#36 - July 2016

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ISSUE 36 I JULY 2016

Banking: creatively disrupted Sanjeev Kumar, Group CEO, M Holdings Limited

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Sanjeev Kumar, Group CEO, M Holdings Limited

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MARKETS

Nigeria’s new FX structure

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WAEMU

Staying afloat on trade

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ISSUE 36

Banking: creatively disrupted

OUTLOOK

An ‘inopportune’ exit

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CONTENTS

ISSUE 36

Editor’s Letter Hello readers,

B

y the time you get this magazine, you will have heard a lot about Brexit.

The initial shock has worn down and the immediate market response has calmed, but questions linger over what the United Kingdom’s departure from the European Union will mean for dozens of trade relationships and investments. Fatima Bhoola and Nimisha Naik discuss the immediate impact on South Africa (pg. 14) while several experts weigh in on Africa’s major economies in the wake of Brexit (pg. 46).

One country that is sure to feel the impact of more unsteady global markets is Nigeria. Last month, the Central Bank of Nigeria unpegged the naira and introduced a host of new FX policies (in depth on pg. 16). While many felt the naira float was a long time coming, it may not have been soon enough—Nigeria continues to struggle through a slower economy, low oil prices, regional instability and now, controversy over the health of its banking sector (pg. 12). Our Nigeria Country Focus is coming up in September, so expect a lot more discussion on this front.

Elsewhere in West Africa, the eight countries that comprise the West African Economic and Monetary Union (WAEMU, or UEMOA) have gone against odds to grow steadily both as independent countries and an integrated union—in our WAEMU Focus this month, the IMF found that it had the highest convergence rates amongst regional blocs (pg. 24) while AfDB researcher Maimouna Gueye hit on the promise of fast-growing mobile money usage in the area.

Increasing mobile usage is also a theme in our Technology section this month, with Oracle’s Chet Kamat discussing how African countries can leapfrog legacy infrastructure through digital (pg. 42). We also have Temenos’ Emma Wadey weighing in on the next line of innovation, blockchain currencies—and why central banks should get on board (pg. 39). In a real-world example of the challenges in going cashless, we look at progress in Egypt’s banks and businesses (pg. 30).

With that, I’ll let you get to reading.

Until next time,

20 IN THE NEWS 6 News analysis: Zimbabwe runs out of cash, food and patience

7

Essential financial news from around the continent

10

Spotlight: Zambia

HAPPENINGS 12 Nigerian Central Bank denies any local bank distress

13

IMF and Mozambique meet over risky public debt

12

OPINION 14 African exporters face choppy

waters in the wake of Brexit Africa’s trade relations with both the EU and UK will be affected by the Brexit decision, according to Fatima Bhoola and Nimisha Naik

16

MARKETS 16 Navigating Nigeria’s new FX

structure The Central Bank’s new policies hold big implications for FX stability

COVER STORY 20 Banking—creatively disrupted

Sanjeev Kumar, Group CEO, M Holdings Limited, discusses how Bank M became a top bank in Tanzania and why it is now taking its offering abroad

28

COUNTRY FOCUS: WAEMU 24 WAEMU stays afloat on trade

Relative to other regional unions, WAEMU has a lot going for it—but trade liberalisation with outside countries and lax banking regulations could shake up stable growth

28

The rise of mobile money in West Africa Maimouna Gueye, Principal Financial Inclusion Officer, AfDB, highlight challenges in mobile money’s growth

Sarah Owermohle

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http://cpifinancial.net/blog/author/78/sarah-owermohle

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CONTENTS

ISSUE 36

36

CASE STUDY 30 The total reform approach to going

cashless Experts weigh in on recent and upcoming policy shifts in Egypt’s bid to go cashless and inclusive

TRAILBLAZERS 34 Lighting up off-grid

Lumos supplies personal solar energy systems through mobile operator partnership, explains Co-Founder Nir Maron

SECTOR FOCUS: FINANCIAL CENTRES 36 The bridge into Africa

Najwa El Iraki, Head of Business Development at Casablanca Finance City, on Morocco’s young financial zone

TECHNOLOGY 39 Blockchain and central banks—friend or foe?

Emma Wadey, Product Strategy at Temenos, explores how central banks can prepare for blockchain technology

42

Africa’s banks set to gain more in a cash ‘lite’ economy African institutions are at a digital advantage, writes Chet Kamat, Senior Vice President, Oracle Financial Services

34

INVESTMENTS 44 Peru’s platform for Africa

39

Peru has set its sights on regional trade through South Africa, says Alvaro Silva-Santisteban, Director of Peru Trade, Tourism and Investment Office

OUTLOOK 46 An ‘inopportune’ exit

The UK’s decision to leave the European Union has a ripple effect on Africa

44

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POLICY SPOTLIGHT Africa Twin peaks in South

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KENYA COUNTRY FOCUS Consumers’ confidence crisis

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NEWS ANALYSIS

Zimbabwe runs out of cash, food and patience A viral social media campaign builds momentum for policy reform and possible regime change in Zimbabwe Protestors gather outside the Zimbabwe Embassy in London as part of the #ThisFlag movement (CREDIT: LUCY PARKER).

T

hings have not been easy for some time in Zimbabwe—90 per cent of people are formally unemployed, 70 per cent of food is imported, cash shortages are growing more frequent and the trade imbalance is ever widening. Yet this month, frustration spilled over onto social media in an unprecedented way, leading to cries for reform and in some cases, the removal of Robert Mugabe as President.

The #ThisFlag campaign, led by activist and Pastor Evan Mawrire, went viral, prompting protests at Zimbabwean embassies the world over and thousands of tweets and Facebook posts. It was so overwhelming that when Mawrire was arrested during 13 July protests, the Government released him just a day later—rare treatment for an opposition activist.

A number of factors—from last month’s extensive import ban to the March revelation that $15 billion in diamond revenue had been looted— set the protests off. A brewing cash crisis also seems ready to spiral, as Zimbabweans resist the Central Bank’s attempt introduce bond notes, cash substitutes that are pegged to the US dollar but hold no actual value outside of Zimbabwe—stoking many citizens’

6 page 6 News Analysis 036.indd 6

fears that the hyperinflation and huge losses of 2009 could return.

On top of this, a record-hitting drought has swept across all of Southern Africa, crippling even the most productive of agricultural sectors—of which Zimbabwe’s is not. While the country is full of arable land, a combination of land redistribution and chronic under-investment have left just a fraction of farms even in operation.

Millions are food insecure, according to the United Nations.

As pressure mounted in Zimbabwe, Finance Minister Patrick Chinamasa travelled to London to appeal to multilateral institutions for emergency funding. As protests in the city mounted, Minister Chinamasa went on the BBC’s Hardtalk on 7 July to defend the country’s policies, deny food insecurity and attribute the country’s problems to sanctions and British involvement in the country.

“Everything can be traced back to our standoff with those countries that imposed sanctions on Zimbabwe. It undermined our agriculture, it basically made our land unproductive,” he said. He also denied that $15 billion in diamond revenue had gone missing—as President Robert Mugabe claimed in March—attributing the missing billions to “trade mispricing”.

The Minister’s appeals were marred

by protests outside the Zimbabwe Embassy in London that reportedly saw hundreds of attendees.

“It was a coming together, and it felt very hopeful and joyful. I went as a show of unity and solidarity to those in Zimbabwe that the Diaspora are with them—calling for an end to corruption and poverty and to save the country— Mugabe must go,” Lucy Parker, Freelance Research Compliance Consultant, said.

Yet Zimbabwe Home Affairs Minister Dr. Ignatius Chombo has openly questioned the motives of these protestors, many of whom are white Zimbabweans that were expelled from the country during Mugabe’s land reform programme.

“The so-called asylum seekers in the United Kingdom and United States of America are on the forefront, fomenting hate messages against Government contrary to so-called human rights views that they purport to be advancing,” Dr. Chombo said. “I want to categorically tell them that their regime change agenda machinations will not work.”

As of press, President Mugabe had travelled to Rwanda for the African Union Summit and had not responded to protest demands.

www.bankerafrica.com

24/07/2016 16:07

IN THE NEWS

RATINGS REVIEW BANKS AND BUSINESSES Moody's confirmed Old Mutual's senior debt at Baa3; Old Mutual Wealth IFS rating confirmed at A2 with negative outlook, due to the outlook for the company’s main insurance business and South Africa as a whole.

Standard & Poor’s (S&P) downgraded Nigeria's Skye Bank to 'CCC+' on 16 June due to capital adequacy and liquidity concerns, with ratings on watch negative. After it became clear that Skye Bank was breaching capital adequacy regulations, the Central Bank of Nigeria stepped in and S&P further downgraded the bank to 'CCC-' also on creditwatch negative.

South Africa’s Vodacom Group 'zaAAA/zaA-1' national scale ratings were affirmed by S&P due to strong full-year results, increased demand for data services by customers and solid cost controls despite the slower SoutH African economy.

S&P lowered First Bank of Nigeria to 'B-/C' on weak asset quality and high credit losses due largely to the bank’s concentration in the oil and gas sector and the resultant high rates of nonperforming loans; it is on creditwatch negative.

SOVEREIGNS

ON THE RECORD

The adverse impact on South African exporters cannot be underestimated and the dti continues to be responsive to affected exporters and to make representations to the Government of Zimbabwe.

— Sidwell Medupe, Media Liaison Officer for the South Africa Minister of Department of Trade and Industry (dti), on Zimbabwe’s recent widespread import bans.

A QUICK WORD Dr. Celestin Monga joins the AfDB

The African Development Bank (AfDB) on 10 July 2016 appointed Dr. Celestin Monga as the new Chief Economist and VP Economic Governance and Knowledge Management.

Vantage Mezzanine Fund III invests $13.7 million in New GX Capital

Vantage Capital has provided an expansion capital facility to New GX Capital, a 100 per cent black and family-owned investment company.

S&P Global Ratings publishes MENA sovereign rating trends

Overall sovereign creditworthiness in the region has continued to deteriorate in 2016.

AfDB approves EUR 6 million water grant for South Sudan as violence heightens

The Board of Directors of the African Development Bank Group (AfDB) approved the grant at its 14 July 2016 meeting.

Moody's affirmed the Democratic Republic of the Congo's sovereign issuer rating at B3; outlook stable, noting its strength growth despite commodities prices’ fall, but also institutional weaknesses that could lead to higher risk from shocks.

S&P affirmed Senegal’s ratings at 'B+/B'; outlook stable, due to strong, ‘above-average’ institutions and robust GDP expectations stemming from the Government’s investment plan, but constrained by possible monetary inflexibility in the WAEMU. S&P also affirmed Uganda’s 'B/B' ratings with a stable outlook, noting that large infrastructure projects have deteriorated its fiscal position, and GDP per capita remains low, but its external financing needs are relatively moderate and there is some monetary policy flexibility.

Construction on a well at Kapuri Primary School in South Sudan (CREDIT: UN PHOTO/JC MCILWAINE/FLICKR).

For these stories and more, visit www.bankerafrica.com

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page 7-9 In the News 036.indd 7

7 24/07/2016 17:11

IN THE NEWS

Orange completes acquisition of mobile operator Airtel in Burkina Faso

O

range announced that, together with its subsidiary Orange Côte d’Ivoire, it has completed the acquisition of 100 per cent of the mobile operator Airtel in Burkina Faso. Airtel is the second largest mobile operator in Burkina Faso, with close to 4.6 million customers.

It said that since the signing of an agreement with Bharti Airtel International (Netherlands) BV (Airtel) in January 2016, Orange has obtained all the official approbations necessary to complete this transaction.

Denham to finance GreenWish’s renewable energy portfolio expansion Denham Capital and GreenWish Partners announced a partnership to develop, build and finance a portfolio of 600 MW of renewable energy assets across Sub Saharan Africa by 2020. The capital commitment will allow the African renewables platform to carry out a $1 billion project pipeline.

Charlotte Aubin-Kalaidjian, CEO of GreenWish, said, “We look forward to partnering with Denham for this expansion phase of GreenWish in Sub Saharan Africa. Independent power producers such as GreenWish are a key solution to the African electricity gap that requires more than $40 billion in annual investments. Our strategic partnership with Denham gives us the means and scale to carry out our ambition and mission for a competitive and sustainable electrification of Africa.”

Senergy II, a photovoltaic power plant with a 20 megawatts (MW) capacity, located in Bokhol Senegal.

AFC and Harith merge assets to bring power to Africa Harith General Partners and Africa Finance Corporation (AFC) have merged in a new joint venture that has over 1,575 MW combined gross operational and under-construction capacity, and supplies power to over 30 million people, the (L-R) Andrew Alli, President and CEO of AFC and Tshepo AFC said.

It includes $3.3 Mahloele, CEO of Harith billion capital value and Chairman of Aldwych. portfolio of assets, including the Kpone Independent Power Project in Ghana, Azura Edo in Nigeria and Lake Turkana Wind Power in Kenya. It also includes the AFC’s interests in Cenpower, owner of the Kpone Independent Power Project under construction in Ghana, and Cabeolica, a Cape Veridan wind farm, with those of the Pan Africa Infrastructure Development Fund (PAIDF) which is managed by Harith.

Andrew Alli, President and CEO of AFC, said, “Our new joint venture will make an invaluable contribution to improving generation capacity in countries across the length and breadth of Africa and by working together we can deliver tangible benefit for Africans, switching their lights on and stimulating positive economic growth on the continent.”

The African Development Bank partners with the African Securities Exchanges Association The African Development Bank (AfDB) and the African Securities Exchanges Association (ASEA) signed on 11 July 2016 a five-year Memorandum of Understanding (MoU) to harmonise and coordinate efforts to strengthen capital markets on the continent.

