#41 - February 2017

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ISSUE 41 | FEBRUARY 2017

Renewed optimism Lesetja Kganyago, Governor, South Africa Reserve Bank

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ISSUE 41 | FEBRUARY 2017

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Renewed optimism

Lesetja Kganyago, Governor, South Africa Reserve Bank A CPI Financial Publication

PLUS: 14 OPINION Changing opera ng environment for SSA banks BA bleed guide.indd 1

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SECTOR FOCUS

The African Islamic finance experience

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TRAILBLAZERS Think pink

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CONTENTS

ISSUE 41 | FEBRUARY 2017

Editor’s Letter

H

ello and welcome to this, my first issue of Banker Africa. I take the reins over from our previous editor of the magazine, Sarah Owermohle.

I will be endeavouring to keep the quality as high throughout my tenure as Sarah was able to through hers, and I look forward to having you all on this journey with me.

This issue our cover story is features Lesetja Kganyago, Governor of the South African Reserve Bank, who spent some time with us discussing how the bank will tackle the issues facing the South African economy in 2017. Turn to page 20 to find out more.

We were also lucky enough to speak with Naadiya Moosajee, the Co-Founder of WomEng, a non-profit focused on getting more women and girls involved in STEM subjects (Pg 44). In the last 10 years the organisation has managed to work with 10,000 girls, and has big plans for the next 10!

Speaking of big plans, we also heard the thoughts of Anne Muchoki, the Chairperson of the Kenya Investment Authority on her and the Authority’s goals for 2017. “Growth of Kenya’s economy and FDI into the country has been strong and is actually accelerating despite recent developments in the global economy,” she said.

Turn to Pg 46 to get the full story.

You can also find an outlook piece on another of Africa’s big economies, Nigeria on Pg 31.

Having emerged from a tough 2016, made harder with lower oil prices and a tightening liquidity landscape, 2017 looks to be improving, with some research suggesting that business in the private sector has begun to expand for the first time in a year in January 2017.

I look forward to working and meeting with you all in the near future.

Until our next issue,

20 IN THE NEWS 6 News analysis: Surprise result in

10

African Union elections

7

Essential financial news from around the continent

10

Spotlight: Ghana

HAPPENINGS 12 The annual Banker Africa Southern Africa Awards begin

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Seventeen South African banks collude on rand fixing

OPINION 14 Operating environment weighs

heavily on Sub Saharan banks

Janine Dow, Senior Director, Financial Inclusion, Fitch Ratings, discusses the changing operating environment and how it will affect banks in SSA

16

GOVERNANCE 16 Creating stability

Regulation and supervison is improving among African banks’, according to a new report from Moody’s

MARKETS 18 Large Egyptian funding gaps point

to large external issuance prospects

Egypt is currently waiting for inflows whilst IMF related financing is insufficient to stabilsh USD/ EGP, said BofA Merrill Lynch in a recent report

25

COVER STORY 20 Renewed optimism

Matthew Amlôt

With the South African economy looking to experience recovery in growth in 2017, the future is bright, says Lesetja Kganyago, Governor of the South African Reserve Bank

COUNTRY FOCUS: EGYPT 25 Road to recovery

28

All eyes look towards South Africa’s budget for 2017 as challenging factors remain

South African banking trends 2017

Mark Walker, Associate Vice President for Sub-Saharan Africa at International Data Corporation gives his thoughts on the future of South Africa’s financial services

www.bankerafrica.com

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CONTENTS

ISSUE 41 | FEBRUARY 2017

OUTLOOK 30 2017: Mixed risk for West Africa

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Control Risks release their annual RiskMap, with low commodity prices and the global economy highlighted as key risks for West Africa

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The year ahead for Nigeria Reports suggest that having emerged from a tough 2016, 2017 will likely remain challenging

SECTOR FOCUS: ISLAMIC BANKING 34 The African Islamic finance

40

experience Wafic Ghanem, CFO, Metito shares his experience with Islamic financing in the African market

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Islamic banking arrives in Morocco The Moroccan Central Bank has approved the establishment of five new Islamic banks in the Kingdom of Morocco

44

SECTOR FOCUS: SME FINANCE 40 East African SMEs strive to succeed

Despite being an important growth sector for banks, SME lending is not without its problems

42

Getting omnichannel banking right Kieran Kilcullen, CCO, CR2 gives his thoughts on how to adopt an omnichannel banking strategy

46

TRAILBLAZERS 44 Think pink

Naadiya Moosajee, Co-Founder, WomEng on the difficulties of getting women involved in STEM

INVESTMENTS 46 Opportunities abound in Kenya

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The growth of FDI and the state of the Kenyan economy with Anne Muchoki, Chairperson of the Kenya Investment Authority

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Trade finance continues to be low risk New data from the International Chamber of Commerce affirms the low risk nature of trade finance against comparable asset classes

THE VIEW 50 Photo and survey of the month

www.bankerafri ca.com ISSUE 41

ISSUE 41

| FEBRUA

RY 2017

| FEBRUARY 2017 Renewed optimism Lesetja Kganyago, South Africa Reserve Bank

A tale of two trends Publication

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COUNTRY FOCUS up Mozambique—picking after debt

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TRAILBLAZERS through Zoona—inclusion entrepreneurship

1

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The critical need financial messaging 24/10/2016 12:45

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Renewed optimism Africa

Lesetja Kga nyago, Gov ernor, Sou th

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A tale of two trends

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NEWS ANALYSIS

Surprise in African Union elections As results came in from the vote for the AU’s top position, disbelief was on the faces of many

T

he results of the African Union (AU) elections, held in January 2017, came as a shock to many. In contrast to many predictions, which pointed to Kenya’s Amina Mohamed or Sengal’s Abdoulaye Bathily cinching the title as Chairperson of the African Union Commission, Moussa Faki, of Chad, won the race after seven rounds of voting.

How did this happen?

Press corps at the event noted that President Kenyatta was one of the first heads of state to arrive in Ethiopia

and begin campaigning on Mohamed’s behalf. Furthermore, the President ensured that his special envoys visited 53 countries as part of the campaign.

Kenya did not fall short when it came to investing in the campaign. We can, therefore, perhaps draw several conclusions from the result of the race.

Firstly it is apparent that the Francophone nations have stretched their muscles as a power bloc in the AU. This can be further seen in the history of the Commission Chairperson itself. Since the creation of the African

The African Union headquarters, Addis Ababa, Ethiopia (CREDIT: UNAMID/FLICKR).

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Union there have been a total of five individuals in the role, of those, four have been Francophone.

General Francophone-Anglophone tension may well have acted against the Kenyan bid for the post and highlights the lack of influence the country has in the region. The East African nation has just one embassy in the entire Francophone region—Algeria, and lacks strong diplomatic relations with influential Francophone states such as Senegal and Cote d’Ivoire. This may have resulted in a quid pro quo response in the voting stage from the Francophone countries.

On a broader note, this articulates a continent-wide issue. The African continent is typically divided on a linguistic level. This division is particularly apparent within the AU itself, with Mohamed highlighting that her poor result may have been partly due to relationships with the other regional blocs.

Having lost the vote, Kenya was quick to offer its support to Faki. “We pledge to work with him to defend the pan-African agenda of integration for Africa, as well as democracy, sovereignty and prosperity for all of its people,” said Manoah Esipisu, the Secretary, Communications & State House Spokesperson of Kenya, in a statement.

On Amina Mohammed’s failed bid he said, “Her candidacy marked the re-emergence of Kenya at the very heart of the pan-African project. Kenya is grateful for the strong campaign she ran, which put pan-African themes— of self-reliance, of sovereignty, of openness to trade—at its very heart.

We thank her for her strong showing.”

A new leader of the AU was supposed to have been decided in July 2016; however the election was postponed after three rounds of voting were held without any candidate garnering the required number of votes.

www.bankerafrica.com

19/02/2017 17:13

IN THE NEWS

RATINGS REVIEW BANKS AND BUSINESSES CI Ratings affirmed its ratings of ‘BB+’ for Arab Tunisian Bank with a stable outlook.

CI Ratings affirmed Banque du Caire at ‘BB-‘ on grounds of the banks’ comfortable liquidity strong operating and net profitability, and increase in capital adequacy.

S&P downgrades its rating on South Africa based Edcon Holdings to ‘D’. All ratings have since been withdrawn at Edcon’s request.

SOVEREIGNS

ON THE RECORD Nigeria to auction NGN 142 billion treasury bills

The bills will go towards trying to fill the national budget deficit, inject much-needed liquidity into the banking sector and curb rising inflation.

ADFD injects $400 million into Central Bank of Sudan

The Abu Dhabi Fund for Development (ADFD) deposited $400 million with the Central Bank of Sudan to increase liquidity and stimulate economic growth in Sudan.

S&P/FMDQ Nigeria Sovereign Bond Index launched to mark signing of MOU

FMDQ OTC Securities Exchange and S&P Dow Jones Indices announced the signing of an MoU to launch new, co-branded fixed income-based indices

Rwandan Government to sell stake in I&M bank

The government announced that the stake will be sold via an IPO. Currently the Government holds 19.61 per cent in the bank, which is the oldest lender in the country.

S&P affirmed its ratings of ‘B-/B’ of Burkina Faso, outlook remains positive.

Moody’s rated Senegal at B1 with a positive outlook, reflecting high government debt levels and longstanding structural challenges.

S&P has lowered its Mozambique Foreign Currency Ratings to ‘SD/D’ on missed payments with stable outlook.

Fitch revised its South Africa outlook to negative and affirms ratings at ‘BBB-‘.

Political risks and infighting within the ruling ANC were highlighted by the agency.

The proceeds of the sale are expected to be invested as initial equity in the construction of Bugesera Airport, due to start in June (CREDIT: DABARTI CGI/SHUTTERSTOCK).

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7 19/02/2017 17:14

IN THE NEWS

A QUICK WORD

Far too often, the world views Africa through the prism of problems. When I look to Africa, I see a continent of hope, promise and vast potential —António Guterres, Secretary-General of the United Nations For these stories and more, visit www.bankerafrica.com

Eveline Tall Daouda leaves Ecobank after 20 years

E

c o b a n k Tr a n s n a t i o n a l Incorporate, the parent company of Ecobank Group, announced the departure of the group’s Deputy Chief Executive Office, Eveline Tall Daouda, who left for early retirement on 31 January 2017.

G r o u p C E O A d e Ay e y e m i , described Eveline Tall Daouda as, “A stellar professional who has built a reputation as an outstanding banker Eveline Tall Daouda and influential leader. Throughout her career, Eveline has been nothing short of the quintessential banker—one whose savvy and experience has helped grow our institution to the pan-African banking leader we are today.”

