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Financial sector research in Africa – looking forward

11.11.2013Thorsten Beck

It is about two years ago that the AfDB, GIZ and World Bank published the Financing Africa book, a broad analysis of trends in Africa's financial systems, of gaps and challenges, and of different policy options. For researchers focused on Africa's financial systems, the past years have been exciting, with many different forms of innovations being introduced and assessed. But there have also been new challenges for analysts and policy makers alike, as I will lay out in the following. Cooperation between different stakeholders, including practitioners, donors, policy makers and researchers can help move forward the frontier for Africa's financial systems. In the following, I will focus on five areas where more data and more research can support better informed policy making.

Long-term finance

One first area is that of long-term finance, which can be seen as the second (next to lack of financial inclusion) critical dimension of shallow financial markets in Africa. As documented in the Financing Africa publication, there is a bias on banks' balance sheets toward short-term liabilities and, more critically, short-term assets, only few countries have liquid equity and debt markets, and there is a dearth of effective contractual savings institutions, such as insurance companies, pension funds and mutual funds. This dearth of long-term financial intermediation is in contrast to the enormous need for long-term financing across the continent, for purposes of infrastructure, long-term firm financing for investment and housing finance.

The long-term finance agenda is an extensive one, both for researchers and policy makers. First, there is still a dearth of data on long-term financing arrangements, including on corporate bond market structures and costs, insurance markets and private equity funds. Second, identifying positive examples and gauging interventions and policies will be critical, as will be expanding to Africa the small literature on equity funds and their effect on enterprises that exists for U.S. and Europe and (increasingly) for emerging markets. One important constraint mentioned in the context of long-term finance is the lack of risk mitigation tools. Partial credit guarantees can play an important role, but their design and actual impact has not been studied sufficiently yet.

Small enterprise growth

A second important challenge is that of extending the financial inclusion agenda from micro- up to small enterprises, both in terms of supply- and demand-side constraints. The emphasis stems from the realization that job-intensive and transformational growth is more likely to come through formal than informal enterprises. Assessing different lending techniques, delivery channels and organizational structures conducive to small business lending is important, as is assessing the interaction of firms' financing constraints with other constraints, including lack of managerial ability and financial literacy. This research agenda is important for both financial institutions and policy makers. For financial institutions, the rewards can lie in identifying appropriate products for small enterprises and entrepreneurial constraints that might prevent take-up and impact repayment behavior by small enterprises.

For policy makers, the rewards can lie in identifying policies and institutions that are most relevant in alleviating small firms' growth constraints.

Regulatory reform agenda

A third important challenge refers to regulatory reform. While global discussions and reform processes are driven and dominated by the recent Global Financial Crisis and the fragility concerns of economies with developed if not sophisticated financial markets, Africa's fragility concerns are different and its reform capacity lower. Some of the suggested or implemented reforms seem irrelevant for almost all African countries (such as centralizing over-the-counter trades) or might have substantially worse effects in the context of shallow financial markets than in sophisticated markets increasingly dominated by high frequency trading (such as securities trading taxes). Prioritizing regulatory reforms according to risks and opportunity costs for financial deepening and inclusion is therefore critical in the definition of the regulatory reform agenda for African countries. While not necessarily an area for fundamental academic research, financial sector researchers can contribute to this conversation by helping identify regulatory constraints for financial deepening and broadening and potential sources for stability risks, based on past experiences from Africa and other regions.

Cross-border banking

A fourth important challenge is that of cross-border banking and the necessary regulatory framework. Identifying cross-border linkages between countries is critical, and data collections, such as by Claessens and van Horen (2014), represent an important first step. Understanding the channels through which cross-border banking can help deepen financial systems and foster real integration, and the channels through which cross-border banks can threaten financial stability, is critical. In this context, the optimal design of cross-border cooperation between regulators and supervisors to minimize risks from cross-border banking while maximizing its benefits is important (Beck and Wagner, 2013). African supervisors have been addressing the challenge of regulatory cooperation both on the bi-lateral and sub-regional level as well as on the regional level, with the establishment of the Community of African Bank Supervisors. Financial research can support this cooperation and integration process.

The politics of financial sector reform

A final important area is the political economy of financial sector reform. Short-term political interests and election cycles undermine the focus on long-term financial development; interests to maintain the dominant position of elites undermine the incentives of governments to undertake reforms that can open up financial systems and, thus, dilute the dominant position of the elites. On the other hand, the financial sector is critical for an open, competitive, and contestable economy because it provides the necessary resources for new entrants and can thus support economic transformation. Better understanding the political constraints in financial sector reforms and identifying windows of opportunity are therefore important. Focusing on the creation of broader groups with a stake in further financial deepening can help develop a dynamic process of financial sector reforms. An increasing literature has tried to understand the political economy of financial sector reform in developed and emerging markets; extending this literature to Africa can support the optimal design of financial sector reform programs.


