepreneurs could be successful crowdfunders. The process was analogous to the investment decision of Silicon Valley super angel Ron Conway who famously said: "We invest in people first."
Recommendation 2: partner with the right platform. There are four types of crowdfunding platforms: Donation, Perks/Pre-order, Debt, and Equity. To launch an effective campaign, the project needs a systematic method for selecting the appropriate platforms for each identified company.
Reality: in Kenya, given the infancy of the crowdfunding market, it was crucial to identify platforms with a critical mass of active funders. Out goes Kickstarter. Project backers that register on Kickstarter may hail from anywhere across the globe, but project originators must be registered in the US, UK, Canada, Australia, New Zealand, the Netherlands, Denmark, Ireland, Norway and Sweden.
Next, our team established which platforms posed the least legal and regulatory risk in Kenya. The team relied upon local legal experts for an analysis of the Kenyan securities regulatory environment and determined that although equity crowdfunding might be permissible within current framework, it posed too much legal risk to the outcome of the pilot.
Lastly, the team considered which platforms would best to complement the business models of the pilot companies. Because many of the businesses sell their products directly to consumers, the "pre-sale" model offered by Indiegogo was a very interesting choice. Moreover, many of these consumer products target underserved African communities and therefore could be best supported with the addition of crowdfunded consumer finance, offered for example by platforms like Kiva.
Recommendation 3: learn from previous experiences. Every country, every company, every product, every community of users is different. There is no perfect formula for designing and running a successful crowdfunding campaign. Learning by trial and error is very important and organizations that support crowdfunding play a critical role in capturing, analyzing and spreading this knowledge.
Reality: the Kenya CIC is capturing knowledge around all aspects of the Crowdfunding Pilot, including company selection, training materials, mentorship techniques and will conduct ongoing data capture and analytics on the crowdfunding campaigns while they are active. The data captured by center on the six winning companies and their campaigns - whether or not they turn out to be successful - will be a stepping stone to a better understanding of the challenges and opportunities of crowdfunding in the country.
Development organizations like the World Bank, governments, venture funds, and NGOs should continue to study crowdfunding to better understand its potential and determine how it can provide innovative solutions to the "last-mile-funding problem" faced by many start-up companies in the developing world.
Sam Raymond is a Consultant with infoDev's Access to Finance Program. His work with the World Bank Group centers on the development of projects that address challenges faced by entrepreneurs in acquiring financing to scale businesses and create jobs. Prior to joining the World Bank Group, Sam worked as a Research and Staff Assistance to Speaker of the United States House Representative Nancy Pelosi.
This blog was originally posted on the World Bank Group's "Private Sector Development" blog.
You don't have to spend very long in Rwanda before you start to be impressed by the financial inclusion landscape in this country - not only by the progress made over the past several years, but by the scale of ambition for the rest of this decade and beyond.
The government has set a target of 90 percent financial inclusion by 2020 and the evidence of progress toward this goal is everywhere: Advertisements for mobile-money products are painted and plastered onto almost every available surface and, if you know what to look for, it doesn't take long to spot an Umurenge Savings and Credit Cooperative (Umurenge SACCO) - Rwanda's signature financial inclusion initiative.
Six years ago, the 2008 FinScope survey found that that 47 percent of Rwandan adults used some type of financial product or service, but just 21 percent were participating in the formal financial sector, which was at the time made up mostly of banks but which also included a handful of microfinance institutions and SACCOs.
Largely in response to these figures - and in particular to the large urban/rural divide illustrated by the data - and the government set out to establish a SACCO in each of the country's 416 umurenges, or sectors. The Umurenge SACCO was born.
An Umurenge SACCO in Kigali, Rwanda.
