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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.

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.

African Infrastructure: Mobilizing Domestic Capital

25.01.2013Cédric Mbeng, Bim Hundal

Investing in and building out much needed infrastructure is one of the key challenges facing Africa. The task is vast and complex. But without making significant headway in meeting this challenge Africa’s promising economic renaissance could be imperiled. Africa is enjoying the benefits of a decade long boom in commodity prices which has propelled economic growth. It is hard to imagine this growth can be sustainable or that its benefits can be broadly shared without investment in roads, rail, ports and maybe most importantly power.

Meeting this challenge will need African governments to think innovatively, to push forward boundaries on the development of their financial markets and to ensure they have ambitious and well thought out plans for infrastructure.

Finance remains a crucial constraint. The African Development Bank and World Bank estimate the financing needs to be in excess of $93 billion per year (AICD, 2009). The Programme for Infrastructure Development in Africa (PIDA) study on key regional projects, endorsed by the 2012 African Union (AU) Summit, estimates a need of $68 billion out to 2020 just for that particular list of projects. These numbers are daunting. But the challenge has to be met; the future of Africa demands it.

In meeting these funding needs African governments need to be aware of several emerging and important trends. Firstly, it is increasingly felt that the financing strategy should be determined by African (ie the users of funds) not just by the international community (ie the traditional providers of funds). Secondly, African governments are aware that they can use the global markets as a source of funding at competitive rates and for significant amounts. The global investor base is more open to African credits than ever before. This has been well underlined by the recently successful bond offering by Zambia and by the performance of outstanding issues from the likes of Ghana and Nigeria.

But a clear new departure for the way forward is for Africa to think about how to use its own resources to meet it financing needs. In particular how can African capital markets be developed to provide finance for infrastructure.

One innovative instrument that has been used in other emerging markets is the ‘project bond’. This is eminently suitable for infrastructure finance because many infrastructure transactions are financed using ‘project finance’. Thus a ‘project bond’ is merely a bond instrument that works similarly to a project loan in that the financing is executed directly with the project vehicle or Special Purpose Vehicle (SPV) and the bond is repaid from the cash flows of the project. While the credit quality of the sponsors may in some affect the credit quality of the SPV, a project bond does not rely directly on the credit quality of the balance sheet of the sponsors.

Project bonds have been broadly used in other countries most notably Chile, Malaysia and Korea (Mbeng Mezui, 2012). In each case the government implemented reforms in the pension and insurance sectors to unlock long-term capital. This created a deep pool of institutional investors with demand for low risk, long dated assets in domestic currency. This investor base is ideally suited to buying project bonds or infrastructure investments. That they have a preference to invest in local currency meant that the projects could avoid any currency mismatches between revenues and debt service. In addition to policies to develop an institutional investors base these governments also crucially implemented economic policies that prioritized macroeconomic stability particularly in bringing down inflation and prevailing interest rates. Indeed in Chile the economy undertook broad based indexation which gave long term fixed income investors additional comfort in holding long term assets. That was an innovative solution used by policy makers and financial institutions in Chile and there is nothing to say the same structure needs to be adopted by others. But what is important is to have a long term strategy of seeking economic stability and creating institutions that will accumulate capital and will focus investment on long dated assets.

Alongside policies that can encourage the creation of pension funds is a need to ensure securities market regulations are in place to give investors comfort that their interests are protected and that procedures exist that enable institutions to invest and meet their fiduciary requirements. It is important once securities markets are created that legislation be passed to ensure that issuers provide satisfactory levels of disclosure and that the information given in prospectuses or other documents is transparent and meets the standards of institutional investors. It is vitally important that as domestic African capital markets develop they adopt internally acceptable standards. This is vital to building investor confidence.

Finally, governments must establish professional and efficient infrastructure departments that undertake the work necessary to get projects approved and ready to be taken to the financial markets.

If African governments can successfully implement these various policies not only will catalyze significant volumes of domestic capital into their infrastructure programmes but they will also set in motion the development and greater sophistication of their financial markets. This will be hugely beneficial to those economies as they face the challenges of development in the years to come. Project bonds can be the instrument to catalyze these various changes.

