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Pension funds can play a pivotal role in African aspirations for 2063

19.06.2017Gerald Gondo, Business Development Executive, RisCura Africa

African equities have recently faced strong headwinds, despite the positive fundamental growth prospects presented by the continent, writes RisCura Africa's Business Development Executive, Gerald Gondo.

If one considers the negative return profiles of a number of the African equity indices over the last two years, it would not be surprising if investors questioned the much-vaunted tag-lines of "Africa rising" and "demographic dividend". Should they retain their confidence that Africa will master its short-term challenges and look to the long-term prospects?

An important element of the African investment case is the oft-cited demographic dividend - referring to a period where a country's workforce is young, willing and able to be integrated into the economy and thus continue its economic growth. But, other elements such as rising disposable income, urbanisation, untapped resources and agriculture also reinforce the need to look beyond short-term challenges and rather to calibrate one's expectations towards the long-term. These drivers are set to continue to develop and arguably present the prospect of compelling organic growth waiting to be unlocked.

The questions investors should be asking are who and how will Africa unlock this growth?

African governments and policy-makers appear quite clear and resolute in their outlook. Evidence of this is the 28th African Union (AU) Summit held in Addis Ababa, Ethiopia in January 2017 whose theme was, "Harnessing the Demographic Dividend through Investments in Youth".

This was perhaps a clarion call by Africa's leadership to revisit its investment case by focussing on possibly its most durable and resilient growth proponent - its youth.

Turning to the AU's "African Aspirations for 2063" - six aspirations aimed at realising the continent's potential by 2063 - Aspiration 1 reads as follows:"A prosperous Africa based on inclusive growth and sustainable development. We are determined to eradicate poverty in one generation and build shared prosperity through social and economic transformation of the continent."

Critical to making in-roads in achieving this aspiration requires African governments, policy-makers, and regulators to undertake a critical review of inhibitors to effective inclusive growth and sustainable development. Deepening, integrating and developing African capital markets is an obvious and immediate area to target.

According to a Milken Institute - Centre for Financial Markets study, "Capital Markets in the East African Community - Developing the Buyside", these markets are fundamental to economic growth because they help to channel domestic savings in a more productive way. Thereby enabling the private sector to invest, produce and create jobs. African pension funds have been cited as a growing pool of assets that can and should be channelled towards deepening capital markets.

At RisCura, we continue to observe and record the growing asset bases of African pension funds due to rising incomes, with emphasis on the need for these funds to look to diversify their investments away from traditional investments. Particular focus is given to the continued elevated levels of exposure that many African pension funds still have to government fixed income securities, which could largely be attributed to static regulation.

A separate Milken institute study in East African pension funds found that "preferential treatment generally given to government securities through regulatory approaches - specifically, relatively high portfolio ceilings - may induce funds to over allocate to this asset class at the expense of others."

If Africa is to progress towards achieving Aspiration 1, alongside the remaining six and equally important Aspirations, the pace of capital market reforms needs to be accelerated. RisCura has previously noted several major African countries have revised pension regulations in recent years, with many either considering or actually revising rules around investments such as allowing investments into private equity and non-traditional asset classes. However, the pace of revision remains slow.

Deepening of capital markets may take time, but the channelling of savings towards productive sectors of the economy is not limited only to listed capital markets. Allocations to private equity and infrastructure as alternative assets classes through the burgeoning African private equity and infrastructure funds, will serve as critical interventions to accelerating economic development in Africa.

Regulatory reform will serve as a powerful driver for increased investment that deepen and develop African capital markets. African pension funds and institutional investors have an important and critical role to play in assisting Africa (through prudent channelling of savings) with projects and initiatives that can accelerate the fulfilment of Aspiration 1.

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About the Author

Gerald Gondo serves as an Executive within RisCura Africa and is responsible for Business Development. Prior to joining RisCura, Gerald was also a founding partner of a specialist investment advisory and investment management business (Atria Africa) based in Mauritius. Gerald's passion to have first-hand experience in investing in Africa led him to join a leading pan-African asset manager (Imara Asset Management) where he had dual responsibility of being lead analyst on listed equities in Egypt, Morocco, Zambia and Mauritius whilst also building the fixed income capability of Imara Asset Management in Zimbabwe. He started his career in private equity investment in Sub-Saharan Africa (Business Partners) and has also worked as a credit analyst for a highly-rated specialist institutional fixed income boutique (Futuregrowth Asset Management), where he was responsible for credit analysis for corporate credit and securitisation issuances within South Africa.