Groundbreaking on Burundian solar field One hundred kilometres outside of Bujumbura, the capital of Burundi, ground was broken on a new 7.5 MW solar field that will add 15 per cent to the country’s generation capacity. Gigawatt Global, an American-owned Dutch developer in charge of the project announced the $14 million project in January 2017.

“This project is a great example of Burundians, Americans and other international partners working together for the economic development of Burundi,” said Anne Casper, US Ambassador to Burundi. “The success of this project will be a positive signal to other potential investors, who are watching Gigawatt Global and the Government of Burundi to see if investing in Burundi is stable, predictable and easy to do. We are working together very hard and very closely—the US, Burundi, the Netherlands, and Gigawatt Global—to make this project a success—to enable the whole country to get energy and this will lead to the country’s economic development.”

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United Capital, SocGen, Orange and others create EUR 77 million SME fund

U

nited Capital has partnered with several financial and corporate institutions to set up a Franco-African Investment Fund (FFA), with investible funds of EUR 77 million ($82 million). The fund is aimed at accelerating the growth of Africa and French SMEs with development projects in both African and France.

Its first cross border investment fund dedicated to the development of African and French SMEs, and will have a lifespan of 10 years.

The Fund will be split into half, with 50 per cent to be invested in French SMEs who have interest in doing business in and with Africa and the other 50 per cent will be invested in African SMEs. FFA will invest primarily in African SMEs with high growth potential in order to create champions of regional and even continental statures.

AFC makes $205 million mining investment in Guinea-Conakry

A

n international consortium including Africa Finance Corporation (AFC) is set to invest in Alufer Mining Limited to fund the development of GuineaConakry’s high grade bauxite reserves. The $205 million deal will be one of the largest foreign investments in the country since the 2014 Ebola crisis.

The project, once complete, will increase production levels in line with global demand, which is currently outpacing supply. Primarily driven by Chinese demand, there is a greater than six per cent per annum five-year growth forecast for aluminium consumption.

Oliver Andrews, Chief Investment Officer of AFC, commented on the announcement, “Mining exports have historically played a crucial role in Guinea’s economy, accounting for up to a quarter of Guinea’s exports.”

www.bankerafrica.com

16/02/2017 16:40

Lives and Livelihoods Fund $150 million Sukuk launches $32 million commitment launched by AFC Finance Corporation (AFC) has issued its to help eradicate malaria in Senegal Africa maiden Sukuk. Initially the target had been $100

The fund aims to compact malaria in Senegal in consort with the Government (CREDIT: JARUN ONTAKRAI/SHUTTERSTOCK).

The Lives and Livelihoods Fund (LLF) has signed its first project—a $32 million financing agreement to support the Government of Senegal’s malaria eradication campaign.

The project will provide Senegal with a substantial boost to its capacity to diagnose and treat malaria, supporting the country’s mission to eradicate malaria by the end of 2018.

The project will do so by: •P roviding 2.5 million people with free, long lasting insecticide-treated nets.

• Contributing to the free distribution of 1.6 million rapid diagnosis tests and more than 70,000 doses of anti-malarial drugs.

• I mproving malaria surveillance and diagnosis by trained professionals.

•P roviding four million people with advice on how to avoid malaria.

• Training 400 community workers and health care providers in malaria control and case management.

IMF Executive Board completes its sixth review under Mali’s ECF, approves $25.8 million

T

he Executive Board of the International Monetary Fund (IMF) concluded the sixth review of Mali’s performance under an economic programme supported by an Extended Credit Facility (ECF) arrangement.

The decision enables This marks the IMF’s sixth review of Mali’s economic the disbursement of performance under an ECF programme (CREDIT: INTERNATIONAL SDR 19 million ($25.8 MONETARY FUND/FLICKR). million), bringing total disbursements under the arrangement to SDR 60 million ($1.3 million). The decision was taken on a lapse of time basis.

The Executive Board also approved the authorities’ request for the modification of the ceiling on the continuous performance criterion on non-concessional external debt.

million, but based on investor interest, the final transaction was upsized to $150 million, with a final order book of approximately $230 million.

Andrew Alli, President and CEO of AFC, commented on the announcement, “The core values of Islamic finance, the need to invest ethically in assets that have a tangible positive social impact, made a Sukuk issuance a natural choice for us. We offer global investors the chance to be involved in high-impact infrastructure projects that not only promote social and economic development across Africa but also generate economic returns for our investors.”

“This Sukuk represents a milestone in our financing activities, a milestone that will enable us to further diversify our funding sources, to build new relationships with key investors in international markets and help us diversify our portfolio of projects to continue delivering real impact across the continent.”

IMF Executive Board approved extension of arrangement under extended credit facility for Malawi The Executive Board of the International Monetary Fund (IMF) approved on 5 December 2016 an extension of Malawi’s arrangement under the Extended Credit Facility (ECF) to 30 June 2017.

This extension will provide additional time for the authorities to achieve the program’s objectives.

The ECF arrangement for Malawi was approved on 23 July 2012 in an amount equivalent to SDR 104.1 million ($146.7 million). An earlier extension of the arrangement from 30 June 2016 to December 2016 and an augmentation of access by the equivalent of SDR 34.7 million ($49.2 million or 25 per cent of quota) was approved by the Board on 20 June 2016 to strengthen the country’s response to the El Niño-induced drought. The programme is aimed at the achievement and maintenance of macroeconomic stability and implementation of policies and structural reforms to spur growth, diversify the economy and reduce poverty.

www.bankerafrica.com

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9 19/02/2017 17:16

NEWS SPOTLIGHT GHANA

AfDB approves $69.6 million risk participation in infrastructure investment

The concessional arm of the African Development Bank (AfDB), the African Development Fund (ADF), has approved two transport sector investment risk participations amounting to $69.6 million under its Private Sector Credit Enhancement Facility (PSF).

These two transactions are risk participations in private sector projects and The AfDB investment will focus on infrastructure in cover investments in Ghana, Ghana, Malawi and Mozambique (CREDIT: TAKE PHOTO/ Malawi and Mozambique.

SHUTTERSTOCK).

The projects aim to increase regional integration and trade. These new transactions brings the total number of approved projects under the PSF scheme to 25, covering a range of industries including transport, energy, industrial, agroindustry and financial sectors.

Fidelity Bank Ghana to promote financial literacy through Monopoly

President defends creation of new ministries President Nana Addo Dankwa Akufo-Addo has publicly defended in a press conference the creation of new ministries. The policy has faced some criticism and backlash as many have argued that these new ministries will cost the taxpayer more without providing a significant return.

The President meanwhile has argued that the new ministries have been created to perform specific tasks to aid country-wide development and that their budget will come from the office of the President. In total the President has appointed 36 ministers, six of which are new posts which have been created by the Nana Akufo-Addo administration.

Standard Chartered Ghana appoints its first female CEO Standard Chartered announced the appointment of Mansa Nettey as the new Chief Executive Officer for Ghana, her appointment will be effective as of 1 March 2017, subject to regulatory approval. Nettey will be the first female CEO of the bank’s Ghana operations, which has been active for 120 years in the country.

Commenting on her appointment, Nettey said, “It is an honour to lead Standard Chartered Bank Ghana Limited. A bank that has been here for 120 years and a GDP enabler to the economy of Ghana. I look forward to working with the board, management and staff to further strengthen the business and to deliver on the bank’s commitments to its employees, shareholders, clients, regulators and communities.”

10

The game is licensed in over 100 countries and printed in over 35 languages (CREDIT: URBANBUZZ/ SHUTTERSTOCK).

F

idelity Bank Ghana announced that it will partner with the Accra edition of the popular Monopoly board game to promote financial literacy. Dr William Derban, Director for Financial Inclusion at Fidelity Bank, said, “For people to be financially empowered, they need suitable products. Expanding financial services to the over 60 per cent unbanked in Ghana will require a lot of education and I hope this game will go a long way to support this agenda.”

Fidelity Bank is already engaged in a new series of ‘future of banking’ seminars to educate students on how technology is changing banking Dr Derban said. “Through the Monopoly game, we hope to even attract younger people to educate them on the fundamentals of finance,” he added.

www.bankerafrica.com

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HAPPENINGS

Banker Africa—Southern Africa Banking Awards 2017 voting announced Voting has begun in the annual Banker Africa—Southern Africa Banking Awards

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he annual Banker Africa— Southern Africa Awards is a programme open to all banks and financial institutions in the region. The aim of the Awards is to recognise outstanding performance and excellence in the financial services industry.

Shortlists have been compiled by our group of experts. The Southern Africa Awards are designed to reward innovation and the ability to gain market share. As always the winners will be selected by the registered readers of CPI Financial products and services—in other words, your peers in the financial services industry.

POLLS HAVE OPENED

Voting has opened for the Banker Africa—Southern Africa Banking Awards 2017 on www.bankerafrica.com.

Each shortlisted entry will be automatically linked to the institution’s own homepage online. In addition you may wish to read supporting material for the specific Award, where provided by the shortlisted institutions before casting your votes. Once voting closes, the results will be tallied and revealed in the subsequent edition of Banker Africa.

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REWARDING EXCELLENCE

The core philosophy of CPI Financial, the publisher of Banker Africa, is transparency, ensuring accurate reporting of economics and financial matters, the factors determining the future of the banking and finance community and the business deals driving the industry forward. Our Awards programmes are designed to reward and promote excellence and competition in the drive to set new standards in the industry in quality of service, best practice and financial performance.

The financial institutions that win one or more of the Banker Africa Awards in 2017 and in future years will be those offering best-in-class services that meet the needs and exceed the

expectations of their customers. They will, truly, be winners.

In each of four regions, North Africa, East Africa, West Africa and Southern Africa, we hold separate awards competitions. With this issue of Banker Africa we are launching the fourth Southern Africa Banking Awards, highlighting dozens of institutions across several key categories: SOUTHERN AFRICA REGIONAL AWARDS

• Best Retail Bank • Best Corporate Bank • Best Commercial Bank • Best Investment Bank • Best Emerging Bank • Best Mobile Security Technology

www.bankerafrica.com

19/02/2017 16:30

HAPPENINGS

Seventeen South African banks colluded on forex deals Both local and international banks have been accused of working together on rigging the price of the ZAR, says the South Africa’s Competition Commission.

The Competition Commission stated that this activity had been ongoing since at least 2007 (CREDIT: FREDERIC MULLER/SHUTTERSTOCK).

A

n investigation by South Africa’s competition watchdog has resulted in accusations that 17 of the country’s largest banks have been working together to collude on prices of the rand.

