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Harnessing the Buy Side’s Potential to Develop East Africa’s Capital Markets

14.02.2017Jim Woodsome, Senior Research Analyst, Milken Institute

First published on the Milken Institute Blog website.

A key step in developing a local capital market is to develop the "buy side"-to encourage greater participation of local institutional investors such as pension funds and insurance firms. If managed well, these pools of savings can become important sources of long-term financing, including for infrastructure, which can drive socioeconomic growth.

The share of residents in East African Community (EAC) countries Kenya, Rwanda, Tanzania, and Uganda who access pension and insurance products is still small, although growing. Savings managed by local institutional investors in these countries nearly doubled in just four years, to about $19 billion by early 2016. We recently surveyed buy-side institutions in these four countries to ask how they are managing savings across asset classes and EAC countries. See the findings here.

We found that most of these investors want to further diversify their portfolios, but they are impeded largely by a lack of investable securities and risk-management products that allow them to invest in a way that meets their aims. This points to a need in these markets for more long-term investment vehicles, in particular-as well as market participants. For example, a large majority of surveyed investors showed strong interest in new vehicles such as a regional "fund of funds" that could pool their resources and manage risk by investing across diverse infrastructure projects by sector and country.

There already are clear signs that pension funds, in particular, have been diversifying their portfolios over the past decade-shifting further away from the most liquid asset classes. Surveyed pension funds hold an average of just 1 percent in cash and demand deposits across the EAC focus countries. And pension fund and insurer investments in short-term government securities typically fall well below national and even internal ceilings. Survey findings show pension funds generally hold much more in longer-term than short-term government securities. But very limited corporate bond holdings, even for pension funds, is at least partly the result of small market size and lack of product.

Our findings also show that tiny allocations so far to private equity and venture capital (PE/VC) reflect limited experience and capacity evaluating these new asset classes-more so than lack of demand or investment limits. In fact, national regulatory approaches are still evolving. Greater clarity on how regulators will treat these new asset classes may encourage more investment. While certainly not risk-free, some investment in PE/VC as part of a well-managed portfolio could help generate returns. At the same time, it will be important to boost risk-evaluation capacity among regulators, investors, and financial intermediaries.

How do national regulations affect how these investors manage their portfolios? We found that in most cases, national regulatory investment limits are not the binding constraint preventing local institutional investors in the EAC from further diversifying their portfolios. Their actual allocations to public equities and corporate bonds generally fall well below national regulatory caps. And internally set targets tend to fall well below national ceilings-as does actual investment in these securities.

Around half of investors said they invest some of their portfolio assets outside their home countries-typically in other EAC countries. How can these EAC markets draw on regional ties to attract institutional investors? Roughly half of survey participants said access to better strategies and instruments for managing foreign exchange risk would make them more likely to invest in assets across EAC borders.

We found that some investors may not be clear on the intraregional restrictions by asset class they actually face. Regulators should step up communications with investors to ensure they clearly understand both the limits and opportunities in how they invest within the EAC and across asset classes. A well-functioning buy side can reduce an economy's reliance on foreign portfolio investors, increasing its resilience to sudden capital inflows and outflows. Further progress on intraregional integration within the EAC may help mitigate some of the risks associated with cross-border investment. Limited investable securities in local capital markets strengthens the case for easing or harmonizing restrictions intraregionally. This, in turn, could improve market liquidity, deepen the EAC's capital markets, and make it easier for local institutional investors to diversify their portfolios.

Our complete survey findings are available here.

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About the Author

Jim Woodsome is a Senior Research Analyst at the Milken Institute's Center for Financial Markets. In this role, he conducts research, organizes events and helps manage initiatives related to the Center's Capital Markets for Development (CM4D) program.

 

Getting ahead of the Curve: How the Regulatory Discourse on M-insurance is Changing

10.02.2017Catherine Denoon-Stevens, Senior Research Associate, Cenfri

First published by FSD Africa on 9 February 2017.

Nearly a year ago, we joined the A2ii in Abidjan to sit down with a roomful of regulators to discuss the challenges and imperatives CIMA faces in regulating mobile insurance at the CIMA-A2ii Workshop on Mobile Insurance Regulation. In the CIMA context, as with most countries in Africa, mobile network operators (MNOs) and the technical service providers (TSPs) that support them are emerging as key players in extending the reach of insurance. The discussions at the workshop focused on how insurance regulators can broaden their focus to include these MNOs and TSPs, as well as how to cooperate across different regulatory authorities.

A year on, these considerations remain as valid as ever, but we have come to realise that there is more at stake than m-insurance. Digital technology is changing the insurance landscape as we know it by paving the way for new players and business models with the potential to rapidly expand coverage. This is causing a re-think of how insurance is traditionally delivered. In addition, while m-insurance remains important, looking beyond m-insurance to the broader insurtech field is important to truly understand the opportunities technology provides to change the game in inclusive insurance and the associated risks.

