Africa Finance Forum
Africa is still touted as the next investment frontier and the figures bear it out: with over $50 billion foreign investments in 2012 according to UN figures it is the recipient of more foreign direct investment (FDI) than any other continent. Investors appear to view the developed world as over-regulated, and regions such as North Africa or parts of the Middle East too unstable. Africa's economic resurgence has its roots in small but real improvements in governance and transparency, more open societies empowered by social media, and economies leapfrogging directly to new technologies such as the mobile phone as a business tool. More than 720 million Africans have mobile phones and 167 million have access to the internet.
However, due to its low domestic savings rates Africa has to rely on foreign investments to fuel its growth and here two models have presented themselves:
- The Chinese 'ask no questions approach' which trades infrastructure investments for access to natural resources; and
- The conditional model espoused by the 'West' where investments seem to come with a range of conditions, especially in respect of environmental, social and governance performance.
While some observers have mistakenly framed the two options as a choice between two new forms of colonialism, it is worth looking dispassionately at some of these conditions - particularly those set out in 'global standards' developed by organisations such as the World Bank and the International Finance Corporation (IFC) - the largest source of development assistance in the world and the leading facilitators of infrastructure development funding globally. The most widely accepted of these standards - the 8 IFC Performance Standards and the sector-specific environmental health and safety guidelines supporting them - are remarkably simple in what they seek. In the case of their direct investments (including project and corporate finance provided through financial intermediaries), investors are required to identify and manage business risks and impacts so that development opportunities are enhanced.
Globally more than 500 asset & investment managers managing more than $30 trillion are signatories of investment codes such as Equator Principles which are based upon the IFC Performance standards and require disclosure of environmental & social risks and management responses to such risks. Together these institutions account for nearly 80% of global project finance and they include banks from Nigeria, South Africa, Morocco, Egypt, Togo and China's Industrial Bank.
The traditional Chinese investment model has over the years encountered sufficient and widespread opposition from African civil society in countries such as Namibia, Botswana and Zambia. This has led to social issues being approached more openly with more space given to opportunities for local labour and suppliers. Several surveys are underway by various Chinese-based institutions to measure and understand Africa's opinion of Chinese FDI. Chinese Banks now have to adopt a recently launched Green Credit Policy, and a draft CSR Policy for Outbound Investments in the Extractive Sector is due out in May.
So while it appears that Chinese investors in Africa are starting their ESG journey, this does not imply that 'First World' investors who placed an earlier emphasis on environmental, social and governance (ESG) issues have been more successful. Rather their approach to ESG issues has more often than not resulted in a compliance, "tick the box" approach, resulting in a "do the minimum" level of ESG interest.
This is why it is critical that as Africa continues to grow that project developers and foreign investors are guided by ESG standards towards achieving holistic risk management approaches. All these ESG guidelines are by their very nature generic and encourage interpretation in terms in terms of local context and sectoral expertise. Thus even Africa's biggest development finance institution - the African Development Bank (AfDB) approaches wildlife protection and anti-poaching measures not as measures to appease western sources of capital, but as its head, Donald Kaberuka explains, as part of its basis for sustainable economic growth. The issue, according to Kaberuka, concerns the survival of the ecosystems on which African economies and communities depend for tourism revenues. This makes wildlife protection a key issue for Africa's largest development bank and the projects it considers in pursuit of its mandate.
A project's failure to consider stormwater flow paths in built-up areas during extreme weather events can lead to catastrophic structural failures affecting projects such as shopping centers. Alternatively failure to openly engage with and compensate informal land users of areas being converted to formal farming can lead to consistent community conflict, road blockages and crop sabotage. Failure to explore the use of slightly more expensive but more eco-friendly inputs in a production process can lead to later impacts on cash costs when waste disposal charges or penalties mount. The list of issues to consider is potentially endless and such global ESG standards offer a widely accepted methodology deemed not only as reasonable for risk management purposes but also structurally encourage project proponents to explore more efficient, more sustainable alternatives.