The banks that have been named in the investigation are: • ABSA Bank Limited • A ustralia and New Zealand Banking Group Limited • Bank of America Merrill Lynch International Limited • Barclays Bank • Barclays Capital Inc. • BNP Paribas • Commerzbank AG • Credit Suisse Group • HSBC Bank Plc. • Investec Ltd. • JP Morgan Chase & Co. • JP Morgan Chase Bank N.A.

• Macquarie Bank Limited • Nomura International Plc. • Standard Chartered Bank • Standard Bank of South Africa Ltd. • Standard New York Securities Inc. The investigation has been ongoing since April 2015, and has focused on price fixing and market allocation in the trading of foreign currency pairs involving the rand.

From at least 2007, the Competition Commission noted, the banks have had a general agreement to collude on prices for bids, offers and bid-offer spreads for the spot trades in relation to currency trading involving USD/ZAR pair.

Collusion primarily occurred on online trading platforms, such as Reuters’ currency trading platform and Bloomberg’s instant messaging system.

Members involved assisted each other in reaching desired prices by coordinating

trading times, and group decisions were made on when to refrain from trading.

Fictitious bids and offers were further used in order to distort demand and supply in order to achieve their profit motives.

The Commission is seeking a tribunal order to declare that those involved contravened the Competition Act. The Commission is also seeking to impose a penalty on 14 of the banks equal to 10 per cent of the institution’s annual turnover.

“The referral of this matter to the tribunal marks a key milestone in this case as it now affords the banks an opportunity to answer for themselves,” said Tembinkosi Bonakele, Commissioner for the Competition Commission of South Africa.

In a statement, the South African Reserve Bank stated that some 30 per cent of daily turnover of the rand takes place in South Africa, with non-residents accounting for 57.5 per cent of domestic turnover. The daily average worldwide turnover in the forex market involving the rand is approximately $49 billion, according to figures published by the Bank for International Settlements from April 2016—accounting for some one per cent of total turnover in international foreign exchange markets.

SARB noted that it takes the allegations seriously and will allow the legal processes that have been initiated to run their course whilst continuing to monitor the situation closely should any further action need to be taken.

www.bankerafrica.com

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13 19/02/2017 16:21

OPINION

Operating environment weighs heavily on Sub Saharan banks Janine Dow, Senior Director, Financial Institutions, Fitch Ratings, discusses the changing operating environment and how it will affect banks in Sub Saharan Africa

S

ub Saharan African banks are facing challenging operating conditions in their domestic markets, signalling substantial credit weaknesses.

Banks in general are highly exposed to sovereign risks and a weak sovereign generally results in a challenging operating environment in which banks do business. Sub Saharan bank ratings face far higher levels of compression than peers in more developed countries due to historically low sovereign ratings.

This is a result of the structure of economies where the private sector is under-developed and stateowned enterprises dominate key economic segments.

Government debt securities—often high yielding and liquid within their own domestic markets—generally represent around 20 per cent of the region’s banking sector assets. These bonds also support liquidity, but the asset class aligns bank balance sheets ever more closely with sovereign risk.

COUNTRY RISKS IN FOCUS

WEAK MACRO VARIABLES AFFECT BANKS’ CREDIT STRENGTHS

Sub Saharan banks typically focus on their domestic markets. They have high direct exposures to their domestic sovereigns—either in the form of direct lending to the public sector or investments in sovereign bonds. At times, loans to the public sector figure in the list of largest exposures at many rated banks in the region. Concentration risks are particularly acute because the public sector is also a very large depositor in some banking systems.

Bank risks are therefore closely correlated with their sovereigns and high concentrations to the public sector mean that, in the event of sovereign stress, a bank would likely experience delays on the repayment of its largest loans, tough trading conditions for its government bonds, and at the same time face a liquidity squeeze as public sector deposits would likely be withdrawn from the system.

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Fitch’s outlook for the banking sector in Sub Saharan Africa is negative with economic forecasts remaining weak.

We expect aggregate Sub Saharan African growth in 2017 to rise to 2.9

per cent from an exceptionally weak 0.9 per cent in 2016 reflecting the shock of commodity price weakness, droughts in some parts of the continent and foreign exchange shortages in Angola and Nigeria. Our expectations are for only moderate growth in the near term (see chart below).

A weak economic environment often limits a bank’s ability to grow and maintain a sound credit profile and is the case in Sub Saharan African countries where bank and macro-economic performance are closely correlated.

UNDERDEVELOPED AND SHALLOW FINANCIAL MARKETS CONSTRAIN BANKS’ CREDITWORTHINESS

With the exception of South Africa, financial markets in the region tend to be underdeveloped and lack depth.

GDP GROWTH AND INFLATION Angola Cabo Verde Cameroon Congo Cote d'Ivoire Ethiopia Gabon Ghana Kenya Lesotho Mozambique Namibia Nigeria Rwanda Seychelles South Africa Uganda Zambia

GDP (USDbn) 2016 2015 77.4 3.0 1.6 1.5 29.9 5.8 9.0 2.3 33.9 10.3 68.6 10.2 14.2 3.9 43.4 3.9 63.3 5.5 1.9 3.1 10.8 6.6 11.0 5.7 418.9 2.8 8.2 6.9 1.4 5.0 287.3 1.3 25.9 5.0 17.6 3.5

GDP real growth (%) 2016 2017 0.0 3.5 2.0 2.2 4.8 4.2 2.1 3.0 8.2 8.0 6.5 8.0 3.0 4.0 4.1 6.3 5.8 6.1 2.7 4.0 3.5 5.0 4.3 5.6 -1.0 2.6 6.0 6.2 3.8 3.5 0.5 1.3 4.6 5.7 3.7 5.0

2018 3.0 2.5 4.6 3.0 7.7 8.0 4.5 7.0 6.3 4.0 6.0 5.6 3.8 6.5 3.5 2.1 5.8 6.0

Inflation (%) 2016 2017 32.0 20.0 0.8 1.5 2.2 2.2 2.0 2.5 1.5 2.0 9.7 8.0 2.0 2.0 17.0 12.0 6.0 5.7 6.9 6.6 20.0 14.0 6.0 6.8 14.0 13.5 5.6 5.5 -1.0 3.2 6.3 6.0 6.8 5.5 7.5 7.0

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According to the African Development Bank, domestic credit extended by the banking sector to the private sector reached only 24 per cent of Sub Saharan Africa’s GDP in 2014, well below a comparative 45 per cent for the Latin American and Caribbean region and a fraction of the 134 per cent figure for high income OECD countries. Banking penetration is also very low, with only 21 per cent of the Sub Saharan African population having access to a bank account.

Banking sectors in Sub Saharan Africa are often over-crowded, with a large number of banks chasing a limited pool of business such as Senegal (24 banks with a 14 million population) and Kenya (41 banks with a 44 million population). This is credit negative for banks because diffuse banking sectors reduce the ability to boost franchises and command better pricing.

IMPROVING REGULATION CREDIT POSITIVE

With the exception of South Africa, where prudential standards compare well with those employed in major international markets, prudential guidelines adopted by Sub Saharan bank regulators are less advanced than those enforced in developed markets.

Regulation has, however, improved in recent years, particularly in Nigeria and Kenya. According to the IMF, many countries have moved to International Financial Reporting Standards, which improves transparency and comparability of financial statements.

However, Basel II standards have only been implemented in 11 countries and South Africa is the first to implement Basel III. Tightening up the credit risk framework has remained a recent focus for regulators. However, large exposure limits remain high. For countries operating within the West African Economic and Monetary Union

(WAEMU), for example, single name exposure limits are set at 75 per cent of a bank’s regulatory capital. This is high compared to the EU’s 20 per cent limit however, it is worth noting that international standards are not always appropriate for less developed banks. The small absolute size of the banks operating in these countries and the need to satisfy the funding requirements of a handful of large corporates means more generous limits are often required. In our opinion, this can result in banks being exposed to exceptionally high levels of concentration risk.

Risk-weighting may not be appropriately assigned in Sub Saharan African countries. In most of the region, exposures to the state are zero per cent risk weighted and incur no capital charges. This is also the case in many developed markets. But in Sub Saharan countries, the public sector can be slow at paying its debts and the sovereigns themselves have highly speculative credit ratings, meaning that these debtors are not ‘risk-free’, as implied by a zero per cent risk weight. In all WAEMU countries, for example, public sector exposure can never be classified as impaired, meaning that banks are not required to set up reserves against these exposures, even when restructured or when default is likely.

In our view, this undermines investor and creditor confidence in the banks.

Prudential liquidity requirements may also be less stringent in relation to the risk of deposit withdrawals and high structural asset and liability maturity mismatches at some banks. Short-term deposits tend to provide the backbone of funding for loan books that can average more than five years in tenor, as banks have little access to stable and longerterm funding and deposit concentrations can be very high, exposing the banks to the risk of substantial, abrupt, withdrawals. In some Western African

countries, it is not unusual for the top 20 depositors to represent more than 50 per cent of a bank’s total deposit base.

In our view, a well-established depositor protection scheme is key to boosting depositor confidence. But only 13 Sub Saharan African countries have implemented some form of deposit insurance to date. A properlyfunctioning deposit insurance scheme is, in our opinion, all the more important in instilling confidence in Sub Saharan African banking sectors, due to high deposit concentrations, magnifying the risks of deposit flight and volatility.

In our view, a wellestablished depositor protection scheme is key to boosting depositor confidence.

– J anine Dow Basel III’s liquidity ratios could prove too complex for many of the countries to implement. There are existing national requirements, but these vary and reserve requirements are often not applied to foreign currency deposits which, in our view, are less stable in times of stress. Reserve requirements in some countries are set as low as five per cent of deposits. This provides limited liquidity protection because, under stress, deposit flights tend to be significant in the region.

In our view, a tougher stance on regulation and enforcement would benefit the credit profile of Sub Saharan African banks as a whole longer term and increased transparency would improve investor confidence.

We expect credit risk, riskweighting, liquidity, greater political risks and external factors will continue to put increasing pressure on Sub Saharan African bank risk profiles moving into 2017.

www.bankerafrica.com

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GOVERNANCE

Creating stability Regulation and supervision is improving among African banks’, according to a new report from Moody’s

The situation for regulation in Africa is positive according to Moody’s (CREDIT: AZRISURATMIN/SHUTTERSTOCK).

A

ccording to a new report released by Moody’s, entitled Banks—Africa: Gaps in Banking Regulation and Supervision Are Progressively Being Addressed, regulatory reforms and improving supervision have strengthened the financial stability of African banks.

The report noted that regulators have updated relevant banking laws and enhanced governance rules whilst also employing macro-prudential tools to mitigate potential systemic risks. These tools have included imposing caps on the concentrations of loans to single clients and industries, limiting the extent of foreign currency lending and restricting the loan-to-value for mortgages.