Thus far, the insurtech debate has largely focused on developed country opportunities. But the tide is turning. My colleagues and I recently scanned the use of insurtech in the developing world to see what the potential is for addressing challenges in inclusive insurance. We found more than 90 initiatives in Asia, Latin America and sub-Saharan Africa that fit the bill. What we saw is that the "insurtech effect" is happening in two ways.

Firstly, digital technology is a tool to make insurance as we know it better: it is being used as a backbone to various elements of the insurance life cycle, in an effort to streamline processes, bring down costs and enable scale. Examples include new ways of data collection, communication and analytics (think big data, smart analytics, telematics, sensor-technology, artificial intelligence - the list goes on), as well as leveraging mobile and online platforms for front and back-end digital functionality (such as roboadvisors, online broker platforms, mobile phone or online claims lodging and processing, to name a few!). It also allows for more tailored offerings: on-demand insurance initiatives are covering consumers for specific periods where they need that cover, for example for a bus ride, on vacation or when borrowing a friend's car for one evening, while advances in sensor technology mean that insurers can adapt cover and pricing based on usage, for example allowing customers to only pay car insurance for the kilometres they actually drive every month.

In all of the above, digital technology, including the application of blockchain for smart contracting and claims, makes the process seamless.

Secondly, digital technology is a game changer. In many ways, it is changing the way insurers do business, design and roll out their products, and, importantly, who is involved in the value chain. Peer to peer platforms (P2P) are a much-discussed example of these next generation models. They are designed to match parties seeking insurance with those willing to cover these risks. The revolutionary element lies in the ability to cover risks that insurers usually shy away from due to the lack of data to adequately price the risks - all now enabled by digital technology. But these platforms are often positioned in regulatory grey areas: if all the platform does is match people to pool their own risks, does it then need a licensed insurer involved? And if advice is provided by a robot powered by an algorithm, who is ultimately accountable? No wonder insurance supervisors are sitting up straight when you mention the word "tech". As Luc Noubussi, microinsurance specialist at the CIMA secretariat, said at the 12th International Microinsurance Conference in Sri Lanka late last year: "Technology can have a major impact on microinsurance, but change is happening fast and regulators need to understand it".

So, how do they remain on the front foot in light of all of this, what different functions, systems and players do they need to take into account and what are the risks arising? In short: how can they best facilitate innovation while protecting policyholders? Front of mind is how current regulatory and supervisory frameworks should accommodate new modalities, functions and roles - many of them outside the ambit of "traditional" insurance regulatory frameworks - and what cooperation is required between regulatory authorities to achieve that.

Two weeks from now we'll again be sitting down with regulators from sub-Saharan Africa for the Mobile Insurance Regulation conference hosted in Douala, Cameroon, from 23 - 24 February 2017 by the A2ii, the IAIS and the 14 state West-African insurance regulator, CIMA, supported by UK aid, FSD Africa and the Munich Re Foundation. This conference will delve into the opportunities that mobile insurance present and the considerations for regulators and supervisors in designing and implementing regulations to accommodate it. The imperative to find an m-insurance regulatory solution remains, but it is clear that the horizon has broadened: at play is the way that insurance is done across the product life cycle, who the players are in the value chain and, at times, the very definition of insurance.

As we suggested in an earlier blog, this could be microinsurance's Uber moment, but then regulators need to be on-board. We look forward to taking part in the discussions to see how supervisors plan to do just that.

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About the Author

Catherine Denoon-Stevens is a Senior Research Associate at Cenfri and has been part of the team since 2012. At Cenfri, her research has focused on building access to inclusive insurance markets, specifically the harmonisation of insurance regulation within the Southern African Development Community (SADC) region; innovative financial services distribution models; and Making Access to Financial Services Possible (MAP) studies in Southern Africa and South Asia. In addition, she is part of the team that runs Cenfri's capacity building portfolio, coordinating open-enrolment and in-house executive education trainings in microinsurance and national payment systems.

Message from the MFW4A Partnership Coordinator

30.01.2017David Ashiagbor

Dear Readers,

Let me begin by wishing you all a very happy and prosperous 2017, on behalf of all of us at the MFW4A Secretariat.

2016 was a rewarding year for MFW4A. We were proud to host the first Regional Conference on Financial Sector Development in African States Facing Fragile Situations (FCAS) in Abidjan, Cote d'Ivoire, jointly with the African Development Bank, FSD Africa, and FIRST Initiative. The conference attracted some 140 policy makers, business leaders, academics and development partners from over 30 countries, to discuss the role of the financial sector in addressing fragility. The conference has already led to several initiatives by MFW4A and our partners in the Democratic Republic of Congo, Liberia, Sierra Leone and Somalia. We expect to build on this work in 2017.