Research in these five areas will have to be supported by an array of new data and a variety of methodological approaches. This implies expanding data availability towards non-bank providers, such as equity funds, but also exploiting existing data sources better, including credit registry and central bank data sets. In addition to exploiting more extensive micro-level data sets, a variety of methodological approaches is called for. I would like to point to just two of them. First, randomized experiments involving both households and micro- and small enterprises will shed light on specific technologies and products that can help overcome the barriers to financial inclusion in Africa. One of the challenges to overcome will be to include spill-over effects and thus move beyond partial equilibrium results to aggregate results. Second, further studies evaluating the effect of specific policy interventions can give insights into which policy reforms are most effective in enhancing sustainable financial deepening and positive real sector outcomes.

For research to succeed in obtaining the necessary data, asking relevant questions but also maximizing its impact, a close interaction between researchers and donors, practitioners and policy makers is necessary. This relationship can often be critical for obtaining micro-level data, such as from credit registries or specific financial institutions, or for undertaking experiments or RCTs. However, these links are also critical for disseminating research findings and having an impact on practice and policy in the financial sector.


Thorsten Beck is Professor of Banking and Finance at Cass Business School in London and Professor of Economics at Tilburg University in the Netherlands. He was the founding chair of the European Banking Center at Tilburg University from 2008 to 2013. Previously he worked in the research department of the World Bank and has also worked as consultant for - among others - the IMF, the European Commission, and the German Development Corporation. His research and policy work has focused on international banking and corporate finance and has been published in /Journal of Finance/, /Journal of Financial Economics/, /Journal of Monetary Economics/ and /Journal of Economic Growth/. His research and policy work has focused on Eastern, Central and Western Europe, Sub-Saharan Africa and Latin America. He is also Research Fellow in the Centre for Economic Policy Research (CEPR) in London and a Fellow in the Center for Financial Studies in Frankfurt. He studied at Tübingen University, Universidad de Costa Rica, University of Kansas and University of Virginia.

References and further readings

Beck, Thorsten, 2013a. Finance, Growth and Fragility: The Role of Government. CEPR Discussion Paper 9597.

Beck, Thorsten, 2013b. Finance for Development: A Research Agenda. Research Report for ODI.

Beck, Thorsten and Robert Cull, 2014. Banking in Africa, in: Berger, Allen, Phil Molyneux and John Wilson (Eds.): Oxford Handbook of Banking, 2nd edition.

Beck, Thorsten, Samuel Munzele Maimbo, Issa Faye, and Thouraya Triki, 2011. Financing Africa: Through the Crisis and Beyond. Washington, DC: The World Bank.

Beck, Thorsten and Wolf Wagner, 2013, Supranational Supervision: How Much and for Whom? CEPR Discussion Paper 9546.

Claessens, Stijn and Neeltje van Horen. 2014. Foreign Banks: Trends and Impact. Journal of Money, Credit and Banking, forthcoming.

Bond index: why the weighting methodology matters?

30.09.2013Cedric Mbeng Mezui, Christian Schedling

Indices have been around for centuries to measure performance and change. The first conceptual index was created by Rice Vaughan in 1675 in his book 'A Discourse of Coin and Coinage' when he compared price levels over time (Chance, 1966). In 1707, William Fleetwood published the first price index in the Chronicon Preciosum to show the change of prices over time (Chance, 1966). The first investment index was calculated when, according to McHugh and Wood (2006), Charles Henry Dow "invented" the concept of following parts of the stock market separately as indices, in 1896. As editor of the Wall Street Journal, he believed that "averages" or indices can be an indicator of business conditions. Charles Dow set up the rail index (now called the Trannies) and the Industrial index.

Many initiatives have been launched to construct weighted benchmark indexes to reproduce the underlying performance of emerging and African domestic bond markets, such as Ecobank Middle Africa Bond Index, JP Morgan EM Index, JP Morgan Next Generation markets index, Citi's WGBI, the GBI-EM Index, etc. They all look at a clear and transparent set of inclusion rules for selecting countries and instruments eligible for the index. This is well aligned with the African Development Bank agenda to actively contribute to the development of sustainable domestic debt markets in Africa through the creation of the African Domestic Bond Fund (ADBF) which will be invested in local currency denominated sovereign and state guaranteed sub-sovereign bonds.