Understanding investment and financial flows in Africa

19.06.2017Kudzai Goremusandu, Financial Consultant, Africa Leadership Insights Institute

This post was originally posted on the NewsDay website.

According to the African Economic report 2016, Africa attracted an estimated $208,3 billion of external finance - foreign investment, trade, aid, remittances and other sources in 2015, the figure was 1,8% lower than the previous year. Falling commodity prices, particularly for oil and metals, were one of the key causes for the 2015 fall.

The total sum was projected to rise again to $226,5 billion in 2016. Portfolio equity and commercial bank credit flows dried up, reflecting tightening global liquidity and a market sentiment wary of risks. Rising remittances and increased official development assistance largely kept the figure up. African governments have to stabilise financial inflows in the short term and use them for sustained economic diversification for the longer term.

Flows of finance into Africa - foreign direct investment, portfolio equity and bonds, commercial bank, bilateral and multilateral bank credit, official development assistance and public domestic revenues - have remained broadly stable despite weak conditions in other parts of the world. Foreign Direct Investment (FDI) into Africa grew steadily from 2007 to 2013. In 2014, however, FDI fell back to $49,4 billion, but increased to $57,5 billion in 2015, according to International Monetary Fund (IMF) report 2015 estimates. Africa has attracted investment from industrialised countries such as France, the United Kingdom and the United States and emerging economies such as China, India, South Africa, and United Arab Emirates. Investment is still mainly directed at resource-rich countries, but non-resource-rich countries are becoming more attractive. The extractive sector, infrastructure and consumer-oriented industries are the main draws for investment.

Africa's pattern in foreign direct investment (FDI) inflows

While the European Union countries and the United States remain the largest investors in Africa, the emerging economies are a vital source too. Foreign investment into Africa increased by 16% from to $57,5 billion in 2015, according to IMF figures. Flows to North Africa reversed a downward trend, as investment increased by 20% from $17,2 billion in 2014 to $20,7 billion in 2015. East Africa has seen higher FDI since 2010. In 2015, the figure rose 16% to $8,9 billion in 2015 from $7,7 billion the previous year. For West Africa investment rose from $9,3 billion to $9,7 billion.

Central Africa saw a decline from $6,6 billion in 2014 to $5,4 billion. Southern Africa received $12,9 billion of FDI in 2015 against $8,7 billion in 2014, and $11,4 billion in 2013.

The leading African investment destinations in 2015 were: Egypt ($10,2 billion), Mozambique ($4,7 billion), Morocco ($4,2 billion), South Africa ($3,6 billion), Ghana ($2,5 billion), the Democratic Republic of the Congo ($2,5 billion), Zambia ($2,4 billion), Tanzania ($2,3 billion), Ethiopia ($2,1 billion), Guinea ($1,9 billion), and Kenya ($1,9 billion).

Without Egypt, investment to North Africa would have dropped. FDI to Egypt increased from $5,5 billion in 2014 to $10,2 billion in 2015. United Arab Emirates investors have played an important role in Egypt's recovery. Flows into Morocco fell to $4,2 billion in 2015 from $4,7 billion in 2014. But Morocco became the third largest recipient of foreign investment in Africa in 2015.

Potential growth areas of foreign direct investment (FDI) in africa

Consumer-oriented sectors in Africa attract growing foreign investment

Resource-rich countries still get the most foreign investment, but countries with no major commodities to rely on are taking a larger share of FDI. Countries that are not resource-rich received an estimated 37% of Africa's FDI in 2015, compared to 30% in 2010. Several countries without significant resources are attracting investors, including Kenya, Tanzania and Uganda, reflecting the shift towards consumer goods. Kenya is becoming an East African business hub for manufacturing, transport, services and information and communications technology (ICT). Investment is starting to diversify into consumer-market oriented industries, including ICT, retail, food and financial services.