In its search for sustainable economic growth, African communities and institutions must set aside fears of externally-imposed standards. Rather they should take advantage of the proven methodologies such standards, when diligently applied with local context and sectorial expertise, can make on project timelines, project risk profiles and improved economic returns for the investments fuelling Africa's economic resurgence.
James Brice, CEO, & Markus Reichardt, Principal, Environmental Business Strategies Pty Ltd: www.envirobiz.co.za.
Dear prospective banker,
You have the luxury of building the first bank of the 21st century in Africa. No doubt you are thinking hard about how differently one would build a bank today than one would have done only twenty years ago. We hope your intention is to build a bank that serves everyone: the mass market and the poor, because they are the same thing. If so, may we suggest ten points we think you ought to consider.
1. Technology. That's the biggest area of change since the last round of licenses were given out, surely you can't ignore that. Go mobile: take advantage of the sense of immediacy that mobile phones can deliver to your customers and the drastic reduction in credit risk that real-time payments involve. No sense in distributing an alternative costly payment infrastructure by default, though some may want more. Do beware, though, of building mobile solutions that are too dependent on telco negotiation and goodwill for access, at some point they'll get you.
2. Cash in/out. Your business is digitized financial services but you won't make cash go away from your clients' lives. Rather than fighting cash, you need to infiltrate it so that people feel entirely comfortable crossing the physical-digital divide. The cheapest way of doing this is through extensive cash agent networks. Do recognize that cash agent networks are hungry beasts, though: the economics only makes sense at substantial transaction volumes. Go ahead and share the agents with others if you haven't got the scale on your own; you can differentiate in more interesting ways than mere availability of cash points.
3. Offerings. People's needs and aspirations are quite diverse, but you are not likely to have the distributed marketing wherewithal to offer a broad portfolio of tailored solutions. The better approach is to offer your customers a limited number of money management tools which they can each use in their own way. Don't try to solve their problems; give them the tools and let them solve their own problems. Think more Google than a vertically integrated bank. And don't mind so much whose financial products your customers consume as long as it's done through your interfaces and with your knowledge. Perhaps it's more like Amazon than Google.
4. Messaging. Talk about those things that worry people: reducing risk and stress in their lives, helping them stretch budgets, helping them achieve the things they want, helping them imagine a better future. Again, your job is not to discipline people, but to give them the tools they need to discipline themselves. Don't talk so much about savings (sacrifices) but of future payments/purchases (rewards). No patronizing, no moralizing. Can you be sure that you'd manage their meager income better than they do, if you were in their shoes? Listen to them, and care about their life stories.
5. Channels. You must do everything to position the mobile user interface as a self-service channel of choice. But don't be a purist here: don't give your clients the impression that you have left them to their own devices (literally!). Let them deal with humans when they wish to do so. You'll need a multi-touchpoint strategy to promote, sell and service your suite of financial services. Why not have some (cashless!) flagship shops on main street, appointed agents around market square and the bus station, a friendly call center. Invest heavily in training and monitoring these channels. These sales/service agents are probably going to be distinct to your cash agents, which will need to be much more numerous.
6. Business case. We have no new ideas here: profitability will likely come from credit and payments, as elsewhere and always. But recognize that to prime both you'll need to be successful at capturing people's savings. Observing how people manage their money and discipline themselves is the best way to gain actionable insights for credit scoring. And people will have a natural tendency to pay for things electronically only if they hold their money electronically. Savings is the engine that turns the other financial product cogs. You won't make money on empty accounts, no matter what.
7. Pricing. Don't obsess about offering lowest prices, and certainly don't hammer poor people with this message. They want quality, reassurance, flexibility - just like anybody else. Deliver useful services conveniently and in relevant small sizes, and you'll see how willing they are to pay for things that help them address their basic concerns. You will be more successful in relating the value they derive from your services to its cost if you offer transactional rather than flat charges.