An index is defined as a selection of securities with the same or similar risk features chosen to represent a particular market. Investors use indices to measure the performance (i.e. beta) in those particular markets. However, the debt crises in Europe for both sovereign and corporate bonds have steered some investors to query the advantages of indexes constructed based on the traditional technique of market-capitalization. For some index developers, cap-weighted fixed income indices are considered to provide suboptimal portfolio allocations and impair performance.

Market capitalization-weighted fixed income indexes

For an index to measure market performance it should be fully inclusive. For practical purposes it is impossible to measure the beta of every single instrument in the market. Therefore a representative sub-set is selected based on a transparent, replicable, relevant and objective rules set. For practitioners, a cap-weighted index reveals the relative value of debt securities as determined by market participants, without altering the market's relative structure. The main variable defining a security's weight in a cap-weighted index is its price (Bennyhoff, 2012). In an open economy, the market price of a security reveals every market participant's information, views, and anticipations about the value of that bond. Additionally, a liquid market makes sure that the price of any given security reflects the consensus appraisal of its intrinsic value, accounting for the projected risk and return from every investor's valuation practice. The cap-weighted index is the benchmark for most of fixed income investors. It holds its constituents in proportion to the size of their issuance. A benefit of the cap weighted index methodology is the easiness to track because it changes automatically as the price of underlying bonds change.

However, for many index developers (Arnott, Hsu, Li and Shepherd, 2010), the optimality of cap-weighted indexes as investment options hinge on the hypothesis of perfectly efficient capital markets and rational investors with mean-variance utility preferences. In the real-life, market mispricing is reflected in the market prices. As the rationale is that a cap-weighted portfolio bases its component weights on prices and that is a correlation between pricing errors and portfolio weights that leads to suboptimal distribution and performance. In brief, should an investor focus on elements, such as GDP, landmass, population, energy consumption, or an investor focus more on issues such as political risk, inflation, exchange rate policy, external debt... Practitioners consider that market capitalization captures all the potential factors that investors collectively analyze to fix a bond's price.

Fundamentally-weighted fixed income indices

In the weighting methodology constructed using fundamental variables (GDP, landmass, population, energy consumption); the weighting is based on the issuer's aptitude to pay its debt rather than on the quantity of debt outstanding. This methodology suggests that countries with better fundamentals get greater weights than those with weaker fundamentals. The use of these proxies lies in the fact that these four elements symbolize a country's capital, labor force, natural resources and technological sophistication. They play a catalytic role as primary inputs to an economy's growth. It seems that the fundamentally weighted portfolios outperform both cap-weighted portfolio benchmarks (Shepherd, 2012) and weighting according to fundamentals has led to a major enhancement to the Sharpe ratio.

The weighting of these indexes is based on several macroeconomic elements. Nonetheless, indebtedness is not the sole factor in assessing sovereign risk. For instance, if a country crowds in the market with new bond issues to the extent that investors start having doubts about the repayment capabilities of the sovereign entity, prices of outstanding issues may drop in anticipation of a lower credit value of the debt, and consequently the country's market capitalization will fall. This is well aligned with Reinhart (2010) analysis that showed that there is a certain level of debt that governments can reach before a slowdown in economic growth begins.

What needs to be considered for decision?

A cap-weighted fixed income index leads to suboptimal allocations and performance (or beta). On the contrary, a fundamentally weighted fixed income index yields superior performance over time. However, for practitioners the best index is certainly not one that offers the highest return during a given period of time but the one that most precisely measures the risk-reward features of the collective capital invested within the market being tracked.

Market capitalization offers advantages when considering the entire market and fundamentally weighted indices represent the segment of the universe that has the higher return potential. Both approaches have pros and cons. whereas in 'normal' times market cap weighted indices are less volatile in its composition and therefore cheaper to track, the fundamentally weighted indices have advantages in times of recessions and market turmoil. Maybe a combination of both would be the ideal solution - so called 'collared' schemes. The advantage would be moderate turnover and full scalability in times of efficient markets and diversification and less dependency on stressed sectors of the markets in turmoil.

Cedric Mbeng Mezui: Senior Financial Economist, African Development Bank

Christian Schedling: Managing Partner at Concerto

Reflections on the Drivers and Development Prospects of African Stock Markets

16.07.2013Simplot Kwenda

Recent press reports have commented on the limitations of the stock markets in Francophone Africa[1], underlining their low levels of development compared to their Anglophone counterparts. These reports further draw some form of a causal link between language and financial sector development. 

There is no doubt that the most dynamic African stock markets are located in the Anglophone countries. However, there is a need for a deeper analysis of the discourse that defines the relationship between the use of language (as a manifestation of the cultural environment) and the development of financial markets.  