Furthermore, Moody’s noted that it had seen a ring-fencing around the

16

local operations of banks with crossborder exposures and the imposition of liquidity and reserve requirements in both local and foreign currency.

Capital levels have also been a target of regulation, with limits set in both terms of capital ratios as well as in minimum absolute amounts.

However, progress in regulatory reform has not been uniform across African countries with, in some cases, weak enforcement of new rules. Moody’s report stated that there is a need to enhance the use of macro-prudential tools in many African countries.

LAGGING ON BASEL III

Moody’s noted that some improvements in the implementation of Basel III would be warranted, as its implementation would, “Be a catalyst for improved

capital management and internal risk management procedures.”

Most African regulators only require banks to conform with Basel I capital standards. Many of the banks are typically well-capitalised and make a limited use of derivatives and more complex financial instruments.

Regulators generally impose capital adequacy ratio requirements higher than the eight per cent minimum implied by Basel I, whilst banks will typically exceed the leverage requirements of Basel III. South Africa is the only major African country to have implemented Basel III, although it should be noted that Mauritius and Morocco also have plans to implement the standard. The implementation of Basel III has helped build capital buffers with equity-to-

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assets and Tier 1 ratios increasing to 7.6 per cent and 12.4 per cent in June 2016 from 5.8 per cent and 8.8 per cent in January 2008. Liquidity buffers of banks in South Africa have also increased significantly to meet the Basel III Liquidity Coverage Ratio.

Basel III’s higher liquidity requirements would also be beneficial for other African banks, according to the report. “We expect increasing demand for infrastructure/project lending, which will require longer maturity funding,” said Moody’s in the report. “‘Dollarisation’ is common in African economies (e.g. in Nigeria, Angola, DRC). This makes liquidity management more challenging given central banks’ limited ability to act as a lender of last resort in foreign currency.”

EVOLVING RESOLUTION

African countries are in various stages of planning their resolution regimes, and are still evolving, with implementation of resolution frameworks trailing much of the rest of the world.

The report pointed to lingering questions around the feasibility of bail-in versus bail-out tools as there are few instruments beyond deposits that can be bailed-in. Emphasising implementation of better crisis prevention and prudential support measures will help authorities to intervene earlier and lower overall resolution costs.

“Evolving resolution regimes mean the cost of any systemic crisis could be substantial since many countries are unable to identify and deal with rising banking risks promptly,” said Constantinos Kypreos, a Moody’s Vice President—Senior Credit Officer and co-author of the report.

AML UPDATES

Anti-money laundering (AML) and counter-terrorism financing (CTF)

standards have been broadly adopted, according to Moody’s. However, despite the legislation often being in place, compliance with the rules has been in many cases inconsistent. It is important though that banks attempt to comply with regulation.

“Avoiding US sanctions is crucial for most African banks, especially in partly-dollarised systems where banks require US or other foreign banks to clear dollar transactions,” the report

stated, although it does go on to mention that the rising compliancerelated requirements will represent an increase in costs for banks.

AML and CTF concerns have already resulted in some international correspondent banks already cutting financial ties with African banks. This is especially true of banks in countries already under US sanctions, such as Libya or Sudan, and banks conducting transactions with these countries.

REGULATORY UPDATES IN BRIEF South Africa

Basel III implemented; higher capital and liquidity; new resolution framework in pipeline. Regulator is hands-on backed by strong legal framework.

Mauritius Strong regulation and supervision required due to reliance on offshore banking. Plans in place to move to Basel III, currently Basel II implemented.

New deposit insurance and resolution framework in pipeline.

Morocco Basel II implemented, Basel III will be phased in. Supervisory colleges have been set up and the central bank’s regulatory powers have bene extended. Mechanism of new banking resolution regime untested but could allow for efficient intervention.

Nigeria Mixed regulatory picture with banks’ loan quality challenges and dollar shortages. Supervision and governance improved with higher capital and provisioning requirements implemented, however extensive loan rescheduling approved by regulator whilst credit concentrations remain high. Central bank’s intervention powers are strong; resolution framework still evolving.

Kenya Basel II implemented, supervision improved. Intervention by central bank in three banks demonstrates supervision and enforcement of regulation.

Banks’ profitability threatened by government rules to cap interest rates on loans, likely to also constrain credit growth.

Egypt Basel II implemented, loan concentrations reduced with new macroprudential requirements. Governance and supervision also improved.

Regulatory overhaul part of 2004—2014 restructuring but resolution

framework still relatively weak. Moody’s also notes requirement to increase SME lending to 20 per cent of total lending may cause problems.

Tanzania

Basel II implemented however closer supervision of banks’ funding and liquidity is required, according to Moody’s, since the government withdrew deposits and transferred them to central bank.

Source: Moody’s Investor Service

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THE MARKETS

Egyptian funding gaps suggest large external issuance prospects Egypt is currently waiting for inflows whilst IMF related financing is insufficient to stabilise USD/EGP, said BofA Merrill Lynch in a recent report (CREDIT: JANERIX/SHUTTERSTOCK).

B

ofA Merrill Lynch suggest that the details of the International Monetary Fund (IMF) Extended Fund Facility (EFF) point to a potentially ambitious economic reform programme that could help attract additional inflows to support the struggling Egyptian pound, in a report entitled Global Economic Weekly: Emerging EMEA. “The programme adheres to a fully floating exchange rate regime, with the Central Bank of Egypt [CBE] moving to targeting monetary aggregates ahead of a medium-term transition to inflation targeting,” said Jean-Michel Saliba, MENA Economist, Bank of America Merrill Lynch. Furthermore, the report notes that the focus on rebuilding the reserves of the CBE points to there being no specific end goal for USD/EGP. Despite continued weakening of USD/EGP, announcements made by President Sisi indicate a continued commitment to reform. However, the report observes that the large fiscal consolidation coupled with increasing inflation—likely to peak at 27 per cent year-on-year in April—implies a potential drag on growth.

18 page 18 Markets 041.indd 18

“We do not expect a possible cabinet reshuffle to change the direction of policy-making for now. We expect the authorities and the IMF to agree on programme modifications at the first review in March,” said Saliba. “We calculate that the EFF assumes USD/ EGP averaging 12 to 14 over the life of the programme, and suggests market overshooting versus fair value estimates.”

Rate hikes may be considered by the authorities should USD/EGP begin to hit or overcome 20, although this is likely not going to occur for some time. “The IMF programme suggests a focus on containing second-round price effects of reforms (with an aim to bring inflation to single digit in two years), and on using tools to control money supply (including lower deficit monetisation). While detrimental to fiscal consolidation over a 1.5 year horizon, a CBE hike could nevertheless improve the carry on long EGP trades,” added Saliba in the report.

Portfolio inflows are required for stabilisation of the EGP to occur; this is supported by evidence of large external financing needs combined with existing financing sources.

BofA Merrill Lynch also point to the continued weakening in USD/EGP as evidence to suggest that there is a degree of forex hoarding occurring.

BofA Merrill Lynch estimates that annual external financing needs will be in the region of some $50 billion, and that there will be a financing gap of between $6 billion and $13 billion in FY18 and FY19 based on the assumption of some Arab CBE deposit outflow, $6 billion in annual Eurobond issuance and no additional impacts from other financial account variables.

“In the near term, progress toward clearing the FX demand backlog is important (at least 50 days needed with pre-2011 $0.2 billion FX interbank market volume). As financing was front-loaded, large EXD issuance is needed to manage potential 1H17 amortisations. Further out, addressing the external funding gap will likely require a large increase in portfolio inflows (T-bills; stocks) and a pick-up in FDI on the back of the IPO programme.

Continued implementation of reforms, as well as control of inflation and debt dynamics, is thus needed,” said Saliba in conclusion.

www.bankerafrica.com

19/02/2017 17:22

BA bleed guide.indd 1

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CENTURY

This is Africa’s

COVER STORY

Lesetja Kganyago, Governor, South African Reserve Bank

20

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Renewed optimism South Africa can expect to see further recovery in growth. With the South African Reserve Bank also focusing on new innovative technologies, the future is bright says Governor Lesetja Kganyago

W

hat are the biggest opportunities in the South African economy in 2017?

Last year was a tough year for economic growth, but optimism is gradually returning. Growth is expected to recover from 0.4 per cent in 2016 to 1.2 per cent in 2017. Job creation was also better than expected in 2016, as was household consumption spending.

Investment was too weak, and we expect it to pick up this year and into 2018, helping to push growth up to 1.8 per cent. Should stronger global growth persist and the much-improved commodity price trajectory sustain itself, our export forecast may also improve through this year and into 2018.

A better growth outcome would ease pressures elsewhere in the economy, not least in providing support to the Government’s revenue collection efforts and generating a rise in per capita income. These outcomes, in turn, should create more space for continuing the country’s renewal and extension of public infrastructure and greater efforts to implement the National Development Plan, key steps in achieving economic inclusion and transformation.

Monetary policy is not an engine for potential economic growth, but lower inflation allows for reduced interest rates and higher real purchasing power

of all South Africans. Alongside greater stability in the global economy in recent months, policy may have contributed to less volatility in the value of the rand and in our inflation forecasts. With our long-term inflation forecast improving, and if this momentum can be sustained, we can expect that lower inflation eventually pulls down nominal interest rates. While the level of debt has come down smartly in the past year, lower inflation and nominal rates would help to further reduce the debt burden on South African households.

What are your inflation rate targets for 2017 and is South Africa on track to achieve these goals?

Inflation has been outside the three to six per cent target range for much of 2016 as a result of pass-through effects from currency weakness and rising food prices. The forecast improved in the latter half of 2016 as some expected food price inflation failed to materialise and the rand strengthened. At its first meeting of 2017 held in January, however, the Bank forecast for headline inflation deteriorated again due to a rise in oil prices. The expected breach of the inflation target lengthened from one quarter to three quarters of 2017. While recent monthly inflation numbers have improved again, at this point in time, inflation is only

expected to return to within the target in the final quarter of 2017.

Greater stability in the currency and more moderate food price inflation has helped to keep underlying or core inflation in recent months from rising as much as had been expected early last year. Nonetheless, sustained nominal wage growth and weak productivity growth continue to support growth in unit labour costs. Alongside passthrough from currency depreciation into import prices, unit labour costs and electricity prices are persistent sources of inflationary pressures.

The gradual removal of policy accommodation since 2014 has helped to reduce the inflationary effects of currency weakness and lowered inflation expectations. This has enabled the Monetary Policy Committee in January to look through the possible inflationary impact of the rise in oil prices and keep the policy rate unchanged for the time being.