In an AfDB statement, the Bank said the partnership will facilitate various projects of mutual interest to both the Association and the Bank targeting areas such as financial markets infrastructure development, introduction of new products in the market, improving market liquidity and market participation, information sharing and capacity building, among other programmes. The Bank and ASEA have already started collaborating on the African Exchanges Linkage Project, which they co-initiated to improve liquidity and foster greater investments and trading across markets.

8 page 7-9 In the News 036.indd 8

(L-R) Oscar Onyema OON, CEO of the Nigerian Stock Exchange and President of ASEA and Dr. Akinwumi A. Adesina, President of AfDB.

www.bankerafrica.com

25/07/2016 09:01

NiFund launches inaugural Nigerian Infrastructure Fund

I

n June NiFund, an investment management company, launched the Nigerian Infrastructure Fund SP with a target of raising $2 billion. It said that the Nigerian Infrastructure Fund SP will have a seven-year investment horizon with up to two additional years for asset divestment. NiFund said it will solicit commitments from both qualified private investors and development finance institutions.

The Fund is managed by Aaron L. Smith, Managing Director of Pecora Capital and Jeffrey Harpur, Head of Risk Management at Pecora and also the Fund’s Manager. In a statement Smith said, “We are witnessing a strong commitment from the Nigerian government to develop the public infrastructure and hence all efforts are being made to attract FDI into this sector. Nigeria offers a great proposition to foreign investors with its vast natural resources, arable land, and a young, entrepreneurial population.”

Crescent Enterprises invests in e-commerce segment of Mara Group Crescent Enterprises, a UAE-based conglomerate, announced an undisclosed investment in Mara Group’s technology vertical through Crescent Investments, its investment arm. The deal supports two business verticals under Mara Group: Mara Shopping and Mara Xpress, which is scheduled to roll out to countries across Africa in the next four years.

“The African continent boasts enormous potential for growth over (L-R) Ashish J Thakkar Founder of the next decade, particularly in the Mara Group and Badr Jafar CEO of technology sector. Our entry into this Crescent Enterprises. market in partnership with Mara Group is in line with Crescent Enterprises’ strategic expansion goals for 2016,” Badr Jafar, Chief Executive Officer of Crescent Enterprises, said.

Mainstream Renewable Power signs $117.5 million Africa clean energy funding Global renewable energy developer Mainstream Renewable Power has signed $117.5 million equity investment from investors including IFC, the IFC African, Latin American and Caribbean Fund (ALAC) and the IFC Catalyst Fund, two funds managed by IFC Asset Management Company, Ascension Investment Management and Sanlam to accelerate the build-out of megawatts of wind and solar plants across Africa. The deal, which is subject to shareholder approval, provides equity funding for the Lekela Power platform, a joint venture with the global pan-emerging market private equity firm Actis. The funding package will help Lekela meet its goal of constructing over 1,300 MW of new power capacity in Africa by 2018.

AfDB approves trade finance loans to First Bank of Nigeria and FSDH Merchant Bank

T

he Board of Directors of the African Development Bank (AfDB) approved $300 million and $50 million trade finance loans to First Bank of Nigeria (FBN) and FSDH Merchant Bank Nigeria (FSDH), respectively.

The AfDB said that the facilities will support local enterprises involved in importexport activity. It projected that if fully utilised, counting rollovers, the interventions are expected facilitate about $2.5 billion of export-import related activity in intermediate and finished goods, raw materials and equipment to support economic growth and tax generation over a 3.5-year period.

Bechtel extends innovative infrastructure partnership in Gabon Bechtel, an engineering, project management and construction company, has extended its partnership with Gabon, which it has been working with since 2010 to create and implement a $25 billion national infrastructure plan. So far the partnership has completed more than 800 homes, 600 classrooms, 600 kilometres of roads and Gabon’s first community wastewater treatment plant, according to Bechtel.

“We’re excited to continue our work to deliver infrastructure for the people of Gabon and to support the implementation of the country’s vision for economic growth,” said Ailie MacAdam, Bechtel’s Managing Director of Europe and Africa, Infrastructure. “This will include up-skilling local workforces to manage major infrastructure projects in the future, building new facilities and improving local services all while sustainably managing the country’s resources and biodiversity.”

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page 7-9 In the News 036.indd 9

9 21/07/2016 16:45

NEWS SPOTLIGHT ZAMBIA

AfDB’s Annual Meeting draws attention to Zambian progress

World Bank advises subsidy reduction on fuel

The flags of AfDB members hung as the Annual Meetings begin in Lusaka (CREDIT: AFDB/FLICKR).

The 51st Annual Meetings of the African Development Bank (AfDB) and the 42nd Meetings of the Board of Governors of the African Development Fund (ADF) convened in Lusaka during the final week of May under the theme ‘Energy and Climate Change’.

The meetings focused on critical African economic and development issues, election of new executive directors and the approval of policies, strategies and the Group’s 2015 audited accounts and operations programmes. According to the AfDB, the Meetings hosted more than 4,000 participants including heads of state and government, members of the Boards of Directors, delegates, business leaders, and representatives of the private sector, civil society organisations and the media.

The AfDB first started working with Zambia in 1971, and since then has committed more than $1 billion in infrastructure and budget support to the country, and an estimated $150 million to private sector loans. Zambia’s programme with the Bank now focuses on diversification, which fit well with the climate change theme. The next two AfDB Annual Meetings will not be held in Africa—next year’s will be in Ahmedabad, India, and the 2018 meeting will be in Busan, South Korea.

Fuel prices need to more accurately reflect costs, the World Bank says (CREDIT: GIMAS/SHUTTERSTOCK).

I

n the World Bank’s most recent Zambia Economic Brief, Beating the slowdown: Making every kwacha count the multilateral institution advised that the government revise fuel prices to more accurately reflect cost and budget pressures.

The report estimated that fuel subsidies have averaged $36 million per month between September 2015 and May 2016. With average electricity subsidies of $26 million per month in the same period, subsidies have eaten into the country’s budget by more than $576 million. Zambia’s trade balance has worsened in recent months due to a drop in commodities prices and corresponding pressure on the kwacha.

“To beat the slowdown, there is a need to make every kwacha of Government expenditure count. Any fiscal adjustment should be accompanied by a shift in spending priorities that support the efficiency of public expenditure,” the report stated.

“There is need to identify and reallocate under-utilised resources to ensure that every kwacha spent is contributing towards each sector’s objectives,” it continued, adding that a price settling mechanism for fuel is a priority. It recommends that additional funds from the reduced subsidy could help meet a mounting power crisis.

United Bank of Africa and Zampost partner on payments Under the Civil Servants Payment project, which was first approved by the Zambian Cabinet and the Bank of Zambia in 2013, United Bank for Africa (UBA) and the Zambia Postal Services Corporation (ZAMPOST) have partnered on salary

10

payments for civil servants in remote parts of the country.

UBA Zambia Managing Director Stanley Ugwuenze told Times of Zambia that he bank had provided over 15,000 prepaid cards to the Zambia National Farmers Union and 100,000

to other farmers under the e-voucher system for accessing farming inputs. He also said UBA had also introduced a new product called Africash specifically designed for crossborder traders working between Zambia and the Democratic Republic of Congo.

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HAPPENINGS

Nigerian Central Bank denies any local bank distress The Central Bank said that Skye Bank persistently failed requirements but does not reflect on the banking industry as a whole, writes Managing Editor Georgina Enzer

T

he Central Bank of Nigeria (CBN) has slammed rumours that banks in the country are facing financial difficulties, following speculation around the health of Skye Bank’s operational success following the replacement of the entire board and bank management, who voluntarily resigned on 4 July 2016.

“Neither Skye Bank nor any other bank in the industry is in distress.

Therefore, the CBN would like to request the general public to ignore speculations or rumours to the contrary as they could only be the handiwork of mischief makers who do not mean well for the Nigerian banking system and its economy,” CBN stated in a press release imploring the general public to not make ‘panic withdrawals’.

The Skye Bank staff members being replaced by the CBN include the Chairman, all non-executive directors on the Board as well as the Managing Director, Deputy Managing Director, and the two longest-serving Executive Directors on the management team.

“The Nigerian banking industry remains strong in spite of the global economic challenges emanating from the collapse of global commodity prices.

We therefore urge the banking public to

12

remain calm and go about their normal businesses without panic. It is important that we do not create problems when none exists,” Isaac Okorafor, Ag. Director, Corporate Communications for CBN, wrote in a statement.

The CBN would be failing in its duties if it does not take immediate action to nip the steadily declining health of the bank in the bud.

— Isaac Okorafor Ag. Director, Corporate Communications for CBN According to the statement, Skye Bank has persistently failed to meet minimum thresholds in critical prudential and adequacy ratios, which has culminated in the bank’s permanent presence at the CBN Lending Window. Skye Bank’s liquidity and non-performing loan ratios have been below and above the required thresholds, respectively, for quite a while. The Bank’s management changes follow a series of discussions between the Bank’s management and CBN on the best way forward for the Bank.

“Despite the expectation of relevant regulators, market watchers, financial analysts and interested stakeholders that Skye Bank should be doing much better than it is right now, we have seen about the opposite in reality.

Given the aforementioned issues and the fact that Skye Bank is a domestic, systemically important bank with significant interconnectedness, the CBN would be failing in its duties if it does not take immediate action to nip the steadily declining health of the bank in the bud and correct the situation. In view of the long grace period allowed the bank to correct the situation, we came to the conclusion that, although the existing board had done its best to steer the ship it had come to a realisation that it would be unable to bring the bank out of its present precarious situation,” Okorafor said.

CBN has already appointed a new management team and board for the bank, Alh. M. K. Ahmad, who will step in as the new Chairman and Adetokunbo Abiru as the new Managing Director.

The more recent executive directors will be allowed to remain to ensure continuity and a smooth transition, according to the statement.

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25/07/2016 09:35

HAPPENINGS

IMF and Mozambique meet over risky public debt IMF authorities made their first visit to the country in the wake of the Prime Minister’s April confirmation of more than $1 billion in hidden state debt

A

n International Monetary Fund (IMF) staff team headed by Michel Lazare visited Mozambique from 16-24 June to follow up on the April 2016 reveal that Mozambique had $1.4 billion in previously undisclosed debt.

The IMF said that the purpose of the mission was to help design corrective measures needed to prevent further economic deterioration and measure the impact so far of the undisclosed loans that, according Angola Prime Minister Carlos Agostinho do Rosario, bring total public debt at end-2015 to $11.64 billion, of which $9.89 billion is in foreign debt.

The additional loans represent 10 per cent of the country’s GDP, and according to the IMF has pushed the total stock of debt at end-2015 to 86 per cent of GDP. The state-owned fishing company EMATUM, which went through a bond restructuring earlier this year, is responsible for 41 per cent of the debt according to Moody’s Investor Services.

“According to our technical assessment, public debt is now likely to have reached a high risk of distress,” Lazare said.

The mission met with President Nyusi, Prime Minister do Rosario, the Economy and Finance Minister, the Governor of the Bank of Mozambique, other sectoral ministers, senior Government officials, parliamentarians, civil society, private sector representatives and the donor community.

Much of the country’s debt has been pinned on a stateowned fishing company, EMATUM (CREDIT: SIMON_G/ SHUTTERSTOCK).

Following the mission, Lazare acknowledged the difficult economic challenges Mozambique faces, saying that economic growth in 2016 is expected to decline to 4.5 per cent from 6.6 per cent in 2015, nearly three percentage points below historical levels, with substantial downside risks to this projection. Inflation has also been rising fast, reaching 16 per cent in May 2016.

“Fiscal policy in 2015 and the first half of the year has been excessively expansionary, with an increase in net credit to the government that far exceeded program targets. At the same time, the metical has depreciated by about 28 per cent since the beginning of the year and international reserves have continued to decline,” Lazare said.

“The mission and the authorities agreed that this context calls for an urgent and decisive package of policy

measures to avoid a further deterioration in economic performance,” Lazare said.

In particular, substantial fiscal and monetary tightening, and exchange rate flexibility are necessary, he said.

Lazare also urged an international and independent audit of the EMATUM, Proindicus, and MAM companies, the state-owned enterprises that the debt is largely attributed to, with EMATUM taking a larger share of existing debt and the latter two being the companies that received funding under the previously undisclosed loans.

“Further progress in the effective implementation of both the corrective macroeconomic measures and the measures aimed at strengthening transparency, improving governance, and ensuring accountability would pave the way for the resumption of program discussions at a later stage,” Lazare said.

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13 24/07/2016 14:25

OPINION

African exporters face choppy waters in the wake of Brexit Africa’s trade relations with both the EU and UK will be affected by the Brexit decision, according to Fatima Bhoola, Lecturer in Economics, University of the Witwatersrand, and Nimisha Naik, Lecturer in Economics, Macroeconomics and Mathematical Economics, University of the Witwatersrand

O

ne would certainly be forgiven if, like us, you found yourself doing a double take at the news that Britain’s public voted in favour of leaving the EU. This is because shortly before the Brexit polls closed, opinion polls were showing the ‘remain’ vote marginally ahead. While currency markets were already reflecting heightened volatility in the run up to such a momentous event, the decision to leave certainly came as a surprise, garnering an even more tumultuous response.

A more disconcerting development is that Britain’s decision has opened the possibility of other member states calling their own referenda on EU membership.

This would result in a fragmented EU, creating further market uncertainties.

Caroline Southey, the Conversation Africa’s editor, asked Fatima Bhoola and Nimisha Naik, lecturers in economics at the University of the Witwatersrand, what it means for Africa.

What impact will the exit vote have on South Africa and other African countries and who on the continent will be most adversely affected?

The immediate effects were clearly reflected in the currency markets.