Our support to the Conférence Interafricaine des Marchés d'Assurances (CIMA), the insurance regulator for francophone Africa, helped them to secure financing of EUR 2.5 million from the Agence Française de Développement. The funding will help to expand access to insurance in a region where penetration rates are less than 2% - well below the average for the continent. We worked closely with a number of our funding partners to help define their strategies in Digital Finance and Long Term Finance. These results are a clear demonstration of how the Partnership can directly support the operations of its membership.

With the support of our Supervisory Committee, we took steps to ensure the long term sustainability of the Partnership. The approval of a revised governance structure which fully integrates African financial sector stakeholders, public and private, was a first critical step. The ultimate objective is to expand membership and build a true partnership of all stakeholders in Africa's financial sector.

2017 will be a year of transition for the Partnership. It marks the end of MFW4A's third phase, and the beginning of its transformation into a new, more inclusive partnership, with an expanded membership. We will focus on revamping our value proposition to provide more focused, needs based services with the potential to directly impact our current and potential membership. In so doing, we hope to consolidate MFW4A's position as the leading platform for knowledge, advocacy and networking on financial sector development in Africa.

In closing, I must, on behalf of all of us at the MFW4A Secretariat, thank all our funding partners, stakeholders and supporters, for your constant support and encouragement over the years. We look forward to working together to strengthen our Partnership.

With our best wishes for a happy and prosperous 2017,

David Ashiagbor
MFW4A Partnership Coordinator

African Financial Markets Initiative (AFMI) hosts Annual Local Currency Bonds and Financial Sector Development Workshop in Abidjan, Cote d’Ivoire

13.12.2016Cédric Mbeng Mezui, Coordinator, African Financial Markets Initiative (AFMI)

The 5th Annual Local Currency Bonds and Financial Sector Development Workshop, hosted by AFMI and the African Development Bank (AfDB) will be held on 15-16 December 2016, at the AfDB's CCIA Building in Abidjan, Cote d'Ivoire. MFW4A spoke to Cédric Achille Mbeng Mezui, AFMI Coordinator, to find out more about their flagship event.

Q1: What is the rationale behind this Annual workshop, and its importance?

The African Development Bank (AfDB) launched the African Financial Markets Initiative (AFMI) in 2008. AFMI contributes to the development of domestic bond markets in Africa through its two complementary pillars: i) the African Financial Markets Database (AFMD); and ii) the African Domestic Bond Fund (ADBF).

AFMD is a comprehensive database on African domestic bond markets, with a focus on treasury bills and bonds. AFMD includes data on the bond markets of 41 countries provided by AFMI's network of Liaison Officers, who are officials of their respective central banks. The data provided allows for a comparison across countries for both investors and issuers. The annual workshop provides AFMI's liaison officers the opportunity to get together and discuss developments in their various markets, exchange ideas as well as discuss how to improve the AFMD. The workshop will also be an opportunity for for the officers to further hone in their data collection skills, and to improve the quality whilst also increasing the amount of data collected in all of AfDB's Regional Member Countries.

This year we will also present the African Domestic Bond Fund (ADBF), the multi-jurisdictional first fixed income exchange-traded fund (ETF) in Africa. The AfDB Board approved a seed investment of USD 25 million in the ADBF on 7th December 2016. We will be presenting ADBF with a view to identifying potential investors.

Q2: Give us a brief overview of the workshop

The event will bring together more than 300 delegates including Central Bank Governors, Ministries of Finances, bank CEOs, pension funds, as well as over 60 liaison officers covering the debt market, pension, insurance, banks, and Senior Management of the AfDB. This year, we are expecting the workshop to spur interest and commitments from potential investors for the African Domestic Bond Fund (ADBF).

As a brief background, the ADBF was conceived as an integral part of AFMI, with the objective of contributing to the development of local debt markets in Africa, through investing in local currency-denominated debt. The ADBF coincidentally will be topic in the first session of Day 1, and this is where we are working to create awareness around the Fund. We are very excited about the ADBF, given its recent approval by the Board of Governors of the AfDB on 7th December 2016.

The second session will be a panel discussion with senior officials including, Honourable Minister Mr. Thierry Tanoh, CEO of the Mauritius Stock Exchange, Mr. Sunil Benimadhu, AfDB Finance Vice President, Mr. Charles Boamah, Representative of BCEAO, Governor M. Antoine Traore and the representative of the CEO of AfricaRe, Mr Kone Seydou. The aim of the session is to highlight the importance of local currency bond markets development, and how the Bond Fund could impact the development of the Bond Markets in Africa.