How has the announcement of Brexit affected the South African economy? Do you see it causing any further problems?

The impact of the UK decision to leave the EU is still unclear. The direct shortterm impact on South Africa is expected to be fairly limited, but there could be longer-term impacts on trade and cont. overleaf

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COVER STORY

cont. from page 21

Better growth for the economy in 2017 will help relieve pressure in other arts of the economy, said the Governor (CREDIT: MEDIA 24).

financial links, and on tourism from the UK into South Africa, should economic growth moderate there. Brexit will unfold in a managed process that will clearly take considerable time.

This implies that the current level of uncertainty may reduce as the process gets underway, but also that economic agents and policy institutions will have time to adjust to the outcome.

From your position what do you feel are the biggest challenges in the South African financial sector right now? How is the SARB approaching these?

The fact that the South African banking sector remains profitable and adequately capitalised is a strong positive for us, but not a cause for complacency. The domestic banking

22

sector could be affected by a range of risks, some positive and others negative.

As a regulator, the SARB will remain vigilant in monitoring and, where possible and appropriate, mitigating the impact of the challenging environment in which domestic banks are operating.

A particular challenge that we have been dealing with for some time, is the impact of regulatory requirements developed for advanced economies that could have adverse effects on the South African banking system and/or financial market, such as the Net Stable Funding Ratio or the proposals being developed around TLAC. Some of these requirements may be more suitable for developed markets; they may not always be fit-for-purpose in emerging markets such as South Africa nor Africa more generally.

Another challenge lies in ensuring that South African banks operating in the rest of Africa are adequately supervised, particularly where local regulators have yet to implement newer standards.

Finally, the SARB has made the case that, while greater standardisation and comparability of risk-weighted assets across banks and jurisdictions is needed, there remains scope for banks to apply quantitative risk models to adequately measure risk across portfolios and/or risk types. The use of test requirements has made a significant positive contribution to the way in which banks measure and manage risk, leading to improved risk management and pricing of risk across the regulated entities. The SARB supports the risk models under the advanced measurement approaches to be used. cont. on page 24

www.bankerafrica.com

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21/02/2017 11:28

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BA bleed guide.indd 1

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COVER STORY

cont. from page 22

Earlier in 2016 the SARB announced a focus on payment innovation. How have these newer banking and transaction technologies changed the banking space in South Africa?

Innovative technologies—‘fintech’— have emerged as a transformative force in financial markets. Coping with opportunities and threats from innovation and technology remains a key area for banks and continues to pose challenges for supervisors. New technologies can outpace the ability of banks to put in place adequate controls and information technology (IT) systems. Furthermore, supervisors do not necessarily have sufficient expertise to assess a bank’s capability in this area.

Building capacity to address these new areas is a priority for the SARB. As in other jurisdictions, fintech is putting pressure on South African banks to respond. There are many ways to do this, not least in using technology themselves to retain market space. It is too early to tell how this will work out and what the banking sector will look like in ten years’ time. A key goal should be to ensure safe, reliable, cost effective financial intermediation to a growing market. With that in mind, it seems important is to provide the regulatory room for new technology and to ensure that key core regulatory principles continue to apply at all times.

The fact that the South African banking sector remains profitable and adequately capitalised is a strong positive for us, but not a cause for complacency

— Lesetja Kganyago, Governor, South African Reserve Bank

Given the current global conditions, and as Governor of the SARB, how will you achieve your goals in 2017?

Since the end of 2015, we have embarked on a major new articulation of our strategic objectives and how they filter through into the operations of the Bank. While most of the high-level objectives are not new, the reformulation of them and identification of supporting objectives,

24

Lesetja Kganyago (CREDIT: MEDIA 24).

has been a re-invigorating process for our senior management and staff. It has reminded us of what we are here for and has helped us to focus our attention on critical areas of work that need more effort, innovation and in some cases resources. The process has also created time for us to reassess global and domestic conditions and validate existing objectives and perspectives while adjusting them for new ways of looking at the world around us.

Our revised assessment of our core mandate has allowed new ways of measuring effectiveness, such as analysing our communications and their impact on inflation expectations in ways that should help us better achieve our inflation target. It has also helped us to move to develop crossdepartment coordinating bodies, for example, in research across the Bank, and to enhance our focus on the quality of our statistics. It has helped us to think differently about the role of forecasting in the policy process, and has encouraged a needed internal discussion of the interactions between monetary policy and financial stability.

Our focus on strategy has renewed our commitment to engagement at all levels of our work, from the South African public to our banks to the G20.

I raise these particular outcomes from our strategic process, among many others, because I feel they are critical to how we better address global conditions and achieve our aims.

As the global economy continues to exhibit uncertainty, it is even more important for the SARB to enhance its contribution to reducing it. To my mind, that means reducing domestic macroeconomic risks and uncertainties, to help economic agents make longterm decisions about investment and saving and to indirectly support economic development. This is where our focus will lie over the course of 2017.

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COUNTRY FOCUS SOUTH AFRICA

S

Road to recovery

All eyes look towards South Africa’s budget for 2017 as challenging factors remain

outh Africa narrowly avoided a downgrade to sub-investment grade in late November and early December of 2016 when the ‘big three’ credit rating agencies traditionally conduct their year-end reviews, a fate that has unfortunately befallen other major emerging economies such as Russia and Brazil.

The effect of a sovereign credit rating downgrade would have a significant impact across all sectors in South Africa. Borrowing costs would be driven up, causing a negative impact on the government’s finances, as well as potentially driving foreign investors away from South Africa’s capital markets whilst weakening the rand further.

As of writing, South Africa’s Finance Minister, Pravin Gordhan, has not yet announced the budget for 2017/18.

However, there are some facts that we do know for the year ahead. Weaker economic growth caused by adverse economic shocks, such as a decline in commodity prices and economic activity coming to a virtual standstill, has led to government revenue failing to keep pace with spending. In order to help fill this fiscal gap, Gordhan did announce in his October minibudget speech that overall tax revenue will need to increase in 2017, by $2 billion.

Although no specifics were given, this figure will likely come from an increase in consumer goods tax.

This may take the cont. overleaf

(CREDIT: PATRICE6000/SHUTTERSTOCK).

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COUNTRY FOCUS SOUTH AFRICA

cont. from page 25

form of introducing a permanent tax on sugar-sweetened beverages, an increase in so-called ‘sin’ taxes on alcohol and tobacco products, and general increases on non-essential products.

“In South Africa, recovery after a severe drought in 2016 and improved electricity generation should provide a modest lift. But private sector confidence remains weak, and rising debt levels mean that South Africa remains at risk of losing its investment grade credit rating. With little room to scale up public investment, a tepid recovery is likely, at best. Faster growth will be needed to contain rising public debt. South Africa faces its next round of rating reviews in June, but it will be difficult to achieve anything meaningful by then,” said Razia Khan, Chief Economist for Africa, Standard Chartered Bank.

POSITIVE DEVELOPMENTS BUT SLOW PROGRESS

Slow progress in townships and rural areas in delivering economic change and social services has remained a key challenge of the Government. Weak economic growth has impeded the economy’s ability to curb unemployment and inequality, commented the IMF in its concluding statement of its staff visit to South Africa in December 2016. Should the slowdown continue then public finances would face even greater strain and declining investor confidence— leading to a potential interruption of capital inflows. Although South Africa would be cushioned from this to a degree due to its free-floating exchange rate, small share of foreign denominated government debt, deep investor base and well-hedged private sector balance sheets, contractions would ensue in consumer imports and investment goods and services, leading to a cycle of falling growth and rising debt, the report continued.

On a more positive note, continued improvement of the world economy and some recovery in commodity prices are

26

expected to be supporting factors for South Africa’s economy through 2017.

Although inflation ended 2016 having increased to 6.8 per cent in December, over 6.6 per cent in November, analysts’ project that inflation will ease through 2016 as the food price base effect dissipates. FocusEconomics noted that inflation will likely average 5.8 per cent in 2017. Moody’s expects that South Africa will see subdued GDP growth of 1.1 per cent in 2017 off the back of political uncertaintiy, weak consumer consumption and low capital investment spend, in addition to rand volatility. Meanwhile, S&P points to a growth of 1.4 per cent in 2017 and 1.8 per cent in 2018, whilst noting that this means that in per capita terms South Africa will not see positive real GDP growth until 2018.

Further positivity can be found in the year-end results for the Standard Bank South Africa PMI (Purchasing Manager’s Index). The index continued to climb to 51.6 in December, the highest recording marked since March 2015. A score above 50 on the index marks expanding business activity, meaning that the index is suggesting that there is an increasingly positive business environment for South Africa.

HOUSING MARKET CONTRIBUTES DRAG

S&P Global Ratings in a report entitled Weak Economic Conditions Are Weighing On South Africa’s Housing Market, the agency argues that a weak macroeconomic environment, high household indebtedness and rising interest rates are proving to be a significant encumbrance on the housing market.

“Residential property prices stagnated in real terms in 2016, as above-target inflation eroded nominal price gains, and construction activity has been soft,” said S&P Global Ratings Senior Economist Tatiana Lysenko.

“Home prices improved at the end of 2016 as financial conditions stabilised.

Still, subdued economic growth, persistent very high unemployment, and elevated consumer indebtedness do not bode well for the South African housing market in the near term, especially if interest rates continue to rise, as our baseline scenario anticipates.”

The agency projects a subdued house price growth of 5.5 per cent in 2017, which in real terms implies a stagnation of home prices. Meanwhile S&P forecast nominal growth of home prices as 6.5 per cent in 2018.

Consumers may continue to suffer in 2017, as taxes on goods are increased (CREDIT: RAWPIXEL/SHUTTERSTOCK).

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“We expect continued strong structural demand for better-quality housing from South Africa’s young and growing population and rising urban middle class,” added Lysenko.

“Meanwhile, the softness in the construction sector is exacerbating the housing supply shortage in South Africa. This supply demand imbalance should support prices in the mediumto-long term.”

Despite the subdued growth noted in this article thus far, risks in the financial sector are likely to remain low, according to research from the IMF. Initiatives to modernise prudential regulation, financial service consumer protection and to enhance resolution framework are ongoing and welcome additions to the sector.

The organisation goes on to note that this increases the pressure to ensure that the Financial Sector Regulation Bill is passed early in 2017. The bill aims to bring groupwide supervision under a single prudential authority, in addition to establishing a new Financial Sector Conduct Authority.

Overall long-term problems and downside risks in the economy will likely mean that we can expect tepid growth from South Africa in 2017.

A focus on greater coordination in the public sector and centralised evaluation and implementation of policy could help remove some of the uncertainty felt by potential investors and financial institutions.