14 page 14-15 Opinion_036.indd 14

For emerging markets heavily reliant on commodity exports, Brexit could not have come at a more worrisome time.

Growth prospects are already severely strained due to flat commodity prices and slower global growth.

UK ministers in favour of Britain’s exit were quick to offer reassuring comments.

The UK minister for Africa James Duddridge pointed out that without the burden of the EU, relations between the UK and Africa would improve.

Despite this reassurance, Brexit will adversely affect countries such as Nigeria, which relies heavily on foreign direct investment from the UK. The country’s tenacity is going to be severely tested by a combination of the post-Brexit transition period coupled with softer oil prices.

Kenya is equally concerned that trade with the UK will be disrupted because agreements made under the auspices of the EU will have to be renegotiated.

Kenya is heavily dependent on earnings from agricultural exports to the UK such as cut flowers. On the other hand bilateral agreements between the two nations are long standing which means that trade relations are likely to continue.

On a positive note, the decision to leave the EU may well open a new chapter in the UK’s trade relations

with the world in general and Africa in particular. The UK’s exit could give it new found sovereignty and autonomy over its relations with Africa. This could result in more favourable agreements with African trading blocs, creating incentives for African farmers as well as firms.

If Duddridge is to be believed, then the UK’s post-Brexit resurgence of relations with Africa may extend to its policies on monetary aid. He argues that funds will be allocated more efficiently as they will no longer be channelled through the European Development Fund.

How is the decision likely to affect the rand?

The immediate aftermath of the announcement saw currency traders seeking refuge in safe havens such as the yen and the US dollar. These currencies strengthened while the pound hit record lows last seen during the Plaza Accord.

Naturally this also led to a significant decline in the currency of most emerging markets. Investors shed their pound denominated holdings.

They sold anything associated with the currency while buying assets related as remotely as possible to the pound.

South Africa was no exception.

The strengthening dollar resulted in a

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24/07/2016 14:29

sharp drop in the rand’s value to levels lower than those seen during last year’s ill-fated decision to reshuffle the finance ministry. The rand remains volatile and will do so as worldwide uncertainty prevails.

Unfortunately, the weakened and volatile rand does not bode well for South Africa. If it continues, the depreciation of the currency will put upward pressure on the inflation rate.

Higher prices will weaken the economy further. A persistent decline in the rand may also reduce the country’s ability to service its foreign denominated debt.

The implication of this is that when ratings agencies reevaluate South Africa’s position later this year they may very well readjust its credit rating to junk status. If this happened international banks, among others, would be more reluctant to lend to South African entities. And existing credit lines could also be withdrawn. This is a development South Africa has been trying to prevent and most certainly cannot afford.

Will there be any impact on South Africa’s trade relations with the UK? Trade is a cornerstone of South Africa’s relationship with the UK. It is the country’s seventh largest trading partner and the UK’s largest trading partner in Africa. This relationship is governed under the EU-Southern African Development Community (SADC) Economic Partnership Agreement.

South Africa also has several trade agreements with the 28-member EU member countries. But the UK is a highly profitable market for the country, generating exports to the value of nearly ZAR 42 billion in 2015. This figure constitutes almost 20 per cent of South Africa’s total exports to the EU, making the UK one of the top four destinations for South African exports.

In the very short term there are unlikely to be major changes to South

Fatima Bhoola, Lecturer in Economics, University of the Witwatersrand

Nimisha Naik, Lecturer in Economics, Macroeconomics and Mathematical Economics, University of the Witwatersrand

Africa’s trade relations with the UK or even EU. This is because it could take two to four years before the UK officially exits. Nevertheless continued market uncertainty will see a definite decrease in exports of South African commodities to the UK as markets adjust to news of the exit.

The medium term is going to be characterised by significant changes to South Africa’s trade relations with the UK, and, by the same token, with the remaining EU bloc. Professor Peter Sinclair at the University of Birmingham, who was opposed to Britain’s withdrawal from the EU, believes that because the UK constitutes such a substantial portion within the EU market, previous trade relations between South Africa and EU would certainly need to be re-evaluated. He believes that a more detailed renegotiation of trade relations, particularly with the UK, is inevitable.

immediate beneficiaries. A brief period of weak foreign direct investment should be expected as the UK’s new relationship is renegotiated. But to assume that this capital flight will continue indefinitely is premature since the UK, despite not being a member of the EU, would still remain a safe haven for investors.

It may be surprising to some, but the benefactors of Brexit may well be the EU and UK. The creation and subsequent expansion of the EU delivered clear benefits for both Britain and continental Europe. However, according to British economist Andrew Lilico, the success of the euro depends on the Eurozone becoming a more unified state. The UK’s refusal to join Europe’s common currency project was a clear obstacle to it achieving deeper European integration.

Hence it is in fact in the EU’s best interest that Britain voted to leave.

Will anybody benefit economically from this decision?

The immediate reaction to the referendum was to move capital away from UK assets. Those holding dollardenominated assets emerged as the

This article originally appeared on The Conversation Africa.

Fatima Bhoola and Nimisha Naik are lecturers at University of the Witwatersrand, a partner of The Conversation.

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15 24/07/2016 14:29

THE MARKETS

The new role of primary FX dealers will change the way foreign currency is traded in Nigeria. (PHOTO CREDIT: PHOTOFRIDAY/SHUTTERSTOCK)

Navigating Nigeria’s new FX structure Though the Central Bank’s announcement of a new floating currency policy stole headlines, several other policies announced the same day hold big implications for FX stability

16 page 16-18 Markets 036.indd 16

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O

n 15 June, along with the announcement that the Central Bank of Nigeria (CBN) would float the currency, the naira, CBN Governor Godwin Emefiele announced a host of new guidelines and regulations designed to boost transparency and liquidity in the foreign exchange (FX) market. Most significantly, the new regulations mean a limited, CBNselected list of primary FX dealers.

In a speech, Governor Emefiele said that the Bank decided the time was right to restore a market-driven exchange rate along with the re-introduction of a flexible inter-bank exchange rate market. Two sets of guidelines—new stipulations for licensed primary dealers as well as revisions for the inter-bank FX market—were released directly after the press briefing.

The CBN is also introducing nondeliverable over-the-counter (OTC) naira-settled Futures that the Governor said would have daily rates on the CBNapproved FMDQ Trading and Reporting System. He expressed the hope that this new product would moderate volatility in the exchange rate by moving nonurgent FX demand from the Spot to the Futures market. The OTC FX Futures will be non-standardised amounts and different fixed tenors, but to address current liquidity trouble, the CBN may also offer long-tenored FX Forwards to authorised dealers. The CBN released an overview of the OTC market on 15 June and announced the tenors and rates for the OTC Naira-settled FX Futures on 27 June 2016. The first FX Futures trade took place on 29 June between Citibank and the CBN. Emefiele said that selected FX primary dealers would be notified by 17 June 2016 and that inter-bank trading under the new guidelines would begin on 20 June 2016, but that all other non-

primary dealers would remain valid and eligible to participate in the market— just not deal directly with the CBN. However when the new trading date arrived, controversy over authorised dealer status had already set in. The CBN initially planned to only allow 10 banks to be authorised dealers, but Nigerian newspaper Vanguard reported on 20 June that at least 13 unapproved banks were protesting the new system. The pressure has led the CBN to reportedly reexamine its policy towards potentially lowering some of the requirements barriers to allow more primary dealers.

THE NEW ROLE OF PRIMARY DEALERS To improve the dynamics of the market, Emefiele said that the CBN would introduce a framework for FX primary dealers (FXPD) that would be registered by the CBN to deal directly with the Bank for large trade sizes on

FAST FACTS Ü B anks must be licensed primary dealers to deal directly with the Central Bank of Nigeria. Ü Primary dealers must

meet at least two of three requirements: possess minimum shareholders fund, unimpaired by losses, of at least NGN 200 billion; hold a minimum of NGN 400 billion in total foreign currency assets; and operate at a minimum liquidity ratio of 40 per cent. Ü Primary dealers are required to

resell a minimum of 70 per cent of any uptake from the CBN in the inter-bank market on the day of purchase

a two-way quotes basis.

“These primary dealers shall operate with other dealers in the Inter-bank market, amongst other obligations that will be stipulated in the Foreign Exchange Primary Dealers Guidelines,” he said.

Interested traders must apply for FXPD status, which is up for review each year.

According to the guidelines, authorised FXPDs have to meet at least two of three quantitative criteria: possess minimum shareholders fund, unimpaired by losses, of at least NGN 200 billion; hold a minimum of NGN 400 billion in total foreign currency assets; and operate at a minimum liquidity ratio of 40 per cent. According to banks’ own annual reports, compiled and analysed by Vanguard, an estimated seven or fewer Nigerian institutions currently meet these requirements.

In addition, the guidelines stated that certain qualitative factors could come into play. For one, FXPDs can also be evaluated on their “strong FX trading capacity”, including qualified FX dealers but also strong sales teams and wide distribution networks. Other important factors include the use of approved trading systems, independent risk management systems with disaster recovery capability, computerised systems and active participation on the inter-bank FX market.

The guidelines made it clear that approved FXPDs would be expected to participate actively in the FX market to boost liquidity, but also to provide market information and analysis to the CBN to further improve FX policy.

FXPDs will be required to resell a minimum of 70 per cent of any uptake from the CBN in the inter-bank market on the day of purchase, and to provide two-way quotes for advised standard amounts and bid-ask spreads on FX Spot, Forwards, FX Swaps and nairasettled OTC FX Futures, all of which cont. overleaf

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17 24/07/2016 17:18

THE MARKETS

cont. from page 17

will be agreed upon between the CBN and the dealers periodically. However they will also be expected to provide two-way quotes to other FXPDs, “thereby facilitating price discovery and developing liquidity in the FX market”.

“The CBN shall expect the FXPDs to participate in the market on a daily basis or such period as the CBN may require. FXPDs that record low volumes of FX transactions with the CBN during the evaluation period, that repeatedly provide bids and offers that are not reasonably competitive, or that fail to provide useful market information and commentary, shall be deemed not to have met the expectations of the CBN,” the guidelines state.

IMPROVING THE INTERBANK MARKET

CBN Governor Godwin Emefiele said that he expects the new policies to moderate currency volatility.

The revised guidelines for the Nigerian inter-bank FX market seek to boost competitiveness while solidifying risk management protocol and reducing volatility. A significant share of these objectives will rest on the new FXPD requirements, but the CBN also said that it expects to occasionally intervene in the market, either directly in the inter-bank market through “secondary market intervention mechanisms”.

“The CBN reserves the right to intervene in the inter-bank market to either buy or sell FX Spot upon the receipt of valid two-way quotes on the standard amount as defined from time to time in the FXPD Guidelines,” the Bank stated. It also reserved the right to intervene through placing orders on the FMDQ TRFXT index and through the sale of FX to authorised dealers (wholesale) or to end-users through authorised dealers (retail) via a multiple-price book building process.

According to the separate inter-bank FX market revisions, market participants include authorised dealers, authorised buyers, oil companies, oil service companies, exporters, end-users and

“any other entity the CBN may designate from time to time.” Authorised dealers can buy and sell FX among themselves on a two-way quote basis, and offer oneway quotes to other participants.

The CBN plans for OTC FX Futures to further help in deepening the FX market.

These Futures will have to be backed by trade transactions or evidenced

18 page 16-18 Markets 036.indd 18

investments, and will be valued and settled according to the benchmarks established by the Thomson Reuters FMDQ Index. The CBN said that to promote market liquidity, authorised dealers may apply FX Spot transactions to hedge Outright Forwards, OTC FX Futures and FX Options.

Floating or sinking? The initial impact of a flexible naira On 27 June the market closed with naira at 281 to the US dollar, compared to a 16-month peg of 197 naira to the dollar. In a months-long liquidity crunch and economic slowdown, the naira peaked at 370 to the dollar on the black market.

The Futures market has become an important part of the CBN’s efforts to stabilise the naira against other currencies, one that Governor Emefiele said himself would help moderate volatility as demand moves from the Spot to the Future market. According to Reuters, the bank sold $697 million in one-month Futures, $1.22 billion in two-month contract, and $1.57 billion in three-month contracts, since the Future markets opened.

After controversy over the number of authorised primary FX dealers, the CBN announced 15 approved banks, including Citibank—which already made its first Futures trade—as well as Stanbic IBTC Bank, Standard Chartered Bank, Zenith Bank, Access Bank, UBA, Sterling Bank and FCMB. Trading in the last few weeks of June was quiet, though traders expected it to pick up in July.

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24/07/2016 17:19

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21/07/2016 17:25

COVER STORY

Banking—creatively disrupted Sanjeev Kumar, Group CEO, M Holdings Limited, discusses how Bank M became a top bank in Tanzania and why it is now taking its offering abroad

Bank M’s service standard guarantee is the key to its success, says Kumar.

Y

ou acquired Kenya’s Oriental Commercial Bank (OCB) last year. What led M Holdings to enter the Kenyan market now? How long has a Kenyan acquisition been on your agenda?

The promoters of M Holdings, who collectively own 73 per cent shares in Bank M in Tanzania, aspire to create a strong network of wholesale banks

20

within the region leveraging their core competence of wholesale banking.

The strategy is aimed at becoming the preferred bank for the wealthy families of Africa.

For achieving this objective, M Holdings has been scanning the banking sector and regulatory environment in neighbouring countries since 2013, looking for suitable investment opportunities. After a detailed analysis of the microeconomic conditions,

business environment, regulatory framework, availability of infrastructure and skilled man-power, the promoters of M Holdings shortlisted Kenya, Mozambique, Zambia, Malawi and Democratic Republic of Congo (DRC) for setting up this network of banks.