African cities are future hubs of investment

With urbanisation, African cities are growing consumer markets increasingly targeted by foreign investors.

Disposable income and spending power in Africa's major cities will grow according to Oxford Economics, 2015, Future Trends and Market Opportunities in the World's Largest 750 Cities. Forecasts show that the gross domestic product of major cities is increasing. The most important ones will be Cairo, Cape Town, Johannesburg, Lagos and Luanda. This ranking reflects the quality of the business climate, infrastructure and logistics, and availability of skilled workers.

A recent surge in infrastructure investment indicates that states are investing in transport corridors to connect urban agglomerations and transform them into urban clusters. Examples include the Greater Ibadan-Lagos-Accra urban corridor, the Maputo Development Corridor, and the Northern Corridor between East and Central Africa. These investments will surge with deeper market integration through reduced transport and trade costs. They will also foster competition and productivity, which will make African hubs more attractive for foreign investors.

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About the Author

Kudzai Goremusandu is a strategic, innovative, dynamic, goal getter, enterprising management and financial consultant. He is the founder of Africa Leadership Insights Institute. Kudzai holds an award for effective media communication from the University of Zimbabwe. Kudzai is based in Harare, Zimbabwe. He can be contacted at kgoremusandu[at]gmail.com.

Can West African households dream of purchasing a home?

27.03.2017Caroline Cerruti, The World Bank & Olivia Caldwell, Affordable Housing Institute

110 million people currently live in the WAEMU region; over the next twenty years, an additional 100 million more will be born. Most of them will be urban dwellers, as the area is experiencing rapid urbanizing. This trend is aggravating an already large housing deficit, which mostly affects lower income groups in a context of widespread poverty (about 43 million live below the extreme poverty line). In Abidjan alone, 40,000 additional new households come to the city every year. Municipalities are struggling to keep up with population growth and rapid urbanization and as a result informal settlements and slums are growing.

So how can the growing housing deficit be addressed?

Making housing finance more affordable will enable a greater number of households to purchase a home. The latest data (2013) indicates low mortgage penetration with region-wide residential mortgage lending at just 15,000 new loans, despite a documented need for nearly 800,000 homes a year. WAEMU governments are acutely aware of the demand-supply challenges, and most have developed ambitious programs to build affordable housing; however, these are not enough to meet the existing demand and the quantum of public spending required is not sustainable. Instead, country and regional policies should leverage the resources of the financial sector to grow effective demand by increasing affordability via reductions in monthly required payments.

Fortunately, the WAEMU region presents some of the best conditions in sub-Saharan Africa to develop housing finance. The peg of the FCFA to the Euro has imported low inflation and favored macroeconomic stability creating an ideal environment for lengthening loan tenors. By contrast, rates in Nigeria, Kenya, Uganda and Ghana are double digits, reaching above 30% in Ghana.

Short loan tenors present one of the greatest constraints.

Currently, average mortgage interest rates are 7.5% with loan tenors of 7 to 8 years. If we consider the cheapest formal house priced of FCFA 7 to 11 Million (USD 11,300 to 17,800), a household needs a minimum annual income of USD 6500 to 10000 in order to afford it. When the loan tenor is lengthened to 15 years, the income required is lowered by 40%. Extending tenors with fixed rate loans has a much greater impact than lowering the rates themselves. We have estimated that by increasing tenors to 20 years, up to 1.5 million additional households will be able to afford the cheapest currently available houses on their local market.

So what can be done to lengthen tenors and increase affordability?

Five years ago, the WAEMU governments and the private sector acted by establishing the Caisse Regionale de Refinancement Hypothecaire (CRRH), a public-private regional liquidity facility that refinances banks' mortgages by borrowing in the domestic markets. Since 2012, it has issued six bonds, which helped provide ten year loans to banks to refinance their mortgage portfolio, thus allowing them to make customers' mortgages affordable by extending the tenor.

These efforts should be encouraged. The CRRH has so far only refinanced over 4000 loans, which is little compared to the needs. Longer term financing into the CRRH would allow it to refinance banks at longer maturities. At the same time, the CRRH should look at ways to refinance the large microfinance and cooperative networks which are in good standing and are interested in extending housing loans. Over 70% of WAEMU households work in the informal economy, are excluded from the banking sector and rely on microfinance networks for their financing needs. Supporting the CRRH with long term financing will enable banks and microfinance institutions to gain access to long term liquidity. The results will be directly captured by households who will have access to longer term loans and thus increase their home purchasing power.

Will this be enough?

The housing value chain in the WAEMU region presents many weak links that need to be addressed in order to promote a healthy housing market. Access to clean property titles remains a significant issue which continues to curtail both the supply and the demand side of the value chain. Though some countries have implemented reforms to improve their land systems (new Code Foncier in Benin in 2013, Reform Sheida in Niger in 2006, and digitization of the tilting agency in Cote d'Ivoire), these reforms have yet to pick up speed and be implemented at the regional level. The construction of affordable housing must also be supported as government programs have proved slow and mostly target public sector employees. Finally, rental housing should not be left behind as home ownership is not the only option to promote a better quality of life.

The affordable housing sector is in the process of being catalyzed. There is now a widespread awareness in all WAEMU countries that something must be done to address the urbanization and population growth. Steps are being actively taken to address the housing deficit across the region. We believe that through the supported development of CRRH, the dream of buying a home is at last within grasp.

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About the Authors

Caroline Cerruti is a Senior Financial Sector Specialist in the Africa region of the World Bank. She works primarily on housing and infrastructure finance, financial sector restructuring issues, and financial inclusion. She has been involved in various financial sector assessments jointly with the IMF. Before joining the World Bank, Caroline worked for the French Treasury on trade and financial regulation issues, and for three years as a banker in the European Bank for Reconstruction and Development. Caroline was educated at the Institute of Political Science in Paris (Sciences-Po), the Ecole Nationale d'Administration (ENA) in Paris, and is a CFA Charterholder.

Olivia Caldwell is Project Manager at the Affordable Housing Institute (AHI) where she focuses on housing development and finance in Sub-Saharan Africa and Haiti. Before joining AHI, Olivia worked with CEMEX and Bayer's Inclusive Business Platform, where she helped develop energy efficient affordable housing and infrastructure projects in Latin America and South East Asia. Olivia holds an Executive MBA at the London School of Economics and an MA in Sustainable Development from the United Nations Mandated University as well as a BA in Anthropology from McGill University.

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

What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 5

25.10.2016Amadou 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 African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), 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 fifth instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at how innovative instruments and partnerships can help mitigate the risks facing financial institutions in fragile situations in Africa.

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

What Role for Risk Mitigation?

Participants noted that the perception of the risk of doing business in Africa is higher than warranted by recent economic progress such as the relatively higher GDP growth in many countries. As a result tools to help mitigate risks can play a role in financial sector development.

Ms. Cécile Ambert of the African Development Bank (AfDB) presented the AfDB Credit Enhancement Facility (CEF), which was established in 2015 to increase private investment in countries perceived to be high risk, especially for long dated investment. The facility is part of the AfDB's strategy to increase its loans to non-sovereigns including in fragile countries. It uses a risk sharing model rather than risk mitigation because risk is not lowered but shared, which allows the AfDB to take more risk on its balance sheet. Initial seeding was used as cash collateral to take exposures that are off-balance sheet exposures for the Bank. That cash collateral served as the equity base that was leveraged three times. Risk-taking capacity stands currently at about $700m with 19 transactions ($300m) approved at the board. The facility does not provide payment insurance but default guarantee as it only pays when there is default. Risk and revenues are shared to ensure sustainability and the facility is now seeking diversity in terms of regions, sectors, size, and maturity.

A lesson from the establishment of the CEF is the need to manage the risk of maintaining an arm's length relationship so as to avoid having only bad assets allocated to the facility. Without an arm's length relationship, the sustainability of the facility would be at risk. Also, to achieve the objective of scaling up the CEF, it will be necessary to balance its exposures and not focus only on one sector, be it fragile countries or renewables only or women only investments. The challenge is to mitigate the propensity to layer objectives over objectives.