Already many African have in place the institutions and regulatory framework to allow for the issuance of project bonds and other innovative products that finance infrastructure. These should be strengthened and stakeholders should be encouraged to use the domestic capital markets. Alongside this African banks should be encouraged to work across the continent and to augment the capabilities of the capital markets.

International markets are undergoing great change. Many international banks are pulling back from infrastructure. But with supportive policies African countries can ensure they have increasing financial resources from its own markets. This will only serve to make Africa’s recent resurgent growth more sustainable and robust.

Bim Hundal: Chairman Lion's Head Global Partners
Cedric Mbeng Mezui: Senior Financial Economist, African Development Bank

Financing Africa’s Infrastructure Gap

14.02.2011Mohamed Hassan

When we talk about Africa’s infrastructure finance gap it is easy to be pessimistic.  I am not.  I am an optimist.
Some see the gap as a problem, a major challenge. But while I agree this finance gap is a challenge, I see it primarily as an opportunity – an opportunity for the private sector to maximise returns on their investment in what is a nascent market.

The highly-regarded Africa Infrastructure Country Diagnostic study (don’t be put off by the title) recently concluded that an annual investment of over $90 billion is required over the next ten years if Africa is to bring its infrastructure to the levels of other developing regions of the world.
About half of these investment needs are currently being met through official development assistance, foreign private sector investment  and, often overlooked, domestic investment  from within Africa.  In fact, the African taxpayer is the biggest investor in African infrastructure.  So it is not all gloom.  

African governments are not only committing public resources to infrastructure development.   They are also creating an economic environment that encourages private sector investment – micro-economic reforms, institutional reforms, efficiency improvements – alongside a commitment to improved corporate and economic governance.  Further,  enabling legislation for effective public-private partnerships (PPPs) is also being introduced.   

These improvements might not be consistent across all of Africa’s nations, but they will certainly continue.  And this improving climate will increase the opportunities for private sector involvement in Africa’s infrastructure sectors.  
The pessimists say that Africa is too risky for investors.  Yet we know that no investment is without risk, in any part of the world.   Indeed, the belief that investing in Africa is a higher risk than in other regions is a myth.  A recent study by the ratings agency Moody’s, which analysed project finance loans in Africa over 20 years, found that only one of the 92 loans defaulted.
What about rates of return?  Africa is an emerging market, so returns are high for those who invest early.  Many privately financed infrastructure projects in Africa are seeing returns that compare well with other parts of the developing world.    

Africa’s infrastructure finance gap is the result of demand and real growth -- demand that comes from Africa’s recent solid growth.  Some countries in Africa have seen double-digit growth and  Africa is now one of the world’s fastest growing economies, with GDP growth rates that are often at par with China and Brazil.  That growth produces demand – for power, for water, for transport and for communications.  Projects in all of these areas are bankable.

Even the recent economic downturn has shown that Africa is not the economic basket case some would like to believe it is. Across Africa, real GDP grew by 5% from 2000 to 2008. Hitting a peak of $1.56 trillion in 2008, the financial crisis brought Africa’s collective GDP down to $1.4 trillion in 2009. The negative impact was therefore not as great as in other parts of the world.  Importantly, Africa’s growth is built on solid foundations and is rebounding. 2010 finished with growth at 4.5% and economists expect growth to reach 5% in 2011.  

Ultimately, it seems we, the optimists, have both the facts and the figures in our favour. If you are an investor, you can’t ignore Africa.  And you can’t ignore infrastructure.  You will want to back a winner.


Mr. Hassan is the Coordinator of the Infrastructure Consortium for Africa (ICA) Secretariat housed by the African Development Bank in Tunis, Tunisia. He holds an MBA in International Banking and Finance from the University of Birmingham in the United Kingdom and a Masters Degree in Economics from François Rabelais University in Tours, France. He has 18 years of experience as a Financial Analyst and Investment Officer in the infrastructure sector.


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