Within these countries, M Holdings narrowed down to Kenya for its initial overseas investment. The selection was based on various factors such as an extended presence of Bank M’s client

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24/07/2016 17:22

Did you look at establishing a greenfield venture rather than acquisition? What ultimately led you to this path?

Yes, we did examine establishing a greenfield bank in Kenya. What ultimately weighed in favour of acquisition of an existing bank was the availability of a good fit, making possible an instant start. Ideally, setting up a greenfield bank requires a time up to two years for the licensing process and commencement of operations after obtaining a license. Further, the market penetration and acquiring a critical mass may take another one to two years. Hence, it was considered preferable to acquire a majority stake in an existing medium-sized bank with a good fit.

What is your outlook on the recent events in the Kenyan banking sector? Have they impacted your own strategy at all?

The overall banking system in Kenya is considered to be robust despite some unfortunate events in the recent past.

The banking system is well-capitalised and possesses adequate liquidity. The recent events are not indicative of any inherent weaknesses in the system and will not change our positive outlook on Kenya. We will continue to pursue our business plan in Kenya aggressively, as planned. base in Kenya, it being an ideal hub for centralised operations, its strong macroeconomic outlook and favourable regulatory environment. The regulatory environment in Kenya is the most enabling among the countries in the EAC [East African Community] region.

The Government, generally perceived as investment-friendly, has enacted several regulatory reforms to simplify both foreign and local investment. All these factors led M Holdings to invest in Kenya.

What are M Oriental’s first priorities, in terms of services and growth? What role do you want to see M Oriental playing in the Kenyan banking sector?

The promoters of M Holdings have created a wholesale bank in Tanzania that is focused on large business families. This business model has enjoyed a phenomenal success and helped the bank to break into the league of top seven to eight banks in

the country within less than a decade of its existence. We want to replicate the same business model at M Oriental. In order to achieve this objective, we have realigned all the back office functions of OCB to increase operational efficiencies and have completely revamped the existing ICT backbone of OCB, finetuning it to facilitate delivery at the expected efficiency levels.

Further, we are opening two more branches in the industrial area of Nairobi to qualitatively improve the delivery channels and have obtained CBK [Central Bank of Kenya] approvals for the same. With a view to rationalising and optimising the existing branch network to improve efficiencies, we have sought and obtained the approval of CBK for closure of the branches at Thika Road Mall and Nakumatt Mega Mall. Also with the approval obtained from CBK, the working hours at all branches have been extended to 6:30 p.m. since March 2016.

The bank has been rebranded as M Oriental Bank Limited with effect from 22 June 2016. Having achieved this, the focus is now on rollout of innovative products and services, introduction of service standard guarantees, building a team of high calibre commercial staff and adopting a cautiously aggressive stance for client acquisition. We want to ‘creatively disrupt’ the Kenyan market with value-added products and services offered through innovative on-site, off-site and electronic delivery channels with unparalleled customer care standards, in the same way that we did in Tanzania.

Are there plans in the pipeline for more new market growth?

What countries are of interest for you?

As already mentioned we had carried out a detailed analysis of the microeconomic conditions, business environment, regulatory framework, cont. overleaf

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21 24/07/2016 17:22

COVER STORY

cont. from page 21

availability of infrastructure and skilled manpower prevailing in several East and Central African countries and have shortlisted Kenya, Mozambique, Zambia, Malawi and Democratic Republic of Congo [DRC] for the regional expansion. We are looking forward to expanding our footprints in these counties in next three to four years’ time.

What led you to choose Oriental Commercial Bank, now M Oriental, for acquisition?

We had engaged one of the top 10 accounting firms in the world to scan the Kenyan banking sector and submit their findings on the relative performance of the banks. Based on the findings in the report, we started the process of identifying potential mid-sized target banks for investment or acquisition based on criteria such as asset size, quality of loan book, extent of retail footprint, background of promoters and identified seven targets for investment.

Further due diligence led to narrowing down the choice to three banks based on our selection criteria and after bilateral discussions, we closed the deal with Oriental Commercial Bank.

Bank M, which was set up by the promoters of M Holdings, has recently won the Award for Best Corporate Bank in Tanzania from 23,500 votes in the Banker Africa East Africa Awards. What do you think propelled this win?

Bank M’s wholesale banking business model and a focus on large business families has won it a large number of satisfied and loyal customers. This single-minded focus has helped Bank M to develop a deep understanding of the business requirements of Tanzanian manufacturing and trading entities and make product offerings that are most suitable to clients’ requirements.

22

M Holdings narrowed down to Kenya for its initial overseas investment…based on various factors such as an extended presence of Bank M’s client base in Kenya, it being an ideal hub for centralised operations, its strong macroeconomic outlook and favourable regulatory environment. � Sanjeev Kumar, Group CEO of M Holdings What makes Bank M different is that it does everything possible to facilitate its clients to transact their business at a time and place convenient to them, while they can expect and receive personalised service. Bank M understands the client preferences very well and is constantly fine-tuning its products and delivery channels to offer these banking services through innovative on-site, off-site and electronic delivery channels. Some of its very unique products are cash delivery/pick up with risk transference at client premises, non-cash documents delivery/pick-up, remote cheque upload, an integrated cash management product incorporating collections, payments, liquidity management and MIS [management of information systems] features unparalleled in the industry, as well as super power-packed current accounts.

Lastly, but most importantly, what makes its products and services unique is that all these products and services are backed by its unmatched quality assurance initiative, known as the service standard guarantees [SSG].

The SSG initiative that is being offered by the bank is the first and only such initiative of its kind in Africa. The SSG assures the clients that the bank will, at all times, deliver what it has promised, within the time promised for its delivery and with the same standards of care that has been promised for its delivery.

A deficiency in service delivery, if it ever happens, is compensated at

a pre-agreed rate in a transparent process. The SSG initiative of Bank M has proved to be a key differentiator giving it market leadership in setting new standards in the banking industry of Tanzania. SSG has also helped Bank M to consistently raise the bar and perform better. The Bank is at present achieving SSG performance of over 95 per cent.

Bank M’s initiatives these areas has made Bank M the ‘preferred’ bank of the corporates in Tanzania and has, perhaps, helped it to be chosen as the Best Commercial Bank in Tanzania.

What is the secret behind Bank M’s consistent performance in meeting its SSGs? Having a basic minimum staff for servicing a client is the means to ensure that Bank M’s SSGs are met on a consistent basis in line with its client care philosophy.

What is more important to us than SSGs is that we are the only bank in the region to offer ‘touch and feel’ experience to our clients through our client facing staff. It is our endeavour that for every three clients of the bank, we have at least one guaranteed clientfacing staff. What it essentially means is that a client stops being a number in our computer system and starts being a real person, whose every need is taken care of by a frontline staff of the bank on 24x7 basis and ‘touch and feel’ nature of dealings are maintained at every point of client interaction.

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23/05/2016 14:58

COUNTRY FOCUS WAEMU

WAEMU stays afloat on trade Relative to other regional unions, WAEMU has a lot going for it—but trade liberalisation with outside countries and lax banking regulations could shake up stable growth

I

ntra-African trade has long been a weak point hit upon by leaders looking to strengthen sustainable growth on the continent. Within certain regions, such as the West African Economic and Monetary Union, WAEMU (or by its French acronym, UEMOA), the East African Community (EAC), Southern African Development Community (SADC) or the Common Market for Eastern and Southern Africa (COMESA), regional economic unions have flourished along trade needs and cultural links.

The most recent African Economic Outlook (AEO) shows that despite varying degrees of economic growth and development, economic blocs have benefitted community members through not just increased trade, but income convergence, with UEMOA leading among them.

Incomes have narrowed at an average rate of 19.6 per cent between

24

WAEMU’s richest and poorest countries over 15 years, according to AEO. In almost all WAEMU countries, the per capita GDP has risen compared to Côte d’Ivoire, the region’s leading economy. Benin and Senegal have caught up with Côte d’Ivoire, while remaining members Niger, Benin, Mali, Guinea-Bissau and Burkina Faso are still behind.

“This could mean that poorer countries grew faster than richer ones to narrow the gap. The convergence may also be explained by the slowdown of the Côte d’Ivoire economy during the country’s political crisis of the early 2000s,” the report stated.

African trade with the rest of the world, especially the European Union, has remained consistently high throughout a decade of growth and the 2008 economic crisis. However the ‘Brexit’ shake-up, along with a general downturn in commodities prices,

puts more pressure on the need for diversified intra-African trade.

According to the AEO, intra-African trade has grown from 10 per cent of total trade in 2000 to 16 per cent in 2014—it is increasing, albeit it at a slow rate. However the report cites ‘mega trade blocs’ that are gaining ground.

The Tripartite Free Trade Area (TFTA)— linking EAC, SADC, and COMESA— includes 19 countries, accounting for more than 59 per cent of continental output and 57 per cent of the African population. The TFTA also accounts for 25 per cent of intra-regional trade, where other blocs account for an average of 15 per cent. It is an unprecedented trade union on the continent, but the UEMOA countries are not a part of it.

West African trade unions will rely on the formation of the proposed Continental Free Trade Area (CFTA), a pan-African trade agreement led by the African Union that it expected to come together in 2017.

www.bankerafrica.com

page 24-26 Country Focus WAEMU_036.indd 24

24/07/2016 14:43

IMF snapshot on WAEMU banking The banking system has been growing steadily over the last years….

… but the growth has variedacross WAEMU countries

EVOLUTION OF WAMU BANKING ASSETSAssets (MCFAF) Evolution of WAMU Banking

GROWTH OF WAEMU BANKING ASSETS BY COUNTRY

30,000

35.0%

25,000

30.0% 25.0%

20,000

20.0%

15,000

15.0%

10,000

10.0%

5,000

5.0% 0.0%

Dec-10

Dec-11

Guinea Bissau Benin Senegal

Dec-12

Dec-13

Niger Mali Cote D'ivoire

Dec-14

Jul-15

Togo Burkina Faso

-5.0% -10.0%

2012

2013

Cote D'ivoire Mali Niger

2014

Senegal Benin Guinea Bissau

Burkina Faso Togo WAMU

Credit to private sector has been growing at a decelerating pace; gross foreign assets have been decreasing while sovereign claims have been steadily increasing.

As a result, sovereign exposures now account for more than 25 percent of banking system assets and credit to private sector has slightly decreased relative to the asset base.

GROWTH OF MAIN ASSETS

ASSET COMPOSITION (MAIN ITEMS)

Credit to Pvte Sector

60.0%

16.5% 13.8%

5.2%

23.6%

Claims on Govts/PSEs

34.3%

14.4%

-12.7% Gross Foreign Assets -10.8%

49.6%

50.0%

10.0%

14.0% 19.7% 17.0% 0.0%

Dec-13

10.0%

20.0%

Dec-14

0.0%

30.0%

2014

Reserves Claims on Govts/PSEs

40.0%

Jul-15

While foreign liabilities have been steadily increasing, the huge increase in BCEAO credit to banks in last years has receded during the beginning of this year.

2015

Gross Foreign Assets Credit to Pvte Sector

However, financing operations from BCEAO still constitute a good part of banks’ liabilities and foreign liabilities are becoming more significant.

LIABILITY COMPOSITION (MAIN ITEMS)

GROWTH OF MAIN LIABILITIES 60.0%

7.7%

Foreign Liabilities

9.1% 2.6%

8.3% 3.1%

8.2% 3.6% 2013

-10.0%

26.2%

24.4%

21.5%

20.0%

Reserves -20.0%

46.9%

40.0% 30.0%

1.7%

47.6%

28.8% 21.1%

56.9%

57.0%

55.6%

50.0% 40.0%

69.3%

Credit from BCEAO -8.2%

46.7%

11.4% 16.1% 9.3%

Retail and Wholesale Deposits

30.0%

Dec-13

20.0%

Dec-14

10.0%

Jul-15

0.0%

8.2% 4.2% 2012

10.2%

2013

Retail and Wholesale Deposits Foreign Liabilities International Monetary Fund, West African Economic and Monetary Union Selected Issues report, April 2016 -20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

5.2% 2014

Credit from BCEAO

www.bankerafrica.com

page 24-26 Country Focus WAEMU_036.indd 25

8.7%

4.6%

cont. overleaf

25 24/07/2016 14:43

COUNTRY FOCUS WAEMU

cont. from page 25

In the meantime, trade within separate regional unions sharply varies.

CEMAC has the lowest proportion of intra-regional trade at just 2.1 per cent in 2014, according to the AEO. SADC and the EAC are the most active, with 19.3 per cent and 18.4 per cent, respectively. UEMOA comes in next at 15.3 per cent, relatively high for the continent but low amongst regional trade unions.

Within the region, transportation finance, namely highways, has become the primary means of linking the eight countries. The African Development Bank (AfDB) is funding a Mali-Guinea highway and previously funded a westeast corridor from Senegal to Chad, linking several WAEMU members. The European Development Fund backed a Mali-Senegal route, and several multilateral lenders supported another west-east corridor than extends to Nigeria. One key project on the horizon is another highway to link Bamako, Mali with Côte d’Ivoire’s San Pedro port, also led by the AfDB. Banks have also helped integrate the region. Togo-based Ecobank and Mali-based Bank of Africa have strong regional presences, as do several foreign internationals. As the AEO points out, regional banking operations require harmonised regulation and supervision frameworks, something the WAEMU bloc is strong in compared to other regional unions. It also is one of the few groups with a regional stock exchange, the Bourse Regional des Valeurs Mobilieres (BRVM) which allows companies to have multiple and cross-border listings.