With initial government support in the form of manager salaries and staff training, Umurenge SACCOs quickly began to spread across Rwanda. By 2012, FinScope data showed that the percentage of Rwandans using a formal financial product had doubled to 42 percent - an increase due almost entirely to the 21 percent of Rwandans who reported that they were using an Umurenge SACCO to save or borrow. The initiative was especially successful in expanding access to financial services outside of urban centers: As of 2012, 80 percent of Umurenge SACCO members were from rural areas.
As is often the case, however, impressive headline numbers mask considerable complexity. As part of a preparation mission for the Financial Inclusion Support Framework (FISF) program, my colleagues and I were able to visit a nonscientific sample of Umurenge SACCOs. What we saw were impressive institutions run by dedicated staff, many of them in places where you'd be hard pressed to find a bank.
Yet the challenges were clear. The manager of an Umurenge SACCO we visited in Kamonyi said that his chief concern was dealing with the inefficiencies and risks associated with running a 5,700-member SACCO on a paper-based system. Indeed, it was striking to see dozens and dozens of wooden boxes filled with members' files in a back room. (To their credit, the Rwanda Cooperative Agency is taking initial steps to address this problem and will soon begin a pilot program to computerize 90 Umurenge SACCOs.)
Member’s files at an Umurenge SACCO in Kamonyi, Rwanda.
In a related limitation, the potential of Umurenge SACCOs is constrained by a lack of interoperability and network connectivity. A member of one SACCO cannot withdraw his or her money from another SACCO or ATM. So traders traveling to Kigali to do business must withdraw money from their local SACCOs and carry a wad of cash rather than wait until they arrive before making a withdrawal - the type of inefficient and potentially dangerous outcome that the formal financial sector is meant to ameliorate.
We also saw first-hand that high levels of formal account ownership may obscure shortcomings in product quality or value proposition. At the same SACCO in Kamonyi, close to half the savings accounts had not been accessed in the past six months, a trend that could be linked to the FinScope finding that 26 percent of SACCO members report having joined because they felt that they were obliged to. Umurenge SACCOs have also struggled to reach the very bottom of the pyramid: Just 3 percent of SACCO members are from the lowest income category (Ubudehe Category 1).
There are issues of product suitability on the credit side, as well. Qualitative evidence suggests that SACCO loans often cannot be disbursed quickly enough to meet the short-term consumption or emergency credit needs of Rwandese. And, like many financial institutions, Umurenge SACCOs must tread a fine line between managing their portfolio risk and meeting the borrowing needs of their members. This can be particularly constraining for entrepreneurs, who still need to rely on banks for larger or longer-term loans. With more advanced risk-management skills, Umurenge SACCOs may be able to play a larger role in the future for the financing of micro, small and medium-sized enterprises (MSMEs). But their current role as an entry point into the formal financial system for MSMEs is itself a significant contribution.
The recently released World Bank Consumer Protection and Financial Literacy diagnostic also suggests that much remains to be done in the realm of consumer protection. While the loan and insurance forms we saw were relatively advanced in terms of transparency and clarity, there is scope for improvement in several areas (for example, in the disclosure of the effective interest rate). These responsible lending practices also need to be institutionalized and uniformly enforced through a more comprehensive regulatory and supervisory framework.
Enter the World Bank's recently launched FISF country support program, designed to help Rwanda ensure the sustainability of recent gains and continue to advance toward its goal of 90 percent financial inclusion by 2020. FISF support consists primarily of technical assistance and capacity-building in five key areas of financial inclusion: MSME finance, consumer protection, financial education, payments, and monitoring and evaluation.
While the exciting FISF program has only recently begun, one thing is already clear: The government's commitment to achieving its ambitious targets, and the momentum created by Umurenge SACCOs and other initiatives, make it a very exciting time to be working on financial inclusion in Rwanda.
Douglas Randall is a Research Analyst in the Finance and Private Sector Development Team of the Development Economics Research Group. He joined the Bank in September 2009 and is currently the lead data analyst for the Global Financial Inclusion (Global Findex) Database.
This blog was originally posted on the World Bank Group's "Private Sector Development" blog.