Optimism for 2017 can be found in the completion of several reforms in the financial sector, and research suggesting a recovering economy following a prolonged period of economic stagnation. Furthermore, the lack of a potentially downgrade by the big credit rating agencies in late last year could be taken as some support for the ongoing reform agenda began in 2016.

South African banks’ problem loans to rise in challenging operating environment, says Moody’s South Africa’s challenging economic environment is likely to lead to a rise in problems loans for the country’s four biggest banks, said Moody’s Investors Service in a report published in November 2016.

“Sluggish economic growth in South Africa over the next 12 to 18 months will pose challenges for the country’s four largest banks,” said Nondas Nicolaides, a Moody’s Vice President—Senior Credit Officer and author of the report. “The subdued South African economy will restrain their lending growth and make it harder for borrowers, especially households, to service their debt repayments.”

Moody’s expects that non-performing loans (NPL) ratios in the banking sector to increase to around four per cent by the end of 2017, up from 3.2 per cent in June 2016. This will, in turn, generate higher provisioning costs that will hamper profitability with return on assets potentially reducing towards one per cent from 1.2 per cent in June 2016.

The country’s weaker economic growth, in combination of inflation above six per ecnt and rising interest rates, will exert pressure on households’ disposable income and borrowers’ repayment ability, which will expose banks to a higher degree of default risk.

Although corporate debt has risen over recent quarters, Moody’s expects that corporates will be more resilient than households to withstand potential challenges.

Banker Africa’s Top Banks in South Africa Banker Africa’s analyst team have compiled the latest data from banking institutions in South Africa. Our Top Banks analysis takes compares the size of the bank and its dollar growth yearon-year. Using these two factors both given an equal weight our analysts create a ranking of the top banks in South Africa:

TOP Rank

Bank

1

Rand Merchant Bank South Africa

2

Capitec Bank Holdings

3

Sasfin Bank

4

Investec South Africa

5

Barclays Africa Group

6

NedBank Group

7

Standard Bank Africa Group - South Africa

8

FirstRand Bank

Source: Banker Africa.

SOUTH AFRICA PURCHASING MANAGERS' INDEX 52

50

48

46 Dec-14

Jun-15

Dec-15

Jun-16

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page 25-27 Country Focus-SA 041.indd 27

Dec-16

Source: Markit and Standard Bank

27 19/02/2017 16:27

COUNTRY FOCUS SOUTH AFRICA

Financial institutions will aim to improve access to services in 2017 (CREDIT: XTOCK/SHUTTERSTOCK).

South African banking trends: What does 2017 hold?

Mark Walker, Associate Vice President for SubSaharan Africa at International Data Corporation gives his thoughts on the future of South Africa’s financial services

T

hree areas in the financial services sector will be impacted by technology this year: customer relationship management, the processes of banking, and the regulatory environment within which these financial institutions operate in, in South Africa.

28

From a broader economic outlook perspective, we will see heightened political influence as the country gears up for another round of elections. The uncertainty in the political environment potentially translates into economic movements that may impact interest rates, the exchange rate, and other factors.

The country’s politics have a proven history of impacting the macro economy and this, in turn, will impact the micro economy and may result in lower consumer spend and a decrease in business confidence.

The South African housing market is already seeing very low growth in the

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19/02/2017 16:28

mid and high sections, which means consumers are already more cautious when it comes to investment. Inflation is relatively stable now but could go up, which will result in higher interest rates.

From a regulatory perspective, the banking sector is under increased pressure. There are many more international compliance requirements, as well as from the Reserve Bank and SARS, which increases administrative pressures at a time when they don’t want to spend more money on nonrevenue generating activities.

Access to financial services will be key in 2017 as financial institutions attempt to further remove obstacles between the bank and the customer, not only from a compliance point of view but also in terms of services offered. Banks want to make it easier for the individual to access the bank, hence the continued focus on online and mobile banking, as well as making services available to the previously unbanked through these platforms and social media channels.

The second focus area is understanding and exploiting customer data, so big data analytics and use of artificial intelligence and algorithms are coming to the fore. The objective is to use the data about their clients to understand their credit worthiness, propensity to earn and spend, and then to pre-empt their requirements to provide the right products to that specific customer at the right time in their lives. Multichannel delivery will also be a focus area, but that is more about using all social, mobile and online channels to make it easier to reach the client. We will also see an increase in the use of integrated applications to make payment mechanisms simpler and more accessible.

The financial services environment is very harsh and banks are finding it difficult to maintain profits. They will continue to evaluate automating more processes to increase the use of self-

service banking. In some countries, entire processes, such as loan generation, have already been automated from a customer, product and regulatory point of view and we foresee the South African institutions following suit.

Security is another big focus area.

With the internet of things or IoT, more devices are being connected to the internet, creating more vulnerabilities.

As more devices are connected and being

The financial services environment is very harsh and banks are finding it difficult to maintain profits.

They will continue to evaluate automating more processes to increase the use of selfservice banking.

— Mark Walker, Associate VicePresident for Sub-Saharan Africa, International Data Corporation used for banking purposes, security becomes a major concern. December 2016 was already a bumper month in ransomware activity and as more devices are connected this is set to increase.

We do foresee 2017 deliver a couple of innovations in FinTech, with innovative companies applying technology to create ways to do banking in a virtual environment. Financial institutions are also waking up the opportunity that this brings as it is a way for them to retain customers and profitability, while at the same time cutting costs.

Telecommunications companies could plausibly use FinTech to get into the banking sector. The biggest challenges they face are in obtaining

banking licences, existing competition and monopolies, and being able to comply with the regulations associated with having a banking licence. That said, will make forays into the banking environment on a partnership or shared risk type model. They will partner with the smaller, already licensed financial institutions, and will then introduce FinTech using technology. Both the banks and telecommunications companies are under pressure from a growth and performance perspective and they both have access to customer data that they can utilise to offer new and innovative products and services. Already we know that the telecommunications providers are looking for ways to increase their market share and profitability, and this approach creates an opportunity for them to do so. That said, it’s very much a ‘wait and see” scenario at this stage.

We will also continue to see emerging currencies such as blockchain and bitcoin, but suspect that the regulator environment must catch up before it becomes mainstream.

We will also start seeing far more use of social media platforms to help complete or compliment banking transactions. These platforms will be used both for internal communications as well as to communicate more effectively with their customers. We will also see an increase in automated CRM to solve customer queries. Here the only challenge will be the need to record all communications as part of their compliance requirements.

So, to recap, while virtual reality and augmented reality are starting to come into play, it will still be a while before they become mainstream in the financial services environment.

Cognitive computing will also increase to some degree. The big bets, however, for financial services will be next generation security and IoT, with mobile also remaining a key priority in the South African market.

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29 19/02/2017 16:28

OUTLOOK

WEST AFRICA OUTLOOK

Mixed risk for West Africa in 2017 Control Risks release their annual RiskMap, with low commodity prices and the global economy highlighted as key risks for West Africa

M

acro-economic instability, driven by low oil prices and unsettled global economic sentiment will continue to be the main driver of business risks in West Africa in 2017 according to RiskMap 2017, the annual report released by Control Risks.

However, these challenges will be tempered by improving governance and the embedding of certain democratic practices and norms that will limit the scope of potential economic deterioration, according to the report.

Control Risks identified three different types of organisations, defined as ‘Arks’, ‘Sharks’ and ‘Whales’, and identified the responses that these companies will seek to protect themselves and pursue greater opportunities.

‘Arks’ were defined as being defensive and more focused on core business and markets. These companies will shed non-performing assets, cut costs, reverse unsuccessful mergers and slow expansion. Control Risks stated that these types of organisations are typically associated with mining and gas industries due to the collapse in commodity prices.

‘Sharks’ are much less risk-averse than their ‘Ark’ rivals, and will look for new opportunities in new locations. Financial services providers in particular are likely to be looking at expanding to emerging and frontier markets in order to capture

first-mover advantages, whilst trying to mitigate the challenges faced with regulatory uncertainty at home.

Finally, ‘Whales’ are companies with significantly deeper pockets than their ‘Ark’ or ‘Shark’ competitors. In addition, these organisations will often have access to cheaper financing which leads to the ability to facilitate mega-mergers, investments and monopolisation of markets. The main risks these companies face are in economic nationalists and regulation in the form of competition.

Companies or organisations which make up ‘Whales’ are generally in the technology, pharmaceutical or agribusiness sectors.

Tom Griffin, Senior Partner for Control Risks West Africa, commented on the release of RiskMap 2017, “Macroeconomic and domestic political changes are driving African nations to re-invent themselves in the hope of becoming Dubai-or Singapore-style commercial hubs. This will present lucrative new opportunities for business, but equally engender unknown risks and require a deeper understanding of the local political and regulatory environment.”

Griffin continues, “For businesses to succeed in this diverse region, it is important to take a threat–led approach and understand the unique and evolving risks that could impact the business in that specific market.”

Nigeria

Control Risks believe that President Buhari’s rising unpopularity will put the ruling party, the APC, under increasing pressure. Being heavily dependent on solving its economic woes with commodities, without an increase in the oil price, both fiscal and sovereign risks are likely to continue. Furthermore, militancy in the Niger Delta is expected to continue on par with 2016.

Ghana

The new administration in Ghana, the New Patriotic Party (NPP), led

by Nana Akufo-Addo, is expected to focus key reforms on addressing the high level of public debts and investing in major infrastructure projects in order to fight long-running energy issues. Anti-corruption is also expected to be a central focus for the regime with legislation on public procurement and transparency in investment deals expected according to Control Risks.

Gambia and Guinea-Bissau

Political instability will continue to stymie reforms needed to help attract investment due to instability in smaller countries in the region following the introduction of a number of new governments.

Mali and Burkina Faso

Control Risks points to the intensifying rivalry between al-Qaida and Islamic State as an important challenge which both states will face as they attempt to create an effective response to terrorism threats in the region.

Cote d’Ivoire

Investor confidence will be maintained as economic growth and investor-friendly regulation continues to be a focus. Control Risks does moderate this with the concerns about the long-term stability of business in the country with particular regard to corruption and political succession post-2020, however.

Source: Control Risks

30 page 30 Outlook 041.indd 30

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19/02/2017 17:29

OUTLOOK

The year ahead for Nigeria Reports suggest that having emerged from a tough 2016, 2017 will likely remain challenging

N

igeria’s economy closed out 2016 with its worse economic performance for the past 20 years. Attacks on its oil infrastructure, tightening financial liquidity and decreasing private consumption all contributed to economic slowdown.