BANKING IN WAEMU Overall, the drop in oil prices over the past year has been credit positive for WAEMU countries. A March review by the International Monetary Fund (IMF) found that economic growth exceeded six per cent in 2015 while inflation

26

Ministers [of the BCEAO]…underline the urgency of ensuring adequate risk management for security problems, unfavourable changes in commodity exports and deterioration of financial conditions internationally, to strengthen sustainable growth in member countries.

— Amadou Ba, President of BCEAO and Senegal Minister of Economy, Finance and Planning

averaged one per cent and monetary policy remained accommodative. Prices for the region’s two main exports, cocoa and groundnuts, remained buoyant, it said. However in an indepth region report published in April, the IMF warned that impending trade liberalisation could take the teeth out of WAEMU’s trade tax revenue, necessitating other inflows.

The same report found that the banking sector in the region has been growing at a steady 15 per cent annual average over the past few years. This growth has mainly been on credit to the private sector, but sovereign exposure also rose to more than 26 per cent of total assets last year.

The IMF warned that WAEMU banks’ prudential indicators and regulatory requirements continue to be relatively weak compared to other African regions.

According to the report, capital adequacy was 12 per cent in June 2015 compared to an 18 per cent average across other Sub Saharan African countries. Nonperforming loans meanwhile rose to

worrying levels; 15.8 per cent of total loans in 2014 and 33.5 per cent of banks’ capital. Efforts by the Banking Commission to improve regulations are just one element of the problem—the report noted stated that, “The position of WAEMU countries with respect to capital adequacy and credit quality may be worse if we take into consideration that capital adequacy in WAMU banking sector is still based on Basel I rules… and that loan classification rules are laxer than international requirements.”

The IMF also estimates that 25 per cent of WAEMU banks on average are in violation of prudential requirements.

However there have been significant efforts by the regional central bank, BCEAO, and the BRVM Exchange to tackle these problems. In a policy statement on 25 June, Amadou Ba— the presiding BCEAO President and Senegal Minister of the Economy, Finance and Planning—emphasised policy improvements.

“Ministers [of the BCEAO]… underline the urgency of ensuring adequate risk management for security problems, unfavourable changes in commodity exports and deterioration of financial conditions internationally, to strengthen sustainable growth in member countries. They further encouraged member states to continue efforts to improve tax revenues and rationalisation of public expenditure, in line with the budget deficit plan to be in compliance with the EU standard of three per cent of GDP in 2019,” Ba said.

In an interview with Banker Africa, BRVM Exchange CEO Edoh Kossi Amenounve was optimistic. “Over the past three years, the BRVM has been boosted by the strong economic growth in the region and the promising prospects for development that are driving emergence over the mediumterm, as well as by the peaceful political environment which is strengthening democracy in our region,” he said.

www.bankerafrica.com

page 24-26 Country Focus WAEMU_036.indd 26

24/07/2016 14:43

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08/11/2015 17:06

COUNTRY FOCUS UEMOA

The rise of mobile money in West Africa Maimouna Gueye, Principal Financial Inclusion Officer, AfDB, draws from Central Bank for West African States (BCEAO) research to highlight challenges in mobile money’s growth

T

here is no doubt that Africa is being shaken by the volcanic digital revolution.

Not surprisingly, the mobile money wave has crossed the Sahelian band over to West Africa from its Kenyan birthplace.

A CONDUCIVE POLICY AND REGULATORY FRAMEWORK Zooming in on the West African Economic and Monetary Union,WAEMU [also known as UEMOA] region comprised of Francophone West Africa (Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Togo, Senegal), one could see it as one of a kind success story when it comes to conducive regulation triggering increase of financial services for the poor. In 2006, the vision to foster economic growth through an improved state of access to financial services was part of the rationale for adopting an innovative regulation allowing non-bank players in the financial services market.

Building on the new regulatory framework and the integrated monetary and economic zone with regional payment systems, the regulator (BCEAO) opened consultations in 2007 with the banking sector and the member

28

states for a ‘bancarisation’ action plan in which every stakeholder was to implement a specific agenda aiming to improve the access and usage of bank accounts and electronic transactions.

BARRIERS TO THE UPSCALE OF MOBILE MONEY The granting of the first e-money licenses between 2007 and 2009 resulted in a timid surge of subscribers in the region. Barriers to access were still prominent and most banks reluctant to embrace low purchase power clientele. In addition, very few innovative partnerships between mobile network operators, financial institutions and other private sector players were being signed in an aim to address the financial needs of the WAEMU population. Besides, the few standalone e-money issuers encountered serious financial distress partly due to lack of sufficient revenue to cover the cost of building a wide network of agents.

THE SURGE OF MOBILE MONEY It is not until the end of the political unrest in Côte d’Ivoire in the year

2010 that the number of mobile money accounts started to take a stride with, at end 2015, 22 million users, up from less than three million in 2010. At end September 2015, users’ performance revealed that 347 million transactions valued at $8.5 billion were accounted for in the region, of which Côte d’Ivoire, Burkina Faso and Mali are the most dynamic markets. On average more than 1.2 million transactions were processed every day during that period.

Strikingly, today, digital cross border remittances are increasingly dominating the traditional rapid money transfer services, particularly on corridors between Côte d’Ivoire and Burkina, Mali and Senegal, Togo and Benin. In addition, microfinance services and government services are progressively being processed on digital wallets.

Aside from the enabling regulation, this speed of growth can be attributed to a dynamic and competitive market of over 33 deployments representing more than a quarter of the number of mobile money deployments on the continent.

Overall, users are increasingly using mobile money as opposed to cash for

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24/07/2016 15:51

of a progressive acceptance of e-money as a means of payment.

A decade after the initial e-money regulation was adopted, access to financial services the region has soared to 49.5 per cent globally. When subtracting mobile money accounts, this rate merely reaches 30 per cent.

Value of mobile money transactions per trimester Valueofofmobile mobilemoney money Value WAEMU region in USD bln* (580 CFA/1usd) transactionsper pertrimester trimester transactions region WAEMUregion WAEMU USDbln* bln*(580 (580CFA/1usd) CFA/1usd) ininUSD

Share of transfers and payments in mobile money Shareofoftransfers transfersand andpayments paymentsininmobile mobile WAEMUShare region money money Waemuregion region Waemu

YET THERE IS STILL MORE TO DO Nevertheless, today’s WAEMU market calls upon the necessity evolve to a diversified range of financial services able to attract and retain users in the digital sphere. A large portion of the money deposited in the mobile wallets is cashed out and barely 40 per cent of users are active.

It would take sustainable and tailored service offerings that address the real demand for digital financial services for specific categories such as: women, youth and rural consumers to unlock the WAEMU potential to achieve near universal financial inclusion given its assets.

The African Development Bank aims to achieve near universal access to financial services in Africa. In particular, the Financial Sector Policy and Strategy prioritises digital solutions as the most promising approach to making those services affordable to the poor. Progress towards universal financial access in Africa requires action along a number of dimensions. These include: (a) introduction of innovative pro-poor products and delivery mechanisms, services and business models that can deliver broad based financial services in economically viable ways, (b) core infrastructure that is sufficiently interoperable that these products and services can be linked not only within a country but across borders and (c) regulation and supervision that balance IT-enabled innovation, enhanced competition and protection of customers.

Source: Digital financial services in WAEMU, December 2014, BCEAO

Source: Digital financial services in WAEMU, December 2014, BCEAO

ACCESS TO FINANCIAL SERVICES (WAEMU countries)

Banks+Postal Network+MFIs+ mobile money Banks+Postal Network+MFIs Banks + Postal Network Banks Source: Digital financial services in WAEMU, December 2014, BCEAO

A decade after the initial e-money regulation was adopted, access to financial services the region has soared to 49.5 per cent globally.

Maimouna Gueye is a digital finance expert with over 15 years of experience in the financial sector. She has solid experience in payment systems, digital financial services policy and regulation as well as oversight. She has significantly worked on financial inclusion in developing markets.

She graduated with an MBA in Finance and Economics from Saint Peters University in the United States and is a fellow of the Fletcher School Leadership Program for Financial Inclusion funded by Bill and Melinda Gates Foundation. After working for JP Morgan Chase and the Central Bank of West African States (BCEAO), Maimouna recently joined the African Development Bank as a Principal Financial Inclusion Officer in charge of funding a portfolio of projects targeting universal access to financial services for people in Africa.

www.bankerafrica.com

page 28-29 Country Focus UEMOA_036.indd 29

29 21/07/2016 17:26

CASE STUDY

In Egypt, small businesses like market stalls rely on cash, leaving many outside the formal economy. (CREDIT:

JM TRAVEL PHOTOGRAPHY/SHUTTERSTOCK)

The total reform approach to going cashless Experts weigh in on recent and upcoming policy shifts in Egypt’s bid to go cashless and inclusive

30 page 30-32 Case Study036.indd 30

www.bankerafrica.com

21/07/2016 16:27

M

oody’s Investor Services estimates that SME clients make up just five to 10 per cent of Egyptian banks’ lending; this despite the fact that SMEs with 10 or fewer employees account for 97 per cent of businesses and 75 per cent of employment in Egypt, according to the World Bank and the African Economic Outlook.

While SME lending is considered risky across markets, one major, unavoidable barrier in Egypt is a cashheavy culture that leaves many of these businesses in the ‘informal’ or unbanked economy.

The Center for International Private Enterprise (CIPE), an affiliate of the US Chamber of Commerce, along with the Federation of Egyptian Banks and the Federation of Egyptian Industries, recently issued a report on the challenges Egypt has faced in realising a cashless economy.

Randa Zoghbi, Country Director of the Egypt Office for CIPE, said that most of all, the report’s research demonstrates the significant problems with the Egyptian legal framework.

“The legal framework suffers from major deficiencies in several critical provisions that are key to Egypt’s transition to a cashless economy. As shown, in most cases, the law does not obligate the Government or a bank to use specific payment methods in their transactions, whatever the nature of the transactions is. In fact, some provisions explicitly mandate the use of cash payments to the concerned entity’s treasury,” she said.

“Yet, on the positive side, Egypt’s demographics, with youth comprising the majority of the population, and the prevalence of internet use, have sparked numerous initiatives that rely

on modern technologies, all of which contribute to transitioning to a cashless economy,” Zoghbi added.

ROADBLOCKS TO GOING CASH FREE Hands down the most commonlycited problem in going cashless is the massive informal sector, but its continued existence says a lot about the hurdles standing in many business owners’ way. Report contributors gave a dozen reasons for the challenges that business and banks face.

“One thing will not do the trick,” Tarek Tawfik, Vice Chairman of the Federation of Egyptian Industries (FEI), said. “Number one [in bringing informal businesses in] will be the ease of doing business—the registration of properties, land allocation, licences being given by the government—which is very cumbersome and one of the reasons that SMEs veer outside the formal economy.”

Tawfik said that the FEI, which counts more than 65,000 Egyptian businesses in its community, has been working aggressively with the government to streamline these operations and introduce a bankruptcy law. It is also working in tandem with the Federation of Banks to lobby for reforms and updates to some 11 or 12 laws related to banking and business, he said.

Zoghbi said that besides the informal economy, factors from low financial inclusion to high rates of corruption and tax evasion hinder a shift towards cashless transactions.

However there are some ways that Egypt’s shift towards digital diverges from other countries’ paths. While the general trend in digital banking means abandoning brick-and-mortar branches, in Egypt some level of bank

presence is still key to bringing people into the financial fold.

“Shortage in ATMs is considered the primary barrier preventing many from setting up bank accounts, and more so, it is expected to pose a significant challenge to Egypt’s shift to a cashless economy,” Zoghbi said.

She estimates that there are 40 banks in Egypt but “insufficient competition, insufficient network of branches” and an ATM shortage in rural areas are holding the sector back. In many ways, financial inclusion requires classic bank presence.

This may go a long way in breaking down cultural hesitation that Zoghbi also mentions.

“Some firmly held beliefs and habits in the Egyptian society constitute a challenge that could hamper the move to a cashless economy,” she said.

“For example, a firm belief regarding difficulties in interacting with the banking sector, a strong preference for relying on cash saved at home, doubts and questioning of the conformity of banking transactions with Shari’ah, and reluctance to disclose financial or personal information are among the key cultural factors contributing to the prevailing cash culture.”

BANKING ON CASHLESS GROWTH On 11 January 2016, the Central Bank of Egypt made headlines with a new directive that banks allocate 20 per cent of their loan books to SMEs. Though several rating agencies warned that the strategy shift could put pressure in the quality of some banks’ loan books, the initiative was largely welcomed as an impetus to bring Egypt’s significant small business owner population into the formal economy.

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31 24/07/2016 14:47

CASE STUDY

Asked about the new policy, Tawfik said, “It’s a nice initiative but it will not materials until we reform the ‘doing business’ aspect. It’s nice to have money at a low interest rate but if you’re not able to get into the formal sector you’ll not get the benefits of it.”

One additional reform in Tawfik’s book would be an overhaul of the archiving system; many Egyptian banks still rely on paper records. “Adopting an electronic archiving system within the banking system would dramatically reduce the cost of opening a bank account for a small individual because I think we have to keep records up to five years, some cases 10 years,” he said.

Zoghbi also highlighted banks’ lack of digital infrastructure. The report found that many banks lacked up-to-date database infrastructure in particular, but also the physical infrastructure that allowed for banks to perform basic services across the country.

“In the absence of banks and ATMs in many rural places, postal service offices are essentially filling the gaps in financial services coverage. So these services are not accessible to everyone in Egypt,” Zoghbi said.

usage could deepen the level of financial services offered remotely.

“Nowadays the number of people using smartphones is progressively increasing; the high penetration of smartphones in Egypt will allow more and more people from all social classes to use digital transactions to make payments and transfer funds,” Zoghbi said.

POLICY REFORM ON THE HORIZON Many of the reports’ recommendations are already underway. Ease of business reforms, including business licencing, are in Parliament discussion, while the SME initiative launched earlier this year has moved banks into action.