This article therefore presents a brief assessment of the African stock market highlighting their performance and the opportunities they offer.  


About 94% of the world’s population live in countries with a functioning stock market[2]. In Africa, although several countries have stock markets that have been established for the past fifteen years, these markets have experienced delays in gaining firm footholds in their countries most notably in DRC, Madagascar, Mauritania, Somalia, Eritrea, Guinea and Burundi. Despite these shortcomings, several of these countries have unveiled plans to establish stock exchanges, most often under the impetus of the Central Banks.  

Not all existing African stock markets have the same levels of maturity. The table below presents an overview of the top 10 markets in Africa. The figures are based on the latest available data on capitalisation, liquidity and trading volume[3]:









Sociétés Cotées


345 775

 789 037

370 192




222 295

 48 682

15 984




218 562

 39 028

3 912




96 142

 60 088

4 366




72 836

 6 188





71 781

 3 104





43 544

 9 662

1 051




29 683

 10 203





29 667

 2 948





11 084

 1 185




It is worth noting that the most developed stock market in terms of volume is Anglophone, a factor warranting further discussion.  

Critical Drivers of Stock Market Development  

If the determination of the growth of an economy depends on the efficiency of the stock exchange markets, then it is the decisions of policy makers and private sector initiatives that will further impact this development. Public policies promoting a market economy can provide a favourable environment for stock market growth and development, and most importantly, improve people’s living conditions.  

The critical drivers of stock market development are that allow the deluding affects that are a consequence of supply and demand of the listed shares, ensuring the efficiency, liquidity and safety of the African stock markets. Smaller markets on the other hand, tend not to meet three essential criteria, frequently applied in comparative analyses, without presenting any structural risks. The three criteria are as follows:    

  • Level of primary market activity and the associated market capitalisation;
  • Stock market index trends’ impact on market capitalisation; and
  • Reasonable and predictable transaction costs in the secondary market.

However, market comparison analysis needs to be applied beyond volumetric factors, and should include criteria such as economic usefulness and/or the quality of service provisions. For example, when comparing the market activities in Ghana and the WAEMU – often cited as modern examples for developing Anglophone and Francophone markets - the following qualitative criteria must be incorporated in the analysis:  

  • Spread of Market capitalisation: 80% of Ghana’s market capitalisation is based on only 3 companies, compared to 15 in BRVM, therefore increasing the vulnerability of the GSE to only a few firms;
  • The impact of the market on the underlying economy: The decision-making organs of the three largest listed companies in Ghana are not based in Ghana. These companies are also listed on international exchanges[1]. This arrangement further increases the Ghanaian market’s vulnerability.
  • Representativeness of the economy: WAEMU’s stock market falls short of reflecting and thus representing the sub-regional economies of which it is comprised, in terms of geography (31 out of 37 listed companies are Ivorian), size (the average company size on the market is approximately 150 billion FCFA (USD300 million) however the economic fabric is comprised of companies that are much smaller), and sector (no mining company is currently listed). Ghana’s economy is better represented on Accra’s stock market than on WAEMU’s, which is comprised of companies covering an array of business segments and varying company sizes[2];
  • Market liquidity: Generally, the more liquid a market and the more shares that are distributed to private investors, the less volatile the market and the less susceptible it is to external shocks. In this regard, private investors should be preferred during the issue of new securities as well as on the secondary market. Additionally, to increase the allocation of shares to private investors, it is important to have regulations facilitating the lowering of the nominal value of shares.

Beyond the qualitative and volumetric analyses, should stock market efficiency not be the main concern for policy makers? Should the stock exchange be used as an institutional device or as a policy driver for economic growth?  

Establishing a stock market enables for example:

  • International issuers to increase their investments in a country; ·     
  • Manufacturing companies and non-financial commercial companies to increase their long-term funds at low costs and without currency risk;
  • Governments to access capital by privatisation;
  • Governments to diversify and expand financing opportunities without the currency risk faced when borrowing in foreign currencies.

African countries are increasingly issuing bonds on international and regional financial markets. A few notable examples:

  • Senegal issued a bond on the WAEMU’s BRVM in 2012, raising the equivalent of USD 175 million over 7 years at 6.7%;
  • Rwanda chose to issue its first bond in early 2013. The transaction worth USD 400 million over 10 years on the international markets at 6.625%.

In the face of limited fiscal resources and declining foreign aid, the reponses of Senegal and Rwanda could not have been more different:

  • By issuing a bond on the regional financial market, while opening it to the international markets, Senegal raised funds and revitalized its markets. In addition, there is no currency risk and annual coupons payments will lead to a 54% supply to resident accounts, having a driving effect on the national economy;
  • By issuing on the international markets, Rwanda secured a better rate than it would have obtained on the domestic markets, which would have amounted to nearly 20% of its national budget. However, this strategy is not without currency risks as it obliges the Rwandese government to settle nearly all coupons abroad without having a dynamic impact on its financial markets.