Economic activity did rebound to a degree in Q4 last year, after likely hitting its trough in Q3. January data from the Stanbic IBTC Bank Nigeria PMI report pointed to an improvement in the health of Nigeria’s private sector as output levels increased the first time in a year. Purchasing activity increased solidly which resulted in a stronger accumulation in stocks of inputs.

Headline PMI was registered at 51.9 in January 2017, over the 50.0 line representing no change, up from 48.1 in December, which was in itself a fivemonth high.

Furthermore, job shedding slowed significantly in January. Lower staff numbers which were reported were linked generally to streamlining plans. In spite of the lower levels of employment, work backlogs have declined since the start of the year, with this set to continue going forward in 2017.

Ayomide Mejabi, Economist for Stanbic IBTC Bank commented, “The first Stanbic IBTC Bank Nigeria PMI reading of the 2017 suggested that the private sector expanded for the first time in a year as it appears that some macroeconomic rebalancing may have ensued. Having said that, the overall

STANDARD CHARTERED MNI NIGERIA BUSINESS SENTIMENT

80 70 60 50 40 Jul'14

Jan'15

Jul'15

Jan'16

Jul'16

Jan'17

Source: Standard Chartered and MNI Indicators

PMI reading still lies below the longrun trend of the series and as a result may not necessarily mean the economy is back on a firm upward trajectory.”

The FocusEconomics Consensus Forecast supports this line of reasoning, having released expectations in February 2017 to see gross fixed investment growth reach 0.8 per cent in 2017, which is down 1.8 per cent from the January 2017 forecast. Further devaluation of the naira may be considered as a key factor in continuing to attract investment into the country and supporting domestic demand going into 2017.

INFLATIONARY PRESSURES TO CONTINUE

Inflation reached over an 11-year high in December 2016 to 18.6 per cent with the consumer price index rising in line with rising inflation by 1.1 per cent in December, above that of November’s 0.8 per cent increase and representing a five-month high. Core consumer prices, however, which exclude both farm products and energy prices decreased to 0.6 per cent in December 2016, the lowest reading for 13 months.

Despite the ongoing tight liquidity environment, a weakening naira and the

The private sector expanded for the first time in a year as it appears that some macroeconomic rebalancing may have ensued.

— Ayomide Mejabi, Economist, Stanbic IBTC Bank cont. overleaf

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31 16/02/2017 17:29

OUTLOOK

cont. from page 31

possibility of oil prices increasing, inflation will likely drop in 2017 averaging 14.1 per cent, according to FocusEconomic’s research, due to a high base effect present in inflation figures in 2016.

Mejabi noted that, “Subsequent positive reads of the PMI should confirm the economy’s modest recovery in 2017 from the low base of 2016 as inflation likely continues to decelerate. The output prices PMI continues to point towards lower inflation reads in coming months.”

The Standard Chartered MNI Nigeria Business Sentiment Survey saw a bump from 41.6 in September 2016, the lowest recording since the survey began in 2014, to an 11 month high of 60.9 in November before falling back to 54.7 in January of 2017.

Panellists contributing to the FocusEconomics Consensus Forecast in February 2017 project that the economy will expand 1.3 per cent in 2017, down 0.1 per cent from the January 2017 consensus. For 2018 the panel expect the economy to grow three per cent.

Although this represents a rebound this year following contractions during 2016, much of the recovery is based upon policy action at a government level and remains fragile. Real GDP growth is likely to remain depressed throughout 2017, with only recovering towards a one per cent growth year-on-year. Mejabi adds that this is likely due to favourable base effects and fiscal benefits off the back of higher oil prices and production levels.

In addition, the 2017 budget plans to keep the exchange rate unchanged at NGN 305 to the USD, far lower than is being traded on the parallel market which is likely to increase the amount of pressure on the currency.

Overall, experts expect to see growth in 2017 for Nigeria following on from the economy’s contraction in 2016. This recovery will, however, be fragile, and further instability could cause severe issues in an economy in desperate need of growth this year.

32 page 31-32 Outlook 041.indd 32

INFLATION AND CONSUMER PRICE INDEX 20

3 Month-on-month (left scale) Year-on-year (right scale) 2

15

%

%

1

10

0

Dec '14

Jun '15

Dec '15

Jun '16

Dec '16

5

Note: Year-on-year and month-on-month variation of consumer price index in %.

Source: National Bureau of Statistics (NBS) and FocusEconomics calculations.

NIGERIA PMI 50.0=no change on previous month 60 Increasing rate of growth

55

50

Increasing rate of contraction

45 Jan '14

Jul

Jan '15

Jul

Jan '16

Jul

Jan '17

Sources: IHS Markit, Stanbic IBTC Bank

www.bankerafrica.com

16/02/2017 17:29

SPONSORED BY:

I N THE PURSUIT OF E XCELLENCE

I NDUSTRY A WARDS 2017

S AVE TH E D ATE 11th

THURSDAY

MAY 2017

The Godolphin Ballroom, Emirates Towers Hotel, Dubai 7pm cocktail reception followed by dinner and the awards ceremony

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Untitled-1 1

08/02/2017 16:46

SECTOR FOCUS ISLAMIC FINANCE

A modern urban wastewater treatment plant, similar the projects that Metito is building.

(CREDIT: DMITRI MA/SHUTTERSTOCK).

The African Islamic finance experience Wafic Ghanem, Chief Financial Officer, Metito shares his experience with Islamic financing in the African market

M

etito is a water and wastewater treatment company with presence across the water treatment value chain. The company’s African operations account for a third of its revenues and the current backlog

34

is around $300 million. The Group has strong presence in North Africa spreading across Egypt, Libya, Tunisia, Algeria, and Morocco. The group also has recently expanded into Sub Saharan Africa and secured projects in Rwanda and Angola.

Metito is actively pursuing projects in Sub Saharan Africa alongside its established presence in North Africa.

Founded in 1958, Metito is the largest privately held water treatment company in the Middle East and the Group is also the largest foreign private investor in the water and waste-water treatment sector in China. Metito is an emerging market-focused group with a presence in 23 countries. The group has an operating capacity of 1.3 million cubic metres a day.

As part of its corporate finance strategy, Metito approached Islamic banks in early 2014 to use their resources to support the Group’s growth. As a result of this initiative, the Group tapped into Islamic financing in 2015 for the first time. As of today, a major part of the long-term financing

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19/02/2017 17:30

that the group has received in GCC region is comprised mostly of Shari’ahcompliant financing tools. Shari’ahcompliant working capital facilities have been also deployed to support short-term funding required for the EPC business unit. The total size of Islamic financing facilities currently in use stand at around $150 million and the share is expected to increase over the next 12 months. The Group has so far availed three types of Islamic finance financing tools, Musharakah, Ijarah and Murabahah.

The Musharakah structure has been used to project finance an on-going project in the Gulf. The variable profit rates relating to this facility has been hedged using Shari’ah-compliant products. The Ijarah structure was used to avail a facility to fund capital injection in concession projects in the emerging markets in order to facilitate competitive tariff pricing for these projects. The Murabahah structure was used for both long-term and shortterm financing requirements. This is an asset-based structured facility secured by a lien on land usufruct.

Despite contemplating the use of Sukuk, Metito ultimately used a combination of bilaterally negotiated Islamic funding tools as detailed earlier. During the assessment process, it became clear to our Group that it would not be possible, or difficult to say the least, to tap into Sukuk.

The first challenge was the tenor and the refinancing risk: shorter tenor of typical private sector Sukuk issuances is one of the key challenges in its deployment for infrastructure projects. While infrastructure projects require over 10 to 15 year tenor, what we have seen is typical Sukuk tenors range from five to eight years for private sector issues. As to the refinancing risk, since Sukuk financing is preferable in a strong economic environment, issuers are faced with

the risk of having to refinance in a weak economic environment at potentially unfavourable terms to avoid default on outstanding Sukuk.

The second challenge we faced was the process cost and time—the structuring complexity of Sukuk renders it somewhat slightly more expensive than conventional bonds.

The time and cost involved in both Sukuk and conventional bonds is higher

Wafic Ghanem

than that of bilaterally negotiated facilities. Rating of the projects poses another challenge. Though unrated Sukuk issuance can expedite the process, it comes with the risk of under subscription of the issue and higher interest/profit rate; securing desired longer tenor is another challenge.

Similar to issuing conventional bonds, success of Sukuk issuance is largely dependent upon the economic environment and market sentiment.

In addition, Sukuk issuance for refinancing presents a higher degree of uncertainty of subscription than Sukuk intended for funding new projects. Shari’ah interpretation varies across issuers resulting in structuring complexities.

Metito has not yet considered tapping into Sukuk issuance for its African business because Africa has only seen sovereign Sukuk issuances up to this point; there has been no

precedence of corporate/private sector Sukuk issuance given the infancy of Sukuk market in the continent.

Given the country risk and typical project risks, we believe possibility of competitive pricing of corporate Sukuk is another key aspect of uncertainty for private sector. The project Sukuk market is yet to be developed to serve the financing requirement of Africa infrastructure projects.

There is also a need for expansion of the Sukuk investor base in Africa.

African infrastructure development has been mainly financed by grants, soft funding and by multilateral agencies, such as the Development Finance Institutions (DFIs) and the World Bank and International Finance Corporation (IFC). However, African Sukuk issuances usually tend to attract investors from the Middle East, owing to familiarity with Shari’ah-compliant financing and African markets.

Lack of participation from DFIs and multilateral agencies to provide longterm funding for infrastructure projects makes Sukuk less suitable for private sector infrastructure projects.

Based on our Group’s recent experience with Islamic finance products including the issuance of Sukuk, I believe at least three factors need to be in place to support promotion and successful issuance of Sukuk.

First, there is need for government sponsorship for infrastructure development through a strong legal and economic framework facilitating corporate/project Sukuk issuance.

Second, one would need support from financial institutions and rating agencies to bridge the gap between demand for and supply of capital through sourcing funds from a broad long-term investor base. Last, there needs to be private sector initiatives to initiate sound business models that can provide infrastructure facilities at reasonable price.

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35 16/02/2017 17:31

SECTOR FOCUS ISLAMIC BANKING

Islamic banking arrives in Morocco

I

n addition to the five new Islamic banks approved by Bank Al-Maghrib, the country’s Central Bank, a further three banks have been granted permission to sell Islamic products.

A statement from the Central Bank noted that a Shari’ah Committee for Participative Finance will be established to govern all Islamic finance activities.