Egyptian pound. Earlier this month, CBE Governor Tarek Amer seemed to confirm this when he called the five-year peg of the currency ‘a grave mistake’.

“Coming right out and announcing that, I think it’s a prelude to a move that will come very soon,” Tawfik said.

“We’ve been hearing some hints that there is a serious appetite for reform in the monetary system…I think these issues, once they come into place, will put us on the right track.”

The report by the CIPE and the two federations recommended several policy approaches, but on the questions of what Egyptian banks can do themselves, Zoghbi highlighted a need for minimal account opening deposit

Shortage in ATMs is considered the primary barrier preventing many from setting up bank accounts, and more so, it is expected to pose a significant challenge to Egypt’s shift to a cashless economys.

—

Randa Zoghbi, Country Director of the Egypt Office for CIPE

NEW TRANSACTION CHANNELS On a consumer level, both Zoghbi and Tawfik pointed to the possibilities mobile banking held. In the report, Kenya was cited as an example of the mobile potential.

“We’re seeing a trend towards mobile banking transactions. There is a good reach—in Egypt, there are more mobile phones than the existing population. We have almost 100 million cell lines for a population of 90 million,” Tawfik said. “I think the phone companies have been taking the lead in this direction along with the industries.”

Though mobile banking in the Kenyan model often relies on SMS or airtime transactions, increased smartphone

32 page 30-32 Case Study036.indd 32

Tawfik added that the Federation of Industry is now pushing aggressively to amend the investment law, while the bankruptcy law has been made a priority by the Minister of Investment.

“I think the country is going through a necessary transition,” he said. “We have been encumbered by a pile of bureaucracy that has built up over the past 60 years. There is a real will in trying to reform the system, but unfortunately it doesn’t come at the click of a button.”

Increasingly, rumours of significant monetary policy reform have also swirled. In May, Renaissance Capital released a report suggesting that the Central Bank could look at floating the

requirements and fees, and again, the promotion of banking through increased branches and ATMs. She added that on a policy level, permitting the establishment of more private banks could help.

“These, all together, work towards improving financial inclusion and facilitating the transformation to a cashless economy.

“If the appropriate bodies were to follow the recommendations provided, the general timeline for Egypt to achieve its goals is from two to seven years. The changes will be gradual because there are many stakeholders involved, and the pace of reforms differ from one to another,” Zoghbi said.

www.bankerafrica.com

24/07/2016 17:25

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20/07/2016 20/07/2016 13:43 13:43 7/17/167/17/16 3:48 PM3:48 PM

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24/07/2016 20/07/2016 14:22 13:43 7/17/16 3:48 PM

TRAILBLAZERS

Lighting up off-grid By supplying personal solar energy systems through mobile operator partnership, Lumos is striving to reach tens of thousands of Nigerians this year, says Co-Founder Nir Marom

Nir Marom, Co-Founder of Lumos, says they are planning to reach 70,000 users by end-2016.

I

n Nigeria, nearly 90 million people live without a connection to the electric grid. It is a market ripe for an affordable service that can remove some of the risk and cost associated with traditional generators—and Lumos is stepping into that gap.

The company came onto the scene in 2014 through a

34 page 34-35 Trailblazers036.indd 34

partnership with MTN, Nigeria’s largest mobile operator with more than 60 million subscribers, which introduced a type of pay-as-you-go model for personal solar panels. Now, with a recent partnership with the United States’ Power Africa initiative and $15 million in financing from the Overseas Private Investment Corporation (OPIC), is in the midst of scaling up its operations to reach tens of thousands more Nigerians.

www.bankerafrica.com

26/07/2016 11:35

Customers buy the Lumos solar kit from nearby MTN retail points. The kit, consisting of an 80 MW solar panel unit and solar cable, a solar control unit, a USB mobile phone adapter and two LED bulbs, is activated through users’ mobile phone accounts once they set it up and initiate payments.

Nir Marom, Co-Founder of Lumos, said that an average usage scenario for a family includes lighting in two or three rooms for six or seven hours every day, as well as power towards cell phones, a television, and fans, also for several hours a day.

Add to this other devices such as laptops and radios, and each Lumos system can bear a fairly substantial amount of power demand—which may be why the system is increasingly being picked up by SMEs and community organisations.

“There is one specific hospital that I know of that’s using three systems to power 20 rooms,” Marom said. “We have small businesses that just use this to extend their business hours, and they can’t afford a generator but they can afford Lumos.”

Price is one key factor in Lumos’ appeal, but safety and sustainability also play an important role, even as fuel prices fall lower, possibly making generators more of an option for off-grid families.

“The driver for distributed solar is the fact that electricity doesn’t reach most of the people…generators are noisy and very polluting, and people use the

generators indoors because they are afraid of them being stolen, and that just makes everything worse,” Marom said, likely referring to the increased fire risk that indoor generators can pose. “They are so much more expensive that even with low fuel prices, we are much more interesting economically,” he added.

From schools and clinics to retail shops and even poultry farms, the Lumos product is being picked up fast in the off-grid space. Of course, that is part of the plan—the $15 million OPIC loan—its largest investment in off-grid power in Africa—goes towards planting 70,000 systems in Nigeria by the end of the year, a goal that Marom feels is more than feasible.

“A lot of this is realistic because of the existing MTN infrastructure. When we don’t need to open up new shops, we just need to ship systems to existing shops, it’s very easy,” he said.

GROWING THE BUSINESS Partnership with mobile operators is an essential part of the Lumos business, so replicating the model outside of Nigeria, and MTN’s extensive in-country coverage, will be a formidable task.

“Of course [we have intentions of expanding outside of Nigeria]. The Nigerian opportunity is huge, 90 million potential customers to be handled, but of course we think broader than Nigeria,” Marom said.

“Every new market has its own different specifics, and that’s of course one major challenge to open up operations in new territories. The good thing about working with an existing mobile operator—and every territory it’s going to be a different mobile operator—is that [it] has all the on-theground infrastructure and we don’t need to rebuild that,” he continued.

One challenge is integrating into the billing system of the mobile operator.

Right now, Lumos bills based on airtime though mobile money payments are also a possibility.

“We can work with mobile money… in any case, that requires integration and a bit of work,” Marom said. As the company is reportedly setting its sights on East Africa—the home region of several successful mobile money companies— this may be the next big hurdle.

Overall some 600 million Sub Saharan Africans, or roughly twothirds of the population, live offgrid. This number does not account for those technically on the grid who have limited or costly access to service. Globally, Marom says there are more than one billion without access to electricity.

But right now, the goal is equipping people in Nigeria with clean solar power. “It’s by far the largest offgrid market in Africa. The market opportunity is huge,” he said.

The portable Lumos kit can power a home, a school, or even a clinic.

www.bankerafrica.com

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35 26/07/2016 11:35

SECTOR FOCUS FINANCIAL CENTRES

Casablanca Finance City sits on 100 hectares in the new Casablanca-Anfa area of the coastal city of Casablanca, pictured (PHOTO CREDIT: NESSA GNATOUSH/SHUTTERSTOCK).

The bridge into Africa Najwa El Iraki, Head of Business Development at Casablanca Finance City, discusses why Morocco’s young financial zone has the potential to be a hub for Africa

T

he Casablanca Finance City (CFC) was first established through a directive of Morocco’s King Mohammed VI in 2010, making it a relatively young but fast growing gateway into African markets. Through aggressive business development and key partnerships with financial centres across the world— including Mauritius, Paris, Singapore, London, Luxembourg and Montreal— the City now boasts just over 100 companies operating under its umbrella.

Sitting on 100 hectares in the new Casablanca-Anfa city centre, the

36

City now hosts several international banks, insurance companies and advisory groups—but has ambitions for much more. Najwa El Iraki, Head of Business Development, sat down with Banker Africa’s Isla Macfarlane at the Africa Financial Services Investment Conference to discuss.

What makes Casablanca Finance City a hub for the African region?

Looking at Morocco’s assets, they basically represent the key success factors for building an internationally

recognised financial centre. First, there are several strategic advantages—this includes ongoing political stability and Morocco’s strategic geographical position between Africa, the Arab world, Europe and the Americas. We also have world-class infrastructure, which includes the largest airport in the West Africa region—we have 33 air connections from Casablanca into other African cities, we are the number one air hub between Europe and Africa…We also have worldclass highways, ports, speed rails and networks, making Morocco’s

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having a specific value proposition for companies with the CFC status, granting them a number of advantages to operate in the region. CFC is today an operational reality with over 100 member companies.

In terms of new financial companies coming in, where have you seen the biggest growth areas?

infrastructure stand out compared to the rest of the continent.

The second key advantage is a sound regulatory framework; we actually have the second-most developed financial sector in Africa, and a regulatory framework which is recognised as a benchmark in the region according to the IMF, not just in terms of banking but also in terms of insurance.

Thirdly, there is a strong presence of Moroccan champions in Africa.

Our companies accounted for about nine per cent of business transactions in Africa last year. Our banks and insurance companies are present in over 30 African countries. Morocco is also the second African investor in the region after South Africa. In terms of being a regional hub, we have very strong cultural, historic, and economic ties with our African neighbours.

Finally, I will add the whole macroeconomic environment as one of Morocco’s key assets. We are an open

Our companies account for about nine per cent of the business transactions in Africa this year – Najwa EL Iraki

economy with strong fundamentals and with free trade agreements that give us access to markets [with a combined total] of one billion customers. This has contributed to improving our rank in the Global Financial Centers Index to become Africa’s first financial centre as of April 2016.

All these elements and more give us the ability to be a pan-African hub.

Under this context, Casablanca Finance City was set up as Morocco’s business and financial heart at the initiative of His Majesty the King in 2010, and we’ve gone a long way towards

Before all, we should look at the kind of companies that we are targeting.

We are interested in companies across the services spectrum within four main categories that together constitute the CFC ecosystem: first, financial institutions such as corporate investment banks, re/ insurance firms, asset managers and so on; second, regional headquarters of international corporates in all kinds of industries; third, holding companies and fourth, professional service firms —lawyers, management and strategy consultants and so on.

So where we’ve seen the most growth looking specifically at the first category i.e. financial institutions: we can see a growing interest from GPs/ financial advisory firms in the private equity and investment funds industry.

There is also the reinsurance sector that has seen significant growth—just in the last year or so, we’ve had about 10 companies from this sector, which have come on board.

As far as regions, companies from Europe and North America are most common, since today we are functioning as their North West hub to North and West Africa. But we are also seeing companies from Asia joining our ecosystem more and more, mainly Chinese companies.

How do you support small businesses?

Our offer caters to both larger and smaller businesses; if they are smaller businesses, they want to be part of cont. overleaf

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SECTOR FOCUS

cont. on page 37

CFC because firstly ‘Casablanca Finance City’ is a label—a quality label. So just being part of CFC gives them in a way a certain natural marketing [angle].

We support smaller businesses through our comprehensive ecosystem, with over 100 financial and non-financial companies that can help generate business for them, either directly or indirectly.

We also have a strong value proposition for both large and small businesses, which includes fast-tracking administrative operations (ex: only 48 hours for company setup). So even if a company is a small business, it will still benefit from a dedicated desk and a team of professionals within CFC to help it navigate and accelerate its legal and administrative procedures. In addition, there are simplified processes for business visas, foreign employment contracts, residence permits, and facilitated exchange control with no restrictions on the management of foreign currency assets from foreign sources. This could otherwise be difficult for small businesses, if they do not have specific agreements and partnerships in place. There are also some tax incentives for both the CFC companies and their employees.

All this is essential for small businesses; they want to start doing business quickly, be less burdened by administrative procedures, and pay less taxes – all so that they can grow more quickly and efficiently.

What effect does this have on Morocco’s domestic economy?

Generally speaking, having a financial centre in a country does create value.

It creates wealth for our city, country, and continent; we are creating jobs, both direct and indirect. We are bringing expertise to the markets, because we are looking at value-added service jobs. On a regional level, we are contributing to increasing business

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Casablance Finance City is a quality label for small businesses, says Najwa El Iraki, Head of Business Development

and investments opportunities from Morocco into Africa. Today, 38 per cent of Morocco’s investments in the continent come from CFC companies.

This, in the long-run, obviously means we will contribute to the GDP growth of the country.

We are also working on the training and talent pool side; we brought in specific qualifications and examination centres in Morocco like the CFA (Chartered Financial Analyst), the CISI (Chartered Institution of Security Investments), and the CII (Chartered Insurance Institute). Thus we’re training people on the ground, helping companies within the CFC ecosystem and beyond to better their employees’ skills, and to have a good talent pool to hire from.

What would you say CFC’s biggest goals are?

There is a vast working field ahead for CFC to strengthen its position as a global financial centre.

We wish to strategically position ourselves on key business lines and attract companies in specialised fields, thereby generating more growth notably in the corporate and investment banking sector.

At its basis, CFC is a promoter of African investment opportunities.

CFC also has a role to play in improving wider financial regulation.

The role of CFC here is to be a facilitator and an accelerator of reforms at the national and regional levels. We are a financial centre that is in constant evolution, and we seek to continuously enhance our competitiveness, the same as even the most advanced financial centres aim to do.

In the longer run, we want to promote regional financial integration.

This is really our ultimate end: to make South-South cooperation even stronger with a focus on GNWA [Greater Northwest Africa region] countries, so as to consolidate our position as a panAfrican business and financial hub and to represent a well-integrated region having achieved critical mass.

With CFC growing as a financial beacon in the region, what are your biggest challenges?

