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Barriers and Obstacles to Financial Integration in Africa

09.03.2015Excerpt from the African Development Report 2014

The following is an Excerpt from the African Development Report 2014, a flagship publication of the African Development Bank.

Regional financial integration has potential to foster financial sector development and inclusive growth. The development of cross-border banking, capital markets as well as regional financial infrastructure could expand the economies of scale, and lead to a larger pool of resources and better risk-sharing mechanisms.

The potential for reaping the benefits of regional financial integration are likely to be greater in Africa than elsewhere, given that financial markets on the continent are still small and shallow.

However, (...) there are many obstacles preventing countries from reaping such benefits. They include the fact that key financial inclusion principles, such as commitment and compliance to a single and acceptable set of rules, equal access to financial instruments and/or services as well as equal treatment in the use of financial services or instruments were seriously undermined in the process of regional financial integration. Moreover, there seems to be a tendency to mimic existing behavior and intermediation techniques, which in the past led to the concentration of bank lending to a few clients, while excluding the underserved at both micro (e.g. small firms, households and underserved sectors) and macro (fragile or post-conflict and poor African countries) levels.

The Report identifies as important challenges weak entry conditions (e.g. inadequate institutions, poor governance in both public and private sectors and underdeveloped financial markets) and the general lack of national financial inclusion policies that are consistent with an inclusive financial integration agenda.

The Report also argues that it is important for African countries to upgrade their regulatory and supervision frameworks for cross-border banking, harmonize them at the regional level and adopt international standards for financial sector stability and confidence building. This would entail a reduction in transaction costs and raise efficiency benefits for all market players. Most importantly, the strengthening of regulations should not undermine financial institutions' capacity to innovate and serve the low end markets and underserved sectors.

Besides, the Report argues that making available long-term funding at regional level is a precondition for inclusive regional financial integration. This could be achieved through a variety of ways, including efforts to enhance the dynamism and liquidity of stock exchanges, encouraging regional rather than national platforms; helping regional economic communities set up harmonized regional payment and information systems as well as credit registries, developing regional bond markets, and building capacity in local currency funding and infrastructure bond issuance.

* If you find value in this Excerpt, you may enjoy reading the full report, particularly the Chapter 5 on "Harnessing Regional Financial Integration".

Challenges of Integrating Payment Systems in Africa

07.07.2014Charles Augustine Abuka and Belinda Baah

When Alan Greenspan, the then Chairman of the United States Federal Reserve, heard of the terrorist attacks on September 11, 2001, his immediate reaction to the event's potential effects on the financial system was the impact it could have on the payment systems in America, and the knock on affects this would have on the rest of the world. He stated, "We'd always thought that if you wanted to cripple the US economy, you'd take out the payment systems. Banks would be forced to fall back on inefficient physical transfers of money. Businesses would resort to barter and IOUs; the level of economic activity across the country could drop like a rock."[1]

Payment systems form an integral part in any society; by facilitating the payment of goods and services, payment systems' increase the pace of economic expansion, improve the functioning of regional integrated financial markets and contribute to the pursuit of sound macroeconomic policies. Thus, African governments have, like the rest of the world, begun to recognise the sheer importance of sound payment systems and the benefits that could be accrued with their successful integration. Integration of African payment systems has lagged that of the rest of the world partly due to the culture of cash use and technological deficiencies. The original European regional Real-Time Gross Settlement System (RTGS), the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET), started operations in January 1999, more than 15 years ago. In order to be a real force in the expanding global economy, consumers, small and medium-sized enterprises and large corporations alike, must be able to make payments efficiently and safely. Thus, African governments need to improve their payment systems' capabilities to enhance domestic, regional and international trade.

The challenge posed by technical and technological deficiencies in many African nations is one of the greatest obstacles to full integration of payment systems in Africa. This challenge creates obstacles when attempting to link regional payment systems at vastly different stages of development across the continent. The East African Payment System (EAPS), a regional payment system linking the five member countries of the East African Community (EAC) namely; Kenya, Uganda, Tanzania, Burundi and Rwanda, has adopted a phased integration process due to the differing level of advancement with regards to the Real Time Gross Settlement (RTGS) systems in each country. Currently, Burundi and Rwanda are yet to join EAPS. The COMESA Regional Payment and Settlement System (REPSS), has also adopted a phased integration approach, with only 5 of its 19 member states currently linked to the system. The regional payment system to cater for South Africa; the Southern African Development Community Integrated Regional Settlement System (SIRESS), has so far linked the SADC Common Monetary Area (CMA), namely, South Africa, Namibia, Lesotho and Swaziland, to SIRESS (July 2013), with the aim of the rest of the SADC, non-CMA member countries to join in due time.

It is evident that a large number of regional payment systems in Africa have had to adopt a two-stage, or more, implementation programme to ensure integration can take place sooner rather than later. Furthermore, many banks in Africa do not have adequate infrastructure to cater to growing technology requirements. In Uganda, only three (3) out of twenty six (26) commercial banks use Straight Through Processing (STP)[2] technology for processing RTGS transactions, often preventing very quick settlement of transactions due to manual intervention in the processing of transactions.