Without analysing the sustainability of public debt in a given country, we suggest that they should focus on elements that are less quantifiable but are nevertheless relevant, such as recycling the induced effects of a bond issue in their economy and consider currency risks. Stock markets can have an impact beyond the securities that are listed, as shown in the examples below:

  • With funds from a bond issue, a government can improve the production and distribution of water and electricity, thus improving its economy and daily life of inhabitants;
  • A situation where a commercial bank finances a company's investment and with a bond issue of similar duration, the company indirectly benefits from this stock market operation. In the absence of stock markets, commercial banks would only finance short term operations thus impeding on economic development;
  • The quality of insurer offer improves thanks to more liquid backing products, the insured indirectly benefit from the stock market.

Analysing these concrete situations shows that African stock markets, even in their early stages of development, are far from being just imitations or reactions to international trends. In less than ten years existence, even the most modest of stock markets in Central Africa issued, a bond amounting to 500 billion XAF. The few public and private listed securities contributed in adjusting the technical provisions framework for the insurance companies in the sub-region.  

African stock markets opportunities  

The prospects for development of African stock markets are real, provided they establish operating rules that are adapted to the cultural, economic and financial reality that surrounds them.  

In addition to national stock markets, some zones set up regional stock markets, in order to support their economic integration. Francophone stock markets are leaders in this regard, enabling wider securities markets for member countries with integrated economic, legal and monetary systems. This model has been applied in different ways:

  • The WAEMU is a world leader in this regard, with a regional stock market bringing together 8 countries for the past fifteen years, built on a national framework that has been active since the mid-70s. Its existence allowed several countries to raise long-term local currency financing without having to pay for a national stock market. Its growth potential remains high;
  • CAEMC faces a very different situation, due to the absence of a stock market tradition, and, paradoxically, to the existence of two stock markets for the past 10 years, one in Douala for Cameroon, the other in Libreville with regional outreach. This situation has hindered the growth of stock market activity in CAEMC; the circumstances surrounding the introduction of the Cameroonian market of the SIAT Gabon to be listed on the Libreville BVMAC is an example of this difficulty;
  • The EAC is characterised by the existence of several stock markets – in Uganda, Tanzania, Kenya, Rwanda – as well as a proposed stock market in Burundi. Several companies are listed on multiple markets in the EAC – 7 out of the 15 companies in Uganda, for example, are Kenyan companies that are also listed in Nairobi.

These examples show that regional stock markets must be based on real economic and financial infrastructure, supported by a long tradition of trade and a strong will to unite. This would thus support the recent trend towards increased economic integration with an adequate and innovative joint financial infrastructure.  

As we have seen, it appears that the Franc zone offers plenty of opportunities, including at the continental level, thus refuting the inability of the francophone countries to develop its financial activities.

Pierre-Yves AUBERT 

[1] Pourquoi les bourses francophones déçoivent? (About francophone stock exchange low performances). Jeune Afrique, 8th March 2013 ; Afrique de l’Ouest : la stratégie de la BRVM en débat (Questioning BRVM, WAEMU regional stock exchange strategy). Jeune Afrique, 21st March 2012. La zone Franc dans un étau, entre blocages culturels et manque de volonté politique (Stock exchange: the Franc zone strangleholded between cultural locks and missing political will). Jeune Afrique, 11th  January 2012.

[2] Source : One half-billion shareholders and counting : Determinants of individual share ownership around the world – P. Grout, W. Megginson, A. Zalewska – Septembre 2009

[3] AfDB Pocketbook 2012 and WFE Database. All figures are in USD.

[4] Tullow Oil Plc based in London is listed on the London Stock Exchange. Anglogold Ashanti Ltd is listed among others in South Africa, in the USA, in London, and in Australia. ETI based in Togo is listed at the BRVM and in Nigeria.

[5]  Middle-sized companies in the printing and fruit juice sectors are being listed.

Deepening local bond markets in the WAEMU through securitization

25.03.2013Anna Selejan

Securitization is a financial engineering technique that enables a private or public entity to raise cash by selling its cash-flow producing assets or its future revenues. These assets are sold to a Special Purpose Vehicle (SPV) which, in order to raise the needed cash, issues fixed income securities on the local capital market.