The CEF does not focus only on fragile countries. Its main objective is to provide capital relief with a view to stretch the balance sheet. The same project that consumes four times in a fragile capital consumes three times in a low-income country (LIC) in terms of risk premium. The vehicle is leveraged so had it focused only on fragile countries, it would have not have been able to leverage as much as it did. Also its projects are large scale e.g. power plants which requires scale. It also needs to achieve a risk rating and for that needs to establish a track record. Ultimately the objective of the facility is not to subsidize the AfDB's loans.

Mr. Henry Morris of the Africa Finance Corporation noted the prevalence of short-term finance instruments and the dearth of tools to mitigate the risks of medium term project finance. He stressed the need to consider the level of coverage for the different phases of a project. In particular, the construction phase is the riskiest part of the project cycle and instruments and enhancements are critically needed at the early phases of projects. He added that Africa is in need of infrastructure but bankability is a problem. As a result, it is crucial to think about the type of support needed at the developmental stages of projects. In short, the focus should be not just on transactions but also on development. Mr. Morris suggested that because risk sharing and participation can come in various forms, stronger partners should take a wider stake in the risk participation and not on a pro-rata basis.

There is a need to think beyond the typical infrastructure sectors and developmental projects need to be widened in their definition. For instance, exploration for crude and gas could be included in this category as gas-to-power projects are also important for infrastructure. Concession-type projects like in a public-private partnership (PPP) could be encouraged as was done for the Henri Konan Bedie Bridge in Côte d'Ivoire. Finally, Mr. Morris stressed that liquidity risk can be important in fragile countries such as in the Nigerian foreign exchange markets.

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. 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.

Mr. Franck Adjagba of the GARI Fund noted that the Africa Guarantee Fund-the largest guarantee fund in Africa-recently purchased the GARI fund. The AfDB and UNECA helped to establish the AGF in order to help micro, small, and medium enterprises access finance. AGF offers two types of products to banks and private equity firms: portfolio guarantees and individual guarantees (for instance for large infrastructure projects). AGF also helps banks raise long-term funds including through guarantees.

Ms. Consolate Rusagara of the FIRST Initiative also discussed the role of credit guarantee schemes in a context where governments intervene in sectors that are deemed as risky such as SME finance. How do authorities design public guarantees that are sustainable? How do they design them so as not to create the wrong incentives by destroying the credit culture? How can we help design public guarantees?

The principles for public credit guarantee schemes (CGS) sponsored by the First Initiative and the World Bank Group help governments answer such questions. The 16 principles cover four key areas: (i) the legal and regulatory framework (foundations for a CGS); (ii) corporate governance and risk management (building blocks for effectively designed and independently executed strategy aligned with CGS mandate and objectives); (iii) the operational framework (provide essential working parameters); and (iv) monitoring and evaluation (how CGS should report on their performance and evaluate the achievement of policy objectives).

A survey of key stakeholders has highlighted a number of important issues:

  • Most CGS were founded as public enterprises but it would be good to have CGS as public-private schemes.
  • Who supervises CGS? The board? The central bank? It is important to have a supervisory authority.
  • Mandate of CGS is not very clear: supporting SMEs? Agriculture? Typically there is mission creep and layers are added to layers. It is important to include a very clear mandate.
  • Claim management process needs to be very clear to avoid the death of the credit culture.
  • Performance evaluation: accountability by management is needed and performance should be measured.

In short, CGSs are important instruments for risk sharing but the role of government and its objectives need to be clear and funding should be sustainable. CGSs are only one tool to manage risks and should not be used by governments for subsidies. CGSs do not replace prudential regulation. Instead, credit risk management by banks and microfinance institutions should be adequate.

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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.

ABOUT THE AFF

What do renowned economists, financial sector practitioners, academics, and activists think about current issues of financial sector development in Africa? Find out on the blog - and share your point of view with us!

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Pension funds can play a pivotal role in African...Gerald Gondo, Business Development Executive, RisCura Africa
Understanding investment and financial flows in AfricaKudzai Goremusandu, Financial Consultant, Africa Leadership Insights Institute
The Supervisory Challenges of Financial InclusionDr. Bryan Barnett, Banking Advisor US Treasury, Office of Technical Assistance

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