To combat these challenges, there is a need to put in place harmonised technological standards, regulations and policies that ensure adequate supporting pillars for the payment and settlement systems to be integrated throughout the region and in order to protect payment flows. Additionally, assistance should be provided so that banks are better placed and incentivised to upgrade their systems and keep abreast of the improvements being made within the payment systems sector. There is also need for a drive for greater private sector involvement in payment systems, once the basics have been implemented, such as the implementation of an RTGS system in countries where they do not exist. Private sector involvement will encourage competition and innovations and thus induce competitively priced services, efficiency and hopefully greater accessibility. Moreover regulation that not only ensures adequate oversight of payment systems and their associated instruments, but also promotes an enabling environment for positive change, innovation and safe and efficient practices, must be implemented.

There are a number of fully integrated regional payment systems in Africa that demonstrate that the effective implementation can be achieved. In the West African Economic and Monetary Union (WAEMU), payment system reform saw the Central Bank of West African States (BCEAO) implement a 3-way plan to establish an RTGS system, an automated multilateral clearing system and the development of regional inter-bank card based system, in its member states where these features were lagging. The Economic and Monetary Community of Central Africa (EMCCA) member states are fully integrated in terms of monetary policy, laws and trade rules, partly due to their use of the same currency, the CFA Franc. In 2003, BEAC, the regions Central Bank, launched a reform project for their payment and settlement systems'. EMCCA now has two regional payment systems; SYGMA, operational in all member states since November 2007, is EMCCA's high value RTGS system and the Central African Tele-clearing System (SYSTAC) is an automated deferred net settlement system for retail payments comprised of national clearing centres installed in each of the EMCCA member states.

In our forever-expanding and forever-advancing global society, Africa must ensure that it keeps abreast of all the advances and improvements being made within the payment systems arena to ensure it does not get left behind, and thus fully benefits from being truly connected to the rest of the world. As aforementioned, African nations understand the necessity of sound, interconnected payment systems and in May 2014, the Association of African Central Banks (AACB) committed to strengthening the process of integration of African payment systems by agreeing to a number of initiatives to facilitate the process of regional and eventual continental, integration. The technical staff from AACB member countries have proposed to work together by commissioning a continental body to accelerate integration by, for instance, establishing working groups that will, but are not limited to, ensuring all existing deficiencies in technology, technical capacity, legislative and regulatory frameworks are identified and addressed with strategic plans devised and eventually implemented. Strengthening the legal and regulatory environment will clarify the role of the regulator, the users and the operators of payment systems, improving confidence and thus increasing the use of non-cash payment systems. In addition, the successful implementation of the necessary components of a multilateral clearing mechanism and institutional framework for the development and interconnection of African payment systems will speed up the process of integration. By improving payment systems, barriers to trade are reduced whilst links and networks are strengthened and thus trade and exchange of capital, goods, services and labour across the region will be expanded, promoting economic activities and growth.

[1] Excerpt from, ' The Age of Turbulence by Alan Greenspan,' www.ft.com/cms/s/2/4ff4c5f0-6c33-11dc-a0cf-0000779fd2ac.html

[2] 'Ability to receive and process financial transactions from start to finish utilizing an electronic system and without intervention of any sort.' www.investorwords.com/8422/straight_through_processing.html

 

Charles Augustine Abuka is the Director Financial Stability Department at the Bank of Uganda. He has been involved in the implementation of Uganda's macroeconomic policies since 1998. 
Belinda Baah is an Economist and Principal Banking Officer working in the Bank of Uganda's Financial Stability Department, in the Financial Market Infrastructure Oversight Division.

 

References

  • Geva, B., 'Payment System Modernisation and Law Reform in Developing Nations: Lessons from Cambodia and Sri Lanka ', The Banking Law Journal, 2009. papers.ssrn.com/sol3/papers.cfm
  • 'Payment Systems and Intra African Trade', UNECA, September 2010. www.uneca.org/sites/default/files/publications/atpcpolicybriefs11.pdf
  • 'EAPS Project Appraisal Report', AfDB, October 2012.· 'The Evolution of Payment Systems', the European Financial Review, February 2012.
  • 'The Southern African Development Community Integrated Regional Settlement System (SIRESS): What? How? And Why?', Central Bank of Lesotho, Economic Review, July 2013.
  • TARGET Europe: www.ecb.europa.eu/pub/pdf/other/targetfffen.pdf
  • Wentworth, L., 'SADC Payment Integration System', European Centre for Development Policy Management, August 2013
  • 'Electronic Payments in Africa', the Economist, September 2013.
  • 'Wamz Payments System Development Project in the Gambia, Guinea and Sierra Leone: Progress Report', West African Monetary Institute, November 2013. wormholedev.net/qwamz/

Movable collateral registries and firms’ access to finance

06.01.2014Maria Soledad Martinez Peria

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.

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.

Conclusions

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.

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