8. Brand. Ultimately, if I was your client I hope I would see your services as a better way of managing my money and my finances, my aspirations and my insecurities. The brand needs to be that mixture of aspiration and reassurance: as a client, I now have more upside and less downside in my life. It has to be more than the sum of the individual products you offer. Brand is the most important asset you'll build up.
9. Partnerships. There is much value to be harnessed from being the one who controls access to people's pockets, the one who has the trusted infrastructure connecting any business to millions of customer account. Grass-roots microfinance organizations have long known that. Seek out national and local partners who can add value to your customer base in financial and non-financial ways: through group purchases and discounting, special business development and education programs, livelihood development, community finance groups, etc.
10. Scale. Embrace scale, for big is the need in Africa. But also because scale may be essential for success on a mobile-led strategy: digital payment services are premised on network effects, and agent networks are premised on economies of density (distributed volume). So: systems need to perform robustly at scale, processes need to be streamlined to avoid future bottlenecks, organizational structures need to help rather than stand in the way of growth and innovation. Your key role as a CEO should be to build platforms that are perceived by your staff as their friend rather than their enemy. If you make sure you build good internal systems, more of your staff will feel they can afford to be more customer-centric more of the time.
There are technically and commercially savvy ways of doing all of this. The developing world needs to draw inspiration from the first successful, truly mass-market bank.
Wishing you all the best, sincerely,
Ignacio Mas is an independent consultant on mobile money and technology-enabled models for financial inclusion. He is also a Senior Research Fellow at the Saïd Business School at the University of Oxford, and a Senior Fellow at the Fletcher School's Center for Emerging Market Enterprises at Tufts University. Previously, he was Deputy Director of the Financial Services for the Poor program at the Bill & Melinda Gates Foundation, and Global Business Strategy Director at the Vodafone Group.
Factoring in Africa
The immense contribution that factoring can make to small and medium scale enterprises (SMEs) is the primary reason that has made this financing tool one of the most attractive to businesses across the world. Unfortunately, Africa has remained on the fringes of the factoring movement until recently. In 2012, Africa accounted for only 1.2 per cent of the €2 trillion world factoring transactions, with activities being recorded in only four countries - South Africa, Tunisia, Morocco and Egypt. South Africa, whose factoring transactions are mainly domestic, accounted for about 90 per cent of those transactions. Conversely, Asia was responsible for 26.8 per cent of the world factoring transactions while, America accounted for 8.81 per cent, Australia for 2.35 per cent and Europe for 60.91 per cent.
The good news
There is good news, however. Africa appears poised to take to the global stage with regard to factoring as a tool for economic development as the continent is now witnessing a sustained quickening in the rate of expansion of factoring volumes.
For instance, total factoring volumes in Africa exploded from €5.86 billion in 2001 to €23.93 billion in 2012, an average annual growth rate of approximately 14.2 per cent. This number is significantly higher than the world factoring growth rate of 8.6 per cent and the European growth rate of nine per cent during the same period. Additionally, Africa's factoring growth has featured strong dominance by banks and bank subsidiaries. This is the case in South Africa, Morocco and Egypt, where there have only been a limited number of independent private factoring companies. That situation is borne out of the fact that an important service offered by factors in Africa is funded credit lines for which affiliation with a bank that has the capacity to grant a credit limit provides important competitive advantage.
Not surprisingly, Africa's factoring market is narrow. An average of about 80 per cent of the demand is domestic, which explains the dominance of South Africa with its relatively strong supply chains. Within the context of constrained credit insurance capacity, even in markets where factoring is flourishing, appetite for risk has been understandably limited with a heavy focus on risk of governments and blue chip companies, especially those in the mining, telecom and retail sectors.