A global financial centre builds itself over time. There are certain components of our hub which can be improved and which require a strong and sustained mobilisation of multiple public and private stakeholders. I suppose it all comes back to the question about our goals and specifically on the longer-term as I previously mentioned—regional financial integration, which remains the biggest challenge. African states will have to work hand in hand in order to overcome outstanding financial and economic barriers, resulting in an integrated and well regulated market that will increase the attractiveness of the region even further for investors.

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TECHNOLOGY

Blockchain and central banks—friend or foe?

Emma Wadey, Product Strategy at Temenos, explores how central banks can prepare for blockchain technology—and how the currency can help them

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itcoin emerged with a lot of excitement in 2013 and now there is a new wave of excitement for public online ledgers using blockchain technology. Often referred to as a ‘distributed ledger’, blockchain works by encouraging users to verify for themselves, and others, blocks of transactions made over time. As everyone in the system has the right to do this, and everyone can see the results, there is no need for a trusted, centralised clearer. The opportunities are endless for areas such as payments and settlement of fiat currencies, asset registries without the need for a central authority, the facilitation of regulatory reporting and the issuance, transfer and clearing of securities though more efficient post-trade processing. But what does this mean for central banks whose central role is to manage settlement?

DOES BLOCKCHAIN REMOVE THE NEED FOR A CENTRAL BODY? At the end of last year, the Bank for International Settlements (BIS), often referred to as the central bankers’ bank, published a report that in part reviewed the impact of ‘digital currencies’ and their associated technology, i.e. blockchain.

From a digital currency perspective it only identified risk in “some extreme scenarios”. Suggesting that the role of a central body that issues a sovereign currency could be diminished by protocols for issuing non-sovereign currencies that are not the liability of any central institution. However, it did highlight that “the emergence of distributed ledger technology could present a ‘hypothetical’ challenge to central banks. A challenge, not by replacing a central bank with some other kind of central body but mainly because it reduces the functions of the

central body and, in an extreme case, may obviate the need for a central body entirely for certain functions”, according to the BIS Committee on Payment and Market Infrastructures. But like many formal institutions that face the threat of change, the only way to address a challenge is usually to embrace it. So how can central banks work this new technology to their advantage?

BROADENING OPPORTUNITIES BEYOND ‘THE BANKERS BANK’ Back in March this year, Dr. Ben Broadbent, Deputy Governor, Monetary Policy at the Bank of England gave a speech reviewing what blockchain might mean to central banks. His view looked to embrace the technology rather than focus on the risk of disintermediation.

He highlighted that the interest from a central bank perspective is not from an alternative unit of account perspective cont. overleaf

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TECHNOLOGY

Often referred to as a ‘distributed ledger’, blockchain works by encouraging users to verify for themselves, and others, blocks of transactions made over time (PHOTO CREDIT: 3DSCULPTOR/SHUTTERSTOCK).

cont. from page 39

(such as bitcoin currency) but in terms of the distributed ledgers, which as we’ve already heard at first glance might be seen as disintermediating central clearing banks. Dr. Broadbent suggested that if a private-sector digital currency uses the technology to substitute for a third-party clearer, the central bank counterpart could do the opposite. It could widen access to the central bank’s balance sheet, beyond

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commercial banks. With no rigid correspondence present, in principle, one could introduce the technology and preserve the current arrangements.

This opportunity for expanding a central banks remit was further reinforced in a speech transcript released last month by the Bank of England Governor Mark Carney. He asked, “If distributed ledger technology could provide a more efficient way for

private sector firms to deliver payments and settle securities, why not apply it to the core of the payments system itself?”

To support this, Carney stated that he would also work on new methods for handling non-bank payment service providers. This could provide huge opportunities for blockchain businesses with such business models and further escalate the adoption of blockchain as a whole.

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PROVIDING A TRANSPARENT VIEW TO SUPPORT THE REAL ECONOMY Another advantage that blockchain technology may offer is from a liquidity perspective. An article on Business Insider based on HSBC reports recently highlighted that HSBC sees a real opportunity for blockchain to support central banks and in turn the economy as a whole. The theory is that central banks could push for blockchain-based digital currency systems to capitalise on transaction transparency and create a clearer picture of a country’s financial system. That information could then be used to add targeted cash injections into the real economy via consumer bank account deposits or tax refunds.

This could add great value to the economy, moving money into the real economy faster compared to the private credit sector route. In theory, this transparency could give a central bank the ability to tailor how much cash it wants to inject into an economy at a given time. Also addressing the risk that too much cash added to the public money supply could trigger inflationary issues.

The article highlighted HSBC’s view that, “Online e-commerce stores are able to give out loans to merchants without collateral, because they know all the flows already from the merchants’ point of view: from how much people are spending to the conversion rate of pages viewed to purchases. In the same way, a modernised monetary transmission system, based on real-time big data analysis through blockchain, could allow the government to balance the economy more efficiently and systematically.” So blockchain could offer real insight into trends, enabling issues to be controlled earlier on, thus protecting the economy.

On the other hand this technology could also pose a risk to the ‘real

economy’. It could increase the liquidity risk by removing friction. If, for an example, the stock market were to crash, a bank run could be more likely to happen because investors would be able to quickly move their stocks into (digital) cash—that is cash the bank might not actually hold. So while blockchain provides transparency to predict and control the economy so in turn does it offer transparency for banks to react promptly to market changes.

SECURITY THROUGH SIMULTANEOUS GLOBAL SYSTEMS But the opportunity to protect doesn’t stop there. There has been a recent spate of financial crime that could easily have been prevented had blockchain technology been in place.

In February this year, $81 million was stolen from the Central Bank of Bangladesh. A commercial bank in Ecuador said it was held up for $12 million last year, while a bank in Vietnam said criminals tried, and failed, to steal $1.1 million in what experts say may have been a practice run for Bangladesh.

All of the attacks were committed by cybercriminals, and at least some used SWIFT messaging system for the transaction. Blockchain could help prevent such hacks. Unlike Swift, a banking system run on a blockchain would be distributed with no one point of failure because the system runs simultaneously on all the computers linked to it around the world. And the benefits of blockchain from a risk mitigation perspective go further, particularly from a central banks perspective, as Bank of England Governor Carney said, “the great promise of distributed ledgers for central banks is their potential to enhance resilience. Distributing the ledger means multiple copies of the

system. It can continue to operate if parts get knocked out. That removes the single point of failure risk inherent in a centralised system.”

FAILURE TO PREPARE IS PREPARATION TO FAIL There is no doubt that for a financial institution to fail to review and explore blockchain technology would likely have grave consequences. Central banks, who have historically shied away from fintech activities to date, are already discussing the considerations and opportunities that this new technology offers. In fact, some are reviewing even opening their own working groups and fintech incubators to explore new concepts in development such as distributed ledgers.

We have heard that blockchain technology could pose both an opportunity AND a risk to central banks and the ‘real economy’, however, blockchain is set to dominate and potentially become part of the financial industries very infrastructure. Without preparation, those risks will still remain but the opportunity to address them and even benefit from this new technology will diminish, after all, as I said in a June article, ‘Is blockchain looking for a problem to solve?’, if we do not start investing and working with the technology now, it will still take 15 years once we do start. But central banks must decide which role they want to play. They can operate the digital networks themselves, issue digital assets, hold those assets, create products and services to run on those networks or just observe them.

However, there is no doubt that all central banks should be taking notice of this technology and understanding the part they should play. Just as the banking world is being disrupted by new technology so too will the bankers bank in time.

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TECHNOLOGY

Africa’s banks set to gain more in a ‘cash-lite’ economy Legacy infrastructure can impede banks’ evolution in digital, but African institutions are at an advantage, writes Chet Kamat, Senior Vice President, Oracle Financial Services

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lobal investors and business leaders are betting on Africa as the next region for expansion. An improved economic climate combined with a large population of millennials holds the promise of robust and sustained growth in the region. Turning the vast potential in Africa into real opportunities depends on several factors; and a crucial factor to success is technology adoption. The aspirations of African people and businesses today are no different from those in other emerging or advanced economies. Technology is paving the way for bringing people together and connecting the continent to rest of the world.

The biggest success in recent years has undoubtedly been on the mobile and smart phone front, with varying degrees of mobile penetration across different African regions. In Ghana alone, the mobile phone penetration rate rose to 127.63 per cent after the country’s voice-subscriber base climbed to over

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35 million in December 2015 from 34 million registered in the previous month, according to Ghana’s National Communications Authority, released in March 2016. Rising urbanisation, increasing internet connectivity, mobile commerce and e-commerce continue to shape the long term prospects of the region. Central to this growth story is Africa’s banking and financial services industry—which is uniquely positioned to both drive Africa’s success and reap its benefits.

Digital innovation today is a global phenomenon and banks the world over are embracing this change and capitalising on the resultant opportunities. Africa in particular is displaying a strong trend of innovation and is leading global progress in the area of mobile money payment platforms and services. Sub Saharan Africa alone accounts for more than half of the world’s mobile money services. It is the only region where more than ten per cent of the adult

Mobile and smartphone usage in Africa opens opportunities for banks, says Chet Kamat.

population has a mobile account.

Futher, the Nigerian-government is issuing millions of payment enabled electronic ID cards, a huge step for financial inclusion—it allows for proof of identity and provides access to innovative financial services.

Interestingly, such innovations in Africa and elsewhere lower the burden of dealing with cash. While cash is king, it also presents a problem— producing, transporting and securing money is expensive; counterfeiting, tax avoidance only adds to the cost of cash. For consumers it is the least convenient mode of transferring funds to distant locations. Some consumers are reluctant to pay high transaction fees while others simply cannot afford them and remain trapped in an informal economy with limited access to financial services. Digital innovators have seized the opportunity and presented a convenient and affordable platform for payments. The popular M-Pesa in Kenya, platforms such as

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Zap in Tanzania and Orange Money in Uganda have been successful in expanding local digital economies for a few years now. In South Africa, organisations such as FinMark Trust and the Centre for Financial Regulation and Inclusion are making markets more accessible to the poor.

Although payments and fees will continue to drive mobile money usage in Africa over the next few years, consumers are increasingly looking to do more—place deposits, obtain insurance and, if possible, even buy a mortgage.

It means banks and microfinance institutions will need to partner with platform providers and leverage those platforms to offer banking products and services. This increases banking activity, even as banks eliminate the cost and effort of investing and maintaining infrastructure such as branches and ATMs. Beyond payment platforms, banks can look to partner with other players in the consumer ecosystem, for example retailers. By opening up banking APIs to retailers, banks can provide for faster payments without a need for intermediaries. For example, ‘Yes Bank’ in India opened its APIs to Snapdeal, a retailer, and has gained significant business benefits.

AFRICA’S BANKS CAN LEAPFROG TO STATE-OF THEART TECHNOLOGY The potential for banks in Africa to leapfrog their counterparts in advanced economies is real.

Digitisation can enable Africa’s banks to surpass their counterparts in Asia and Europe; Europe, for example, is working through PSD2, the Payments Services Directive formed by the European Parliament. As banks begin to extend their partnerships to retailers and other third parties, they must gain the flexibility necessary to meet requirements of this growing ecosystem. Consumers will continue

to take advantage of digital to make transactions from any place and any time. With increasing partnerships, the question is whether banks have the capability of processing transactions and make subsequent updates across systems which are real time and 24/7? This would require a support system and a back-end technology infrastructure which can facilitate immediate and convenient payments to meet consumer and business demands. While several banks in advanced economies are

A major challenge for Africa’s banks lies in having to think and act like startups and fintechs, where decisions are made quickly and new and innovative products are launched.

— Chet Kamat, Senior Vice President, Oracle Financial Services plagued with barriers from a legacy infrastructure set up several decades ago, a majority of Africa’s banks have a relative advantage when it comes to adopting new technologies and processes. However, a major challenge for Africa’s banks lies in having to think and act like startups and fintechs, where decisions are made quickly and new and innovative products are launched. Adapting to change, focusing on speed to market, customer experience and building an infrastructure which supports change will determine success for banks.

AFRICA’S BANKS AND MICROFINANCE INSTITUTIONS CAN LEAD THE WAY Digital innovations have brought

large sections of previously unbanked societies a step closer to a formal banking setup. Mobile money has taken microfinance to several parts of Africa and continues to present a huge opportunity as more than 80 per cent of the African market remains untapped.

Challenges like unavailability of credit history, high risk of defaults, lack of collateral, poor infrastructure and connectivity continue to hamper progress. With increasing financial inclusion goals, microfinance will remain essential to Africa’s success and microfinance institutions (MFIs) must build capabilities to reach out to the under-banked and unbanked population.

MFIs should be able to support families by helping them set up micro enterprises and have the capabilities to provide services to non-smart phone users as well. They must be able to create a virtual presence in remote locations and provide access to the full spectrum of financial services. The success of microfinance initiatives are linked to several factors but in essence they should be able to offer multiple models of deployment, deal with low bandwidth operations, tackle infrastructure issues, reduce the possibility of fraud, keep costs under control and ensure streamlined operations.

Furthering a ‘cash-lite’ economy, banks can help customers pay for things without cash, receive money from foreign shores, and obtain micro loans and insurance products. Without any legacy infrastructure or status quo to hamper progress, the existing banking landscape in Africa is ready for disruption. Banks have to act quickly if they are to take advantage of the huge potential and opportunities available, which are simply unique to Africa. This is a chance for Africa’s banks to succeed by acting ‘different’ despite Africa being no different from the rest of the world.

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INVESTMENTS

Peru’s platform for Africa Peru is setting its sights on African trade through South Africa, embarking on new trade agreements to bring its products to a whole new customer base, says Alvaro Silva-Santisteban, director of the Peru Trade, Tourism and Investment Office

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bout two years ago, Peru began the process of introducing its products into the South Africa market. But as Alvaro SilvaSantisteban, Director of the Peru Trade, Tourism and Investment Office, tells Jessica Combes, it soon found a fast friend and trade partner in Zimbabwe.

Now, Peruvian products are on the cusp of entering South Africa, and Silva-Santisteban is optimistic for further growth cross the continent.

He discusses the country’s plans for trade and partnership, making South Africa a platform for Peruvian exports into the continent.

What makes South Africa an appealing trade partner?

Two years ago, there was no Peruvian presence in South Africa. We did have an embassy of course, so politically we were very well-established, but there were no specifics in terms of encouraging greater trade, investment or tourism.

We looked into the matter and said we need something that covers Southern and Central Africa. Why is South Africa important? Because it’s the gateway to all of the Southern part of Africa. For example, Peru is developing very good

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business on a very high-quality, niche market with Zimbabwe through South Africa. We have struck up a venture with a South Africa company that deals with Zimbabwe directly. So with South Africa it’s not just a matter of gaining a point of entry into the continent, but also tapping into ventures within the country.

At the end of the day, the most important thing that we believe is that

I understand that the market is very protective of its production, but as we’ve said, we’re not going to be competing with existing products.

– Alvaro Silva-Santisteban

it’s not just about placing our products or increasing trade, but to create a sustainable venture that is going to allow us to diversify once we are already in the country. When you start ventures with local partners that know exactly how to tap into the market, whether you go wholesale or retail, or the direct channel or below-theline, that definitely makes a difference.

The synergies that can be forged are immense—for us it’s been a discovery process in terms of what it is that we can do that has not been done before.

Can you touch a little bit more on your relations with Zimbabwe?

It’s not really the first country you think of, when you think of international trade.

Zimbabwe was interesting because it came by chance. It was not something that we really looked into—when we were looking at South Africa, we wanted to discover how South Africa could benefit from Peru and vice versa, and during this process Zimbabwe came along. It came along because South Africa caters to the African continent. I think we should concentrate our efforts on one platform opening offices in SA for the continent, same as we did in Dubai, our platform for the Gulf region.

Has the economic slowdown in South Africa affected your projections at all?

Everything is relative. It depends what side of the balance you’re looking at, and whether you’re putting into perspective what you’re trying to accomplish. If we were present in South Africa for the past 15 or 20 years, how

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it would have affected us would have been much greater than what we’re facing right now. But for us to be in a new process, that gets minimised.

Obviously you have to look at the opportunities that this brings into the market. At the end of the day, it’s not just Africa that has been affected by the downturn, it’s the whole world.

You might lose on some, but you have to measure in terms of how you gain on the others.

It’s good that it comes at this specific point for us in South Africa, because we’re trying to discover the market and that helps us put more attention and focus our efforts on markets where we know that even with this economic slowdown, we are competitive. If there’s no slowdown, we’re going to be even more competitive and our trade is going to be seen bigger. For us it’s a gain more than a loss.

What are the main sectors you’re looking to move into?

South Africa produces mangoes and grapes—and we do as well. We don’t foresee ourselves as being competition, on the contrary we foresee ourselves as being a complement.

In the food and beverage [F&B] market we see huge potential, not just for South Africa, but with South Africa as a platform.

FNB, without a doubt, is going to play a key role.

We’re in the process now of trying to generate more negotiation of certificates for our products to be present in the market. On the process side we have no problems, we are de v elo pi n g tha t surely, but it would be interesting for us to have a whole area of products.

When we pick a specific product within a sector, we should be able to have different presentations [like different quality asparagus] that the market is demanding, or are able to generate that demand. That gives you the recognition that when someone sees asparagus they go ‘asparagus is from Peru’. This is the aim that we have.

South Africa produces auto parts, We’re going to be generating a secondhand auto parts market, a sector that is vast in South Africa. We’ve met the associations, chambers, producers,

exporters, and everybody has the overall very positive frame. We’re open to discover new alternatives, that is already a very good indicator for us to consider it.

You mentioned previously that you’re waiting for certain certifications to come through and everything to get finalised—what sort of timeline are you looking at there?

We have certificates that have been in the process of negotiations for two years. They’ve told us that by the end of [May] at least five products should have the availability or possibility to go into the market, but you never know. The problem is that we cannot start negotiating new products until this batch has been solved. That’s really a hurdle; I understand that the market is very protective of its production and fair enough, but as we’ve said, we’re not going to be competing with existing products—for a simple fact that because if you have local production, the price is going to be less than the one that we’re going to be bringing.

We’re looking at making it easier and faster to generate those products.

It’s a complicated process, sure, and it’s a necessary hurdle that should be passed faster than what we’re experiencing right now.

Alvaro Silva-Santisteban, director of the Peru Trade, Tourism and Investment Office

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OUTLOOK

The UK’s exit from the EU will have far-reaching implications for trade and foreign investment (CREDIT: ROMANTITOV/SHUTTERSTOCK).

An ‘inopportune’ exit The UK’s decision to leave the European Union has a ripple effect on Africa’s largest economies and global trade as a whole, say experts

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n 23 June, citizens of the United Kingdom voted in a referendum on whether to leave the European Union (EU). The shock of the United Kingdom’s vote to ultimately leave, dubbed ‘Brexit’, soon gave way to a slew of opinion pieces and forecasts on what that would mean for the rest of the world.

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The UK will remain part of the EU until it invokes Article 50 of the Lisbon Treaty, which has a two-year deadline to work out an exit. It has not done so yet, despite pressure from EU leadership to get the ball rolling. As long as the UK’s membership hangs in limbo, so do financial markets and the pound itself, leading many international observers to hope for a fast-tracked process.

However at least some feel that the effects have been a bit dramatised.

“Uncertainty, and sensational interviews in financial media, reigns,” said Sam Stovell, Managing Director, US Equity Strategist at Standard & Poor’s Global Market Intelligence.

“Global demand will not dry up and the UK will not be denied access to foreign markets. Granted, the EU will make it

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tough on the UK to discourage other EU countries from getting the same idea.

In the short term, markets will trade on emotion, so make sure you don’t end up becoming your portfolio’s worst enemy. In other words, stay calm and carry on.”

Others have warned of greater waves in the markets. Immediately following the vote, Nigel Green, Founder and CEO of independent financial consultancy deVere Group, said that Brexit-triggered volatility is now only just beginning—and we can expect it to last for up to two years.

“Due the far-reaching impact of this vote, Brexit will inevitably affect the British and the European economies and the wider global financial markets.

The decision may have been taken in the UK but it will impact the rest of the world too,” he said.

“The world’s currencies, equities and bonds are now on magical mystery tour—at least in the short-term,” he continued. “For instance, the FTSE will tumble, the pound is already in freefall, and investors will be gearing up for probable shifts in the Swiss Franc, to the price of gold, and to monetary policies globally.”

However the markets’ initial overreaction spells out opportunities for smart investors. According to Green, this is the time to go bargain-hunting.

“In these times of increased volatility, more than ever a good fund manager will prove to be invaluable to help capitalise on the enormous opportunities that will be coming along and help to sidestep the risks,” he said.

Richard Buxton, CEO of Old Mutual Global Investors and Head of UK Equities, said that the vote to leave the EU was the worst of the two outcomes, with the UK and possibly even the US tipping into recession, and the future of the EU itself being called into question.

But as others had, Buxton referred to the tendency of markets to overreact, or

correspond to an emotional response.

“Within equity markets, as ever at times of market stress, emotional reactions will mean that price falls will overshoot; this is the very nature of stock markets,” he said, noting that the gold price was one of the few bright spots in the Brexit fallout.

BREXIT AND AFRICA One of the biggest questions that arose in the Brexit debate was how it would impact the UK’s trade relations—it will now need to renegotiate more than a hundred trade agreements around the world that that previously been hammered out through the EU. Though new trade agreements are not expected to vary wildly from old,

In the short term, markets will trade on emotion, so make sure you don’t end up becoming your portfolio’s worst enemy.

In other words, stay calm and carry on.

— Sam Stovell, Managing Director, US Equity Strategist at Standard & Poor’s Global Market Intelligence

the period of uncertainty, as well as possible priorities shifts, has dealt a shock to several UK trade partners. As the largest African economies watched the Brexit decision take shape, several leaders sought to calm fears that the vote would have a significant impact on their own markets.

Central Bank of Kenya Governor Dr. Patrick Njoroge admitted in a press briefing ahead of the vote that it could have significant implications for the country, but that the Bank was prepared.

“The vote has introduced some noise or turbulence in the global financial markets. Depending on how it goes, it may push the global economy firmly into recession,” he said before announcing that Kenya has about KES 560 billion ($5.6 billion) in forex reserves, or about five months of its import bill.

“We also have $1.5 billion available for us from the IMF precautionary window that we can draw from in case of need,” he said, assuring the press that the country could weather either outcome of the vote.

On 24 June, the Bank of Mauritius said in a statement that it had recently raised the proportion of gold and US dollar in the foreign exchange reserves and concurrently reduced exposures to the pound sterling.

“Should the need arise, the bank stands ready to take measures as appropriate to protect the best economic interests of Mauritius in the circumstance,” the Bank said, adding that it would continue monitoring the situation.

In South Africa, the rand took an immediate hit from the Brexit news.

According to Bloomberg, the currency was the most negatively impacted in the world following the pound. Many South African companies that are cross-listed on the London Stock Exchange also took a serious hit. Overall, researchers from the North-West University in South Africa say that the Brexit could knock another 0.1 percentage point off of the country’s already weak GDP growth forecast for the year.

Business consultancy EXX Africa, based out of both Johannesburg and London, said the Brexit made South Africa’s return to recession more likely and further downgrade in its credit ratings almost inevitable, but that the impact on the South African economy would be shortlived and relatively manageable. Besides the currency’s decline, South Africa’s trade balance is most at risk.

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47 21/07/2016 16:41

OUTLOOK

“The South African economy is the most exposed to the global economy and in particular its currency is the most volatile among its emerging market peers. South Africa is reliant on foreign capital to finance its wide current account deficit,” Dr. Robert Besseling, Executive Director of Risk Advisory at EXX Africa, said. However it noted in a report that both President Jacob Zuma and Finance Minister Pravin Gordhan have assured the public that South African banks could withstand the shock. Bottom of Form Meanwhile in Nigeria, where authorities are already struggling with low oil prices, banking instability and the recent decision to float the naira, the Brexit decision probably could not come at a worse time. Trade volume between Nigeria and the UK is currently NGN 2.4 trillion ($8.52 billion) and according to from Nigeria’s National Bureau of Statistics, British foreign investment into Nigeria was $3.6 billion in 2015, more than $1 billion ahead of the next top investors, the United States.

These inflows come from both the UK’s independent investments and its part in the EU, so it is still unclear just how much trade and investment could drop or be renegotiated in the years ahead.

“A slowing UK economy on the back of a departure from the EU and potential disruption as the UK renegotiates its trade agreements, would be likely to reduce trade flows, foreign direct investment, and Nigerian remittances.

There is also no guarantee that other EU countries will make up the UK shortfall in trade and investment, as other EU countries look to Iran for more reliable access to oil and to Asia for cheaper labour,” Besseling said.

EXX Africa also highlighted Finance Minister Kemi Adeosun’s plan to issue a $10 billion Eurobond later in the year, with $5 billion coming from foreign investors. “Much of this planning would be delayed as risk averse investors steer away from Nigerian debt,” it said.

48 page 46-48 Outlook036.indd 48

THE UK’S SHARE OF BILATERAL TRADE WITH SUB SAHARAN AFRICA, IN RELATION TO THE TOTAL EU TRADE 0.20 0.18 0.16 Germany 0.14

United Kingdom

0.12

France Netherlands

0.10

Spain Belgium

0.08

Italy

0.06

Portugal

0.04

Other

0.02 0.00 2010 2011 2012 2013 2014

Source: Brookings Institute, UNCTAD

Mariama Sow and Amadou Sy, Research Fellow and Director for the Brookings Institute’s Africa Growth Initiative, said that the decision could have grave implications for African exports, but also development assistance and agricultural subsidies.

Perhaps the biggest impact of the Brexit on Africa would be the end of British ‘outwardness’.

— Africa Growth Initiative at the Brookings Institute “Perhaps the biggest impact of the Brexit on Africa would be the end of British ‘outwardness’—the country’s concern with and responsiveness to global development issues,” Sow and Sy wrote in a blog for Brookings.

They cited the 2005 G-8 summit in Scotland, when the UK-led debt relief

for several African countries and agreed to increase aid to developing countries by $50 billion a year by 2010.

Another issue impacting Africa is the EU stance on agricultural subsidies.

The current Common Agricultural Policy (CAP) in the EU instills a subsidy system that minimises African farmers’ competitiveness in the global market. The UK has been a traditional opponent of the subsidy system, but with their departure from them EU it is unlikely another country will step in to voice concern for the subsidies’ negative impact on Africans.

“The Brexit referendum is rather inopportune as African countries are facing serious external shocks such as the fall in commodity prices, an economic slowdown in China, and higher external borrowing costs. There is not much that they can do on the external front that leaves adequate and timely domestic policies the priority,” Sow and Sy said.

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THE VIEW

PICTURE OF THE MONTH A little girl and her father walk on Lido beach in Mogadishu, Somalia, during Eid al-Fitr, the Muslim holiday marking the end of Ramadan, the month of fasting. (CREDIT: UN PHOTO/ TOBIN JONES/FLICKR).

POLL

This month we asked our website readers at bankerafrica.com...

Do you think Brexit will have an impact on African economies?

YES, SIGNIFICANTLY

31%

YES, ONLY SLIGHTLY

NO, NOT SIGNIFICANTLY

20%

14% 34%

NO IMPACT

(PHOTO CREDIT: NITO/SHUTTERSTOCK)

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