The five banks are: CIH Bank in partnership with Qatar International Islamic Bank; BMCE Bank of Africa jointly with the Saudi/Bahraini group Dalla Al Baraka; Banque Centrale Populaire with the Guidance Financial Group; and Crédit Agricole du Maroc in partnership with the Islamic Corporation for the Development of the Private Sector (ICD), a subsidiary of the Saudi-based IDB. Banque Marocaine du Commerce et de l’Industrie, Crédit du Maroc and Société Générale have also been approved to sell Islamic banking products, whilst

36

CREDIT: Ruslan Kalnitsky/SHUTTERSTOCK)

The Moroccan Central Bank has approved the establishment of five new Islamic banks in the Kingdom of Morocco

Attijariwafa Bank is in talks about a potential future partnership.

“The launching of participative [Islamic] finance products in Morocco complements and expands the range of products offered by the domestic banking sector and opens it to new financing capacities,” a statement from the Central Bank said. “It will strengthen the attractiveness of Casablanca as a leading financial hub in Africa, in accordance with the will and guidance of His Majesty the King, may God assist Him.” “We are delighted by the news that we will be able to positively impact the Moroccan consumer finance market,” said Khaled Elsayed, President and CEO of Guidance Financial Group, USA. He added, “It is also nice to know that this achievement is yet another positive result of the remarkable success our distinctive US Islamic home finance program has had since it was introduced over 15 years ago to the US Muslim consumer market.”

Guidance goes on to note in a press release that the collaboration with Banque Centrale Populaire is aimed at fulfilling the growing demand in Morocco for Islamic financial products.

Morocco has recently passed new legislation last year authorising the establishment of independent Islamic financial institutions, characterised as ‘participative banks’ by the Central Bank. The country had previously held a policy of long-rejecting Islamic banking.

It is also expected that during the first half of 2017 Morocco will issue its first ever Islamic bond (Sukuk) for the domestic market. However, there has not yet been any approval for a bill on the regulation of Islamic insurance (Takaful).

Key features of Islamic banking include prohibition on charging interest and an emphasis on social, moral and ethical values. The less speculative nature of Islamic finance has led to the industry expanding rapidly in many North African and Middle Eastern countries.

www.bankerafrica.com

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16/02/2017 17:32

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13/12/2016 10:07

ADVERTORIAL

Innovation and inclusive banking: the growth drivers for Emirates NBD in Egypt

Emirates NBD Egypt is leveraging technology to aid growth.

Despite regional retreats by global banks internationally Egypt has attracted significant interest from GCC-based banks

W

e have recently witnessed a transformation in the global banking sector w i t h a n i n c re a s i n g number of major players like HSBC a n d C i t i g ro u p re t h i n k i n g t h e i r business models and simplifying their international footprints.

In part, this ‘regional retreat’ is about cutting costs but it has also been driven by banks searching for greater returns by focusing on their most lucrative markets and by shoring up on their capital markets at home.

Egypt’s banking sector has not been exempt from this trend, with the local operations of several international banks being snapped up by their Middle Eastern counterparts and specifically, their highly-liquid GCC counterparts.

One of the biggest acquisitions was by Emirates NBD; the UAE’s leading bank who purchased the Egyptian operations

38 page 38-39 Advertorial_041.indd 38

of BNP Paribas in 2013. Emirates NBD was in good company in Egypt, joining Abu Dhabi Commercial Bank and Qatar National Bank who had similar buy-out stories, and with Kuwait’s Al Ahli Bank also entering the market in 2015.

It begs the question—what has made Egypt such an attractive market for the GCC’s local banks particularly given the country’s economic and currency challenges over the last five years?

Em i rate s N B D Eg y pt ’s C h i ef Executive Officer, Giel-Jan M. Van Der Tol, believes the answer lies in Egypt’s clear growth opportunities, combined with its cultural and geographic benefits.

“Making Egypt our second homemarket wasn’t a decision we made lightly but it was underpinned by the fact that the UAE’s banking sector had become increasingly competitive, particularly for our retail business.

With this squeezing of profit margins and growth, internationalisation was an effective solution to diversify our income stream and the bank’s risk profile too,” he added.

“When we looked at Egypt, we immediately saw huge growth opportunities particularly given its majority under-banked population, although notwithstanding the economic challenges that were, and still are, being resolved,” Van Der Tol explained.

“Additionally, Egypt offered us the advantage of existing trade, cultural and political ties with the UAE, whilst its geographical positioning as the gateway to the broader Africa region benefitted us in eyeing potential future expansion beyond Egypt.”

The growing presence of GCC banks in Egypt has clearly led to a healthy growth in competition but in what other way are they impacting the market? Egypt’s

www.bankerafrica.com

20/02/2017 15:06

continued digital banking evolution is one area where the impact of GCC banks has been felt. The banking sector is increasingly recognising their customers’ desire to interact with them whenever and wherever they are, and GCC banks are playing a critical role in providing their customers with such convenience through digital banking tools.

Specifically in Emirates NBD’s case, the explanation of why this is happening links directly back to the reason it expanded into Egypt in the first place, according to Frederic de Melker, Emirates NBD Egypt’s Head of Retail Banking and Wealth Management.

Intense competition in the UAE’s banking sector made Emirates NBD realise that in such an environment, customer service was the new frontier and secondly, that making such service excellence a reality demanded the best digital capabilities. In doing so, it could transform every single customer’s journey into a highly personalised and convenient experience.

Following this, wide-scale digital change got underway in Emirates NBD’s UAE operations. So far, this has included developing an award-winning mobile banking platform, introducing seamless ATM and mobile banking integration and even launching the Emirates NBD “Future Lab” as a dedicated innovation hub for new digital technology.

“We then kick-started this same digital mandate in Egypt from 2015 onwards with the introduction of new internet and mobile banking platforms, and whose functionality is now being aggressively expanded upon,” said De Melker.

“We launched market-leading ATM software and forged strategic digital partnerships with key organisations including Fawry; Egypt’s leading online bill payments provider and telecommunications provider, Orange,” he added.

Emirates NBD’s focus on expanding its mobile banking capabilities and its

partnership with Orange is particularly interesting when you consider the fact that as mentioned earlier, most of Egypt’s population do not rely on the formal banking sector. In fact, an estimated 94 per cent of financial transactions in Egypt are done using cash and only 35 per cent of the population has access to a bank account.

“Yet, it is also a country where there are more mobile phones than people.

The combination of these two social factors presents a unique opportunity for banks in Egypt, both local and international, to grab a lucrative slice of this under-banked majority by providing banking services through a device that

“We aren’t the first bank in Egypt to launch a dedicated youth banking product. However, the ‘First’ product goes beyond the traditional offer of savings accounts and debit cards to also provide its clients—most of whom are on the cusp of their careers—with exclusive opportunities to join Emirates NBD internship programmes, career seminars with leading HR consulting firms and other career development tools,” explains De Melker.

The goal here is for Emirates NBD to grow its market share by encouraging young Egyptians to buck the cash-habits of their parents and the generations before them.

When we looked at Egypt, we immediately saw huge growth opportunities particularly given its majority under-banked population.

– Giel-Jan M. Van Der Tol

Egypt’s citizens are already clearly very enthusiastic about. Here at Emirates NBD, this is something we are very focused on,” De Melker concluded.

This brings us to the topic of financial inclusion and the need to transition more Egyptian citizens and businesses into the official banking sector.

In addition to being a hot topic for banks given the commercial opportunities at hand, it is also high on the government’s agenda too, given the well-documented economic benefits of such a transition.

Additionally, last year’s currency freefloat in Egypt was undertaken in part, to address the country’s burgeoning informal market.

For Emirates NBD, with the UAE having embarked on its own ‘cashless journey’ several years earlier, it was able to draw on these experiences in Egypt. One such strategy has been the introduction of new niche segments including its recently launched youth banking product, called ‘First.’

But, by actively encouraging youth employment, Emirates NBD is also looking at the bigger picture. In very simple terms, this is about recognising that whilst appropriate banking products can help a young Egyptian to save and prepare for their future, their financial stability relies fundamentally on job stability. This is particularly true in a country in the midst of economic recovery and where youth unemployment remains high. Emirates NBD’s ‘First’ product recognises and proactively helps to address both of these needs.

What is clear is that GCC banks such as Emirates NBD are hungry for growth in Egypt and focused on driving their expansion through innovative new products and digital solutions. It will now be interesting to see how these relatively new players will continue to influence Egypt’s financial sector as market-challengers both during and especially after the country’s economic recovery.

www.bankerafrica.com

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39 20/02/2017 15:06

SECTOR FOCUS SME FINANCE

Traditional markets may consist of many individual informal SMEs (CREDIT: MAKO-STUDIO/SHUTTERSTOCK).

East African SMEs strive to suceed Despite being an important growth sector for banks, SME lending is not without its problems

40

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S

mall and medium sized enterprises (SMEs) are central to any country’s economy. In Kenya it has been estimated by The Practitioner Hub for Inclusive Business that SMEs account for some 80 per cent of the country’s employment and as much as 20 per cent of its GDP. This makes SMEs an important business proposition for banks and financial institutions as it is a large, profitable and growing sector.

However, interest rates have begun to ease across East Africa, rates have remained high in some countries such as Uganda, currently at 12 per cent, and Kenya, where the central bank has held the interest rate at 10 per cent since September 2016.

Keeping interest rates high has been in part to protect currencies from depreciation, although this policy has likely caused growth to slow for many SMEs. The problem of high interest rates for SMEs is twofold. Firstly, consumers have less money to spend, in particular on luxury goods. Secondly, small businesses are far more likely to spend more to service debt, as well as restricting the access and cost to additional credit in the future. Despite additional support being put in place, such as the recently confirmed $90 million financial package from the African Development Bank to support the Commercial Bank of Africa’s funding of SMEs, the underlying issues are likely to remain.

Governments in the region have attempted to lessen this problem by providing additional support for small businesses, as well as for consumers.

A particularly salient example may be found in Kenya. The government introduced a law capping interest rates on all loans, both future and present, in August of last year, despite fierce resistance from banks and, more recently, the IMF.

Although this may help in the shortterm to alleviate some of the costs small businesses are facing with loans, in all likelihood the measure may result in banks and financial institutions reducing access to credit for SMEs as they shy away from the increased risk involved due to being forced to charge a lower interest rate.

SMEs PROVIDE

80

%

of employment

20% of GDP

In order for banks and financial institutions to continue to take advantage of the strategic opportunity that SMEs represent several factors need to continue to fall into line. Most important for SME lending is a stable environment for lending to operate in with both macroeconomic and policy considerations taken into account.

The potential here is significant. The World Bank estimated in 2015 that there is a credit gap for formal SMEs in emerging markets of some $1.2 trillion, and a gap as high as $2.6 trillion for both formal and informal SMEs. Helping SMEs to move from the informal to formal stage could have many benefits, both for the SME and banks. For SMEs, formalