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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/

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