The low level of factoring across Africa can be attributed to a number of reasons, the major ones being:
- A lack, or limited knowledge, of the product across a large segment of the population, coupled with the fact that there has been little effort to promote factoring by governments and global factoring industry groups, including Factors Chain International and the International Factors Group, until the mid-2000s. In an environment dominated by a two-factor mind-set, it has been difficult to grow factoring in the face of reluctance among foreign factors to do business in Africa. In addition, due to limited knowledge, many African governments and regulators had little interest in promoting factoring;
- Lack of interest in factoring by many businesses. Those businesses involved in international trade tended to export commodities to OECD countries on the basis of Cash Against Documents (CAD) with credit worthy buyers. No credit was given so the trade did not lend itself to factoring;
- Absence of an incentive for banks to pursue factoring as a line of business, whether as a product offering or by way of credit lines, due to limited demand traceable to ignorance about the product and absence of support from regulators; and
- Absence of facilitating infrastructure, such as appropriate regulatory framework and laws, as well as credit information services and credit insurance. This has constrained the entry of foreign factors in the African market.
Prospects for factoring in Africa
In spite of these challenges, the fact that factoring is surging to the fore in Africa with forecasts that factoring volumes will rise from €24 billion in 2012 to about €90 billion in 2017 and subsequently to about €200 billion by 2020, means that there is reason to be hopeful. Countries expected to drive this growth are "new" entrants to factoring and include Kenya, Nigeria, Ghana, Cote d'Ivoire, Zimbabwe, Zambia, Mozambique and Senegal. It is anticipated that domestic factoring will continue to dominate in Africa, accounting for about 80 per cent of the market, although country situations will differ.
This anticipated growth is projected to be driven by:
- Entities in oil and mining services in countries that are heavy on extractive industries, such as Nigeria, Ghana and Zambia;
- Telecommunications services, as a result of a rapid growth of this sector and tendency of telecom companies to outsource key services;
- Retail sector, as a result of a rapid growth of the middle class, which will expand domestic demand and reinforce the growth of market economy in the continent; and
- The non-traditional export sector driven by larger share of the South in Africa's trade.
Given the foregoing, it is not surprising that factoring is gaining currency on the continent. The expectation is that factoring in Africa will continue to grow, considering the level of growth in economic activities and trade, particularly in light of the strengthening of domestic supply chains, rising South-South trade, rapid growth of Africa's middle class and improved awareness about factoring across the continent.
Dr. Benedict Okey Oramah is Executive Vice-President, Business Development and Corporate Banking, at the African Export-Import Bank. He supervises the business development, syndications, specialized finance and investment banking operations of the Bank. Prior to joining the Bank in 1994, he was Assistant Manager (Research) at the Nigerian Export-Import Bank. He received a PhD in agricultural economics from Obafemi Awolowo University, Ile-Ife, Nigeria.
To reduce asymmetric information problems associated with extending credit and increase the chances of loan repayment, banks typically require collateral from their borrowers. Movable assets - assets that are not affixed permanently to a building (e.g., equipment, receivables)- often account for most of the capital stock of private firms and comprise an especially large share for micro, small and medium-size enterprises. Hence, movable assets are the main type of collateral that firms, especially those in developing countries, can pledge to obtain bank financing. While a sound legal and regulatory framework is essential to allow movable assets to be used as collateral, without a well-functioning registry for movable assets, even the best secured transactions laws could be ineffective or even useless.
Given the importance of collateral registries for moveable assets, 18 countries have established such registries in the past decade. However, to my knowledge there is no systematic empirical evidence on whether such reforms have been effective in fulfilling their primary goal: improving firms' access to bank finance.
In a recent paper, Inessa Love, Sandeep Singh and I explore the impact of introducing collateral registries for movable assets on firms' access to bank finance using firm-level surveys for 73 countries. Following a difference-in-difference approach, we compare access to bank finance pre and post the introduction of movable collateral registries in seven countries (Bosnia, Croatia, Guatemala, Peru, Rwanda, Serbia, and Ukraine) against three different "control" groups: a) firms in all countries that did not implement collateral reforms during our sample frame (59 countries), b) firms in a sample of countries matched by location and income per capita to the countries that introduced movable collateral registries (7 countries), and c) firms in countries that undertook collateral legal reforms but did not set up registries for movable assets (7 countries). This difference-in-difference approach controlling for fixed country and time effects allows us to isolate the impact of the introduction of movable collateral registries on firms' access to bank finance.