The third session aims to identify how investors can invest in the ADBF, and to address different issues related to the Fund, including access, transaction costs, risk/return asymmetry, liquidity and regulation. This session will comprise of a mix of panelists from the private sector, potential investors, including AfDB's Financial Sector Development Department Director, Mr Stefan Nalletamby, CEO of MCB Capital, Mr. Rony Lam, CEO Africa Re Representative - Director of Finance and Accounts, Mr Kone Seydou, Chair of the Nigerian Pension Funds Association, Mr David Uduanu, and Managing Director, Head of Africa- Public Sector - Citibank London, Mr Peter Sullivan. 

Day two will comprise of two closed thematic workshops. In the first session, there will be a presentation on AFMI as well as a presentation on the African Markets Database (AFMD). In the second thematic workshop of the day, the AfDB's Statistics Department, ESTA, will present the Open Data Platform, followed by a presentation of AFMI's Data portal and website.

CNBC Africa and Vox Africa will cover the event.

For more information and to register, please visit the AFMI website

What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 6

08.11.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

In June 2016, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the Making Finance Work for Africa Secretariat (MFW4A), the African Development Bank (through its Transition Support Department, Financial Sector Department and the Initiative for Risk Mitigation), FSD Africa and FIRST Initiative also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this last instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at the different innovative solutions, instruments and other opportunities to strengthen the capacity of financial institutions operating in fragile contexts in Africa.

In case you missed it, you can read parts One, Two, Three, Four, and Five.

Strengthening Capacity

Mr. Cedric Mousset of the World Bank stressed that capacity is a big constraint in fragile countries and there are no easy solutions. Capacity building should be done when there are incentives for financial institutions to reform such as incentives to leverage market opportunities and improve markets. The supervisory and regulatory framework is key as it allows for adequate competition, restructuring, and the adoption of international standards such as the Basel standards.

Mr. Paul Musoke of FSD Africa stressed the importance of developing scale and sustainability in the financial system in Africa. To do so, his institution favours a catalytic strategy. In particular, FSD's Market Building Approach assesses the environment, looks at the core where demand is meeting supply, assesses the market failures in the supply side and builds capacity within the supply side. Such an approach requires stakeholders to look at support functions such as information, infrastructure, and skills development. It also requires a good grasp of rules such as informal norms, standards, laws, and regulations. Its goal is to build a sustainable market that continues to operate once FSD exits and that crowds-in other players.

Instruments available from development partners

Ms. Kilonzo of the African Development Bank (AfDB) noted that the landscape of African finance is dominated by small and fragmented financial systems with limited access to basic financial services. The AfDB's priorities include not only broadening access to finance but also supporting "green" growth, infrastructure development, regional financial integration, governance, entrepreneurship and innovation, and financial skills development. These priorities can be articulated in the Bank's new "High Fives" areas-Light up and power Africa, Feed Africa, Integrate Africa, Industrialize Africa, and Improve quality of life for the people of Africa.

Finance is an integral part of the Bank's strategy and is based on two pillars: access to the underserved, youth and women (Pillar I) and broadening and deepening Africa's financial systems (Pillar II). The Bank's operations and products cater to a diverse set of financing priorities, including financial institutions, trade finance, and financial markets.

Mr. Nikolaos Milianitis of the European Investment Bank (EIB) shared that the EIB has EUR1 billion per year in new activity in Africa, covering both the public and private sectors through a range of instruments such as loans, equity, guarantees, and technical assistance. The EIB brings best practices from its worldwide operations and a particularity of its operations is that they all include a sectoral expert and a banking expert.

Mr. Musoke discussed FSD's Market Systems Approach which focuses on building services that are critically missing: (i) executive coaching so as to assess environment and respond to environment; (ii) e-learning as a cost effective education tool and as a way to tap experts, working with content providers and platform deliverers, and learning for financial institutions; (iii) data analytics so as to use information that is available e.g. financial diaries in Kenya. FSD tries to develop local supply so banks can tap into these services and hopefully think differently about their markets.

Change management is critical for financial sector development and FSD Africa identifies banks that are ambitious about serving the under-banked and helps them assess existing constraints and solve them. To make the change, it offers funding, research, and technical assistance over a 4-5 years period. For instance, FSD is working on establishing a Financial Frontiers Challenge Funds to identify 23 financial institutions, including in fragile states, so as to support an analysis of the environment, help them develop proposals that can be funded for GBP 500,000.

Finally, Mr. Mousset flagged the Conflicted Affected States in Africa (CASA) initiative through which the IFC provides assistance to fragile African states to rebuild their financial sector and improve the business environment.

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You can download all presentations on the conference website.

You can view a selection of photos here.

You can watch the conference in our YouTube channel here.

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Harnessing the Buy Side’s Potential to Develop East...Jim Woodsome, Senior Research Analyst, Milken Institute
Getting ahead of the Curve: How the Regulatory Discourse on...Catherine Denoon-Stevens, Senior Research Associate, Cenfri

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