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Pension Funds and Private Equity: Unlocking Africa’s Potential

21.07.2014Stefan Nalletamby

Dear Readers,

A resounding thank you to everyone who joined us in Dakar, Senegal, last month for our Partnership Forum. I hope you found the event as engaging and stimulating as we did. One of the lessons for the Secretariat that emerged from the Forum discussions is the need to deepen our engagement with key stakeholders in support of financial sector development in Africa. This means that we will be doing things differently, rather than doing different things. Our emerging work programme with pension funds is an example of this.

Pension funds play a critical role in finance through the mobilisation and allocation of stable long-term savings to support investment. Recent reforms in many African countries have created private pension systems, which are rapidly accumulating assets under management (AUM). The Nigerian pension industry, for example, grew from US$7 billion in December 2008 to US$25 billion in December 2013[1]. Similarly, Ghana's pension industry is expected to expand by up to 400 per cent in the four years from 2014 to 2018[2]. Pension assets now equate to some 80 per cent of GDP in Namibia [3] and 40 per cent in Botswana[4]. How can Africa mobilise these domestic resources to support private sector development, as well as the investment in infrastructure and social services that need to drive continued growth and transformation? How can these long-term savings support the development of capital markets on the continent?

In the coming days, we will be releasing a joint publication, "Pension Funds and Private Equity: Unlocking Africa's Potential" with the Commonwealth Secretariat and the Emerging Markets Private Equity Association (EMPEA). The report provides information that is crucial to a better understanding and appreciation of the pensions industry in Africa. In addition to outlining the latest data and regulatory profiles for 10 African countries, the report estimates how much capital could be available to support private equity in these countries as well as how much has already been mobilised to date. We chose to focus on private equity in particular because in the context of underdeveloped capital markets and a lack of long-term financing, private equity is an attractive option for African companies in search of capital and can be a catalyst for job creation and economic growth.

The report profiles the pension industries of Botswana, Ghana, Kenya, Namibia, Nigeria, Rwanda, South Africa, Tanzania, Uganda and Zambia, in addition to providing expert insights from practitioners in the industry. The aim of this comparative analysis is to advance the dialogue among African pension fund managers, pensioners, regulators and other industry stakeholders about private equity and further the exchange of best practices across the region and with other emerging and developed markets. Whilst this publication focuses on private equity, the lessons learned are applicable to other sectors such as infrastructure and housing, as well as how these long term savings can be used to support the development of capital markets.

In that vein, and based on the publication, we are engaging with pension fund managers, through our recently launched Africa Pension Funds Network (APFN), to explore how the various barriers to unlocking domestic capital can be addressed. APFN was inaugurated during the Partnership Forum in Dakar in June, and membership currently includes industry associations and pension fund managers from Botswana, East Africa (covering Burundi, Kenya, Rwanda, Uganda, Tanzania and Zambia), Namibia, Nigeria, and South Africa, with more countries expected to join in the coming months. The network will provide a platform for exchange of knowledge and expertise amongst industry participants across the continent. The network will also facilitate cross-country collaboration through co-investments, peer-to-peer learning and provide a forum for engagement with other financial sector stakeholders at the pan-African level. We are already in discussions with the International Organisation of Pension Supervisors (IOPS) about the possibility of organising a meeting between African Pension Supervisors and APFN at the IOPS Global Forum in Namibia in October.

We will be building on these foundations over the summer using new tools such as our Online Collaborative Platform, an interactive and secured social networking platform aimed at supporting and catalysing MFW4A networks and working groups, the African Partners Directory, a database repository of key stakeholders active in Africa's financial sectors, and the more traditional tools like the bi-weekly newsletter.

To conclude, I would like to extend special thanks to all our partners for the constructive and stimulating collaboration that is driving us towards our common goal of promoting Africa's financial sectors. I would also like to thank the Secretariat team for their sterling efforts and achievements so far.

To all our readers, sincere and best wishes for an enjoyable and restful summer/winter break.

Stefan Nalletamby
MFW4A Partnership Coordinator

 

 

[1] National Pension Commission Nigeria (PenCom).

[2] According to National Pensions Regulatory Authority officials, pension industry assets could grow from ¢1.06 billion to ¢5.5 billion in this period.

[3] Namibia Financial Institutions Supervisory Authority Annual Report, 2013.

[4] Based on Non-Bank Financial Institutions Regulatory Authority (NBFRIA) and World Bank figures.

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/

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.

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