Overall, we find that introducing movable collateral registries increases firms' access to bank finance. In particular, our baseline estimations indicate that the introduction of registries for movable assets is associated with an increase in the likelihood that a firm has a bank loan, line of credit or overdraft, a rise in the share of the firm's working capital and fixed assets financed by banks, a reduction in the interest rates paid on loans, and an increase in the maturity of bank loans.
The impact of the introduction of movable collateral registries is economically significant: registry reform increases access to bank finance by almost 8 percentage points and access to loans by 7 percentage points. These are sizeable effects considering that in our sample, about 60 percent of firms have access to finance and 47 percent have a loan. There is also some evidence that the impact of the introduction of registries for movable assets on firms' access to bank finance is larger among smaller firms, who also report a reduction in a subjective, perception-based measure of finance obstacles.
Our findings suggest that policymakers in Africa would be wise to adopt movable collateral registries to facilitate firms' access to finance. Currently, in the region, only 8 countries (Ghana, Kenya, Mauritius, Nigeria, Rwanda, Seychelles, South Africa, and Tanzania) have such registries. Clearly, there is scope for reform throughout the continent in this area.
MARIA SOLEDAD MARTINEZ PERIA is the Research Manager of the Finance and Private Sector Development Team of the Development Economics Research Group at The World Bank. Her published work has focused on currency and banking crises, depositor market discipline, foreign bank participation in developing countries, bank financing to SMEs, the impact of remittances on financial development and the spread of the recent financial crisis. Prior to joining The World Bank, Sole worked at the Brookings Institution, the Central Bank of Argentina, the Federal Reserve Board, and the International Monetary Fund. She holds a Ph.D. in economics from the University of California, Berkeley and a B.A. from Stanford University.
The recent financial crisis has heightened attention to the links between the financial systems and the real economy. Policy makers, especially in developing countries, have expressed a greater degree of interest in the design, development, and implementation of national strategies for developing the financial sector. Equally, policy makers have increased their investment in reporting on financial sector stability and are making greater efforts to link financial sector performance and risks to the real economy. Between 1996 and 2005, publishing of financial sector reports became a rapidly growing "industry," with the number of central banks issuing such reports increasing worldwide from 1 to about 50. Since 2005, this number has grown less rapidly, although it has kept increasing and has now reached about 80.
In a forthcoming publication, we assessed a sample of 78 countries on the comprehensiveness of their financial sector strategies. We did so against 10 predefined attributes that we postulated a comprehensive financial strategy should have. Broadly, these attributes concerned identification of financial development objectives, approach to managing systemic risk involved in achieving the set objectives, consideration of trade-offs between achieving development objectives and maintaining systemic risk in the financial sector at an acceptable level, and outline of implementation plans for the financial sector strategy.
We found that only 67 percent of the 78 countries had financial sector strategies with clearly identified goals and that only 27 percent had a quantifiable indicator included in their statement of objectives. Given that only 58 percent of strategies identify policy tools to support the achievement of the set goals, 42 percent of strategies rely on wishful thinking rather than on credible policy support. Overall, we find that the scope and characteristics of national strategies for the financial sector are influenced by a country's type of legal system, its level of income and macroeconomic stability, its existing financial depth and inclusion, the share of foreign ownership in its national financial sector, and its experience of past financial crises.
Significantly, we found that although many countries commit to both development and systemic risk management (55 percent) in their strategy; only 26 percent specify trade-offs between their financial development goals and management of systemic risk in their strategies. Overall, 42 percent of countries commit to both advancing financial development and managing systemic risk but do not consider any trade-offs between the two goals. Although most strategies refer to systemic risk in general terms (88 percent), many fewer documents (38 percent) refer to specific indicators of systemic risk, and only about a half (51 percent) of the strategies identify policy tools to manage that risk.