Although widely used in developed countries and in some parts of Africa (Morocco, Tunisia, South Africa and Nigeria), securitization is a new concept in most Sub-Saharan countries. In the WAEMU, asset securitization has been possible since 2010 when the regional regulator (the CREPMF) issued the relevant texts. The law allows for a very large spectrum of FCFA-denominated assets to be securitized: besides traditional mortgages, it is possible to securitize any kind of existing assets and even future cash flows. Moreover, there is no restriction on entities that can sell their assets: they can be financial and non-financial companies, as well as public sector entities. However, no securitization transaction has occurred yet in this part of Africa. This article explores how securitization can contribute to the development of the local bond markets.

The public debt market in the WAEMU presents numerous challenges to both potential issuers and investors. Issuing costs are high relative to other forms of debt financing and almost all corporate issuers need to have their bonds partially or fully guaranteed by a Development Financial Institution (DFI) or a guarantee fund, which further increases costs. Sovereign or quasi-sovereign issues dominate the bond market, and there is little credit discrimination among these bonds and the guaranteed corporate ones, they have more or less the same risk/reward profile. Maturities are concentrated in the 5-year segment with only a couple of bonds issued at 7 or 10 years. In a nutshell, the fixed income universe in the WAEMU is quite homogeneous, offering investors little choice in risk, yield and maturities.

The CREPMF has recently introduced the possibility of substituting a guarantee with a financial rating given by one of the 2 licensed rating agencies. This action would allow for more credit discrimination among securities, since interest rates would reflect the real credit risk of each issuer. However, the first bond without guarantor and with a credit rating is yet to be issued.

Asset securitization can be the solution for private and public sector entities looking to raise cash, as well as for investors keen on diversifying their portfolios, while substantially increasing the depth of the local bond markets. Through securitization, companies can monetize part of their good-quality assets or future revenues by selling them to a Special Purpose Vehicle (SPV), thus raising cash without having themselves direct recourse to capital markets. If the securitized assets are worth more off-balance sheet (translating into lower borrowing costs against the specific assets than against the company’s entire balance sheet), raising cash through securitization is much more cost-efficient than issuing company debt. With the advent of financial rating, securitization can help curb financing costs for companies that are considered risky and thus have a lower credit rating than part of their assets would.

For example, the first securitization transaction in Morocco that took place in 2002 involved a mortgage pool securitization for Crédit Immobilier et Hôtelier (CIH), a bank who wished to restructure its balance sheet. Through the true sale of a quality mortgage portfolio, CIH was able to raise DH500M (approximately $45M) through the indirect issuance of two senior and one junior tranche. The longest (16-year) senior tranche was issued with a 7.32% annual coupon, only slightly above the 7.1% coupon offered on a 15-year Moroccan government bond issued some months earlier. Had the CIH issued under its own signature, its borrowing costs would have been much higher.

Governments could also resort to securitization of existing assets or future flows, in order to reduce budget deficits, as well as to finance future investments. The Italian and Belgian governments in the late 90s both securitized outstanding social security receivables, thus putting them off-balance sheet in order to reduce their budget deficits to comply more easily with the Maastricht criteria. In 2004, the Government of Hong Kong SAR decided to securitize the future toll revenues from state-owned tunnels and bridges, thus raising a total amount of HK$6 bn (approximately $800M). The state government of West Bengal (India) raised Rs.15 bn (approximately $300M) through the securitization of future taxes levied on several fuel products. Apart from instant cash inflow in an alternative way, these kinds of transactions allow public authorities to have a better asset-liability management, by matching public asset cash flows to the repayment of the asset-backed securities, and a more efficient cost-benefit analysis and hence management of public assets, by clearly earmarking revenues to be used to fund them, instead of relying on general tax-backed funding. Moreover, future flow securitizations involve a thorough assessment of the sovereign originator’s legal and institutional environment, notably recovery processes and claim enforcement rules, which can foster necessary institutional reforms. This in turn can have a positive spill over effect on general investor confidence.

Securitized assets are carefully selected and their future behaviour (future cash-flows) is thoroughly modelled. The future cash-flows (and the risk of non-payment associated with them) are then structured into fixed income securities (tranches) of different risk-return profiles. Thus the same asset pool will serve as a funding source for senior (low-risk, low-return) and junior (higher risk, higher return) securities. The basic idea is to spread the risk unevenly among tranches and reward investors according to the amount of risk taken. For example, the above cited Moroccan mortgage-backed securities were issued in 3 different tranches, all offering different risk exposure, maturity and remuneration.