The absence of substantive discussions on risk-development trade-offs in financial sector strategies is troubling. Finance is well-known to be a double-edged sword - substantial developmental impact when it performs well and the major social costs when it does not. The double relevance of financial systems thus puts a high premium on carefully calibrated and implemented financial sector policies. Therefore, financial sector policy must account for the trade-off between the speed of financial development and the systemic risk accumulation. This trade-off is analogous to the risk-return trade-off in finance. At the national level, the financial sector strategy formulates policy for the financial sector and chooses how much speed and how much restraint to apply, and where. Overall, the strategy should set development targets that account for the associated risk and communicate the systemic risk appetite (tolerance) of the country in the financial area.
Admittedly, determining if a given financial sector strategy has adequately considered and communicated trade-offs between the speed of financial development and the degree of systemic risk associated with it-or, for that matter, gauging whether the strategy involves plans to address the trade-off-is challenging, but not impossible. To that end, we examined the strategies to see whether risk and return in development had been explicitly weighed. We noted whether strategies referred to the expectation that the financial system would work well-that is, would it allocate resources to the most productive uses and help the real economy, including individuals and firms, manage risks by enhancing productivity, boosting the poverty-reduction effects of growth, and promoting equal opportunity? We then looked to see whether the strategies also referred to concerns that overambitious development, excessive risk taking, and malfunctioning risk management on the side of the financial system and its clients could create a breeding ground for costly financial crises.
In general, we found that strategies include a lot of numerical analysis on recent trends and changes in the financial sector; however, they lack a comprehensive discussion of trade-offs in general and of the trade-off between financial development and systemic risk in particular. At best, they acknowledge that economic growth is negatively affected by financial sectors that are weak or unable to provide long-term capital. This is a general reference to the performance of the sector in aggregate and not explicit reference to specific systemic risks or to trade-offs between risk and development of the sector.
Our findings are consistent with research that suggests that although the process of preparing a strategy involves a lot of scientific analysis of data, it lacks the creation of novel hypotheses and careful generation of custom-tailored tests of those hypotheses. That conventional strategies are focused on isolated issues rather than making choices, an approach that would naturally lead to a discussion of trade-offs. We support the view that many strategies are merely an aggregation of issues into an all-inclusive reform program aimed at modernizing a financial system. What is needed is a 'possibilities-based approach' that balances ambition with obstacles and risks; requiring governments to recognize that they must make choices and that each choice has consequences.
To encourage risk-development trade-offs discussions in strategy formulation discussions, we emphasize the importance of establishing a financial policy or stability committee. To set compatible and sustainable policies for the financial system, a group of policy makers and experts that understands the risk-development trade-offs in financial sector development should be established. Most important, the committee's terms of reference must explicitly encourage the discussion of choices for financial sector development. Only then will norms for discussing trade-offs between risk and development be established. Formulating financial sector strategy through such policy dialogue can improve policy coordination and produce balanced policies.
In essence, our paper calls for a more dynamic strategy design, development and implementation process than is presently found in many countries around the world.
Samuel Munzele Maimbo is an Adjunct Professor of Finance at the University of Lusaka, a Simon Industrial Fellow at the University of Manchester and a Lead Financial Sector Specialist in the European and Central Asia region of the World Bank. Prior to joining the World Bank, he was a Senior Bank Inspector at the Bank of Zambia and an auditor at Price Waterhouse. A Rhodes Scholar, Samuel obtained a PhD in Public Administration from the University of Manchester, England (2001); a MBA Degree from the University of Nottingham, England (1998); a Bachelor of Accountancy Degree from the Copperbelt University, Zambia (1994). He is also a Fellow of the Association of Chartered Certified Accountants, United Kingdom and a Fellow of the Zambia Institute of Certified Accountants.