Getting exposure to a specified pool of assets and having the possibility to select the desired risk-return investment profile are clearly two important steps forward in the development of the local bond markets. While until now, investors could basically subscribe to two kinds of risks (sovereign and quasi-sovereign), with relatively low risk profiles, with the introduction of asset-backed securities, investors will not only be able to get exposure to a new risk classes, but they will also be able to select how much of it they want to hold (by choosing either the senior or more junior tranches). The asset-backed securities also introduce the notion of real credit risk: that of not being able to get back 100% of their initial investment or all coupons, based on the underlying asset pool’s overall performance.

Are institutional investors ready for the big change? Definitely. Are companies and national treasuries ready to add securitization to their list of financing options? Not quite so. Securitization, and financial engineering in general, are quite unknown concepts for the majority of companies in the WAEMU. The subprime crisis has not helped much either in popularizing the concepts in a positive sense. Since companies have traditionally raised cash through banks or DFI loans, a large part (if not all) of their asset base is pledged as guarantee, so there is little room left for alternative asset-based financing. Securitization offers a different perspective on assets: they are no longer considered as an end, but rather as a means to optimize a company’s financing. Realizing this concept may take some time and may need a more innovative state of mind.

We believe that education is key to the success of any financial innovation and that applies in the WAEMU as well. Once public and private sector decision-makers thoroughly understand the concept and philosophy of securitization, it will no longer appear as a mystical, complex and ultimately risky alternative. Bonds issued in this fashion will tap into huge reserves of regional savings (through asset managers and insurance companies) and thus further enhance the efficiency of local capital markets.  

Anna Selejan has been the Managing Director of ALC Titrisation, the first privately owned securitization SPV management company in the WAEMU, based in Abidjan, Côte d’Ivoire. Prior to setting up ALC Titrisation, she worked as Vice President – Investment Management with IC Securities, a Ghanaian asset management company and as Fixed Income and SRI (Socially Responsible Investment) portfolio manager with Allianz Global Investors in Paris (France) for several years. She holds a Master’s degree in Economics from the Budapest Corvinus University, Hungary and a Master’s degree in Portfolio Management from Université Paris XII, France.

Unlocking African Institutional Capital for Private Investment in Africa

01.10.2012David Ashiagbor

Sub-Saharan Africa has come to represent one of the biggest growth stories in emerging markets private equity. According to the Emerging Markets Private Equity Association, fundraising by fund managers for Sub-Saharan Africa rose from US$800 million in 2005 to over US$2.2 billion in 2008, before falling back to US$960 million in 2009 and rising to US$1.5 billion in 2010.  2011 saw fundraising fall slightly to $1.3 billion, with $490 million raised in the first half of 2012.

Fundraising for Africa has been led by development finance institutions, international commercial banks, pension funds and even foreign private investors (family offices). According to an EMPEA / Coller Capital published in 2011, 38% of LPs planned to “begin or expand Africa commitments”. This compares with just 16% a year earlier. The same study found that 67% of LPs found Africa “attractive or very attractive”, compared with just 37% in 2010. With increasing foreign interest in private equity in Africa, the issue of local capital (or lack of it) in private equity in Sub-Saharan Africa has become a hot topic for the industry.   

Long term savings vehicles (mainly pension funds) are uniquely placed to manage the long investment term and limited liquidity of private equity. In the African context, domestic pension funds would also capture a significant performance premium and the benefits of portfolio diversification. Based on latest available figures, if the largest African markets by assets under management were to invest 5% of their portfolio in private equity, a potential US$17 billion could be released to support private sector investment in Africa. Increased local capital could also play a catalytic role in attracting international capital to the continent. With assets under management in major countries like Nigeria increasing at 30% a year, this potential is set to increase still further in future.

Unlocking this potential means addressing the many challenges that African institutional investors face. First among these is the lack of awareness about the asset class across the continent. Even in South Africa, with its sophisticated financial markets, few pension funds have experience of or knowledge of private equity. One of the basic principles of successful investment is “stick to what you know”, so until African pension funds become more familiar with the asset class, the dream of an industry led by or with significant participation from local investors will remain just that. Achieving this requires understanding and openness, from the industry (fund managers and investors), local investors, policy makers, regulators etc. Pension funds, regulators and other stakeholders must be empowered with the right information which enables them to evaluate if and how private equity fits within their investment strategies and objectives.

It is in this context that the Commonwealth Secretariat has worked with the African Development Bank (AfDB), the African Venture Capital Association (AVCA), and Aureos Capital organised a series of regional roundtables on Private Equity in Africa, to:

  1. Introduce participants to private equity as an asset class;  
  2. Familiarise participants with the private equity industry in Africa and provide the opportunity to meet with fund managers, investors and other stakeholders;
  3. Provide participants with an understanding of the structure of private equity funds, their operations and governance, and
  4. Identify next steps to promote increase local participation in the private equity industry in Africa.

Regional roundtables have been held, in Nairobi (for East Africa) in May 2010 and Gaborone (Southern Africa) in October 2010 and Accra (West Africa) in May 2011. A pan-African workshop was also held as part of the AVCA conference in Accra earlier this year. Country events have also been held in Kenya (March 2011) and Nigeria (September 2011) in partnership with their respective pensions regulators.

Feedback from these roundtables has been overwhelmingly positive. The regional approach has worked well in terms of raising awareness of the private equity and the barriers to increased participation in the industry by domestic investors. However, different levels of awareness and country level regulation means that there are different priorities / needs amongst the countries, even within the same sub-region.

Specific recommendations for follow up activities have included:

  • Education and capacity building at all levels for all stakeholders  (including regulators, other institutional investors,  policy makers and lawmakers) Policy makers in particular need a better understanding of  private equity kind of environment in which it can thrive;
  • Practical assistance for the development of appropriate regulatory regimes and knowledge sharing amongst stakeholders, and;
  • Further research into private equity in Africa – areas of focus would include regulatory environment, funding raised, local participation levels etc.

In parallel with this educational effort, several African countries are in the process of reforming and liberalizing the pension sector. The revised Regulation 28 of the Pensions Fund Act in South Africa is probably the best known example of this. Under the regulation, institutional investors can invest up to 10% of assets under management in unlisted equities. This is up from historical figures of 5%, which encompassed all alternative asset classes, to a universal figure of 15% for both private equity and hedge funds. This is indeed a significant development, even more so now that the Public Investment Corporation has announced that it is looking at committing some$3.8 billion to private equity, following these changes.  

Reform in Nigeria is also paving the way for pension fund investment in unlisted equities.  The regulator, National Pension Commission (Pencom), was established in 2004 to regulate and supervise the pension fund industry. With total pension fund assets of approximately US$13 billion as at December 2010, and a growth rate of close to 30% per annum , Nigeria represents a potentially significant source of funding for the private equity industry.  

Prudential limits for private equity and alternative assets have been capped at 5% of assets under management. However, the regulations also require a minimum of 75% of funds need to be invested in companies or projects in Nigeria, and among other requirements, funds need to have multilateral development finance institutions (DFIs) as Limited Partners.   

Some commentators have argued correctly, that these requirements are unnecessary and pose a few problems for general partners and pension funds alike. A 75% exposure requirement to Nigeria effectively creates a Nigeria fund, concentrating risk – country, currency and political. The nascent nature of private equity in Nigeria and Africa in general is such that Pencom should be encouraging pension funds to use private equity as a risk diversification tool.  In looking at private equity alongside other asset classes – how much diversification is being achieved by pension fund managers? Are potential political and economic considerations coming at a cost to a pension fund’s mandate and returns?  

The issue is slightly different from a regulators standpoint. Their first duty is to protect the pensions of their fellow citizens. In that context, it would be unwise (to put it mildly) to allow pension funds unfettered access to invest in an asset class which neither they nor the regulators are fully familiar with. We only have to look to the origins of the global financial crisis to understand the potential damage that could cause. In that context, the slowly slowly approach taken by some regulators seems reasonable. The idea behind the additional restrictions in places like Nigeria is to get the pension funds to learn from experienced LPs (hence the requirement for DFIs) and then slowly lift these restrictions. From a market development point of view, it is hard to argue with that. It is also worth noting that despite these restrictions, some fund managers have successfully raised not insignificant sums from Nigeria. Yes the structuring has been perhaps more costly and complicated, but it can and has been done.  

In the end, whether we see increased domestic capital in African private equity (and perhaps who gets that capital) will depend significantly on the willingness and capacity of fund managers to invest time and energy in engaging with and understanding local investors and regulators:  What are their issues? What are the risks from their point of view? How can fund managers, existing LPs and industry associations work with them to resolve these? That is the true challenge of unlocking African institutional capital for private investment.

David joined the Commonwealth Secretariat in May 2007. He leads the Secretariat’s investment and private sector development programmes, including the Commonwealth Private Investment Initiative (CPII). CPII has helped to raise US$800 million for investment in Africa, South Asia and the Pacific through a series of private equity funds. David has been leading efforts to unlock local capital in Africa through a series of workshops for institutional investors, regulators and other stakeholders over the past two years. David previously worked for the International Finance Corporation (IFC) in Cote d’Ivoire, Cameroon and South Africa. Prior to IFC, he was a Project Officer responsible for Infrastructure at the Agence Française de Développement in Ghana. David has also worked as an Analyst in the Corporate Finance Department CAL Bank in Accra, where he set up and managed the bank’s brokerage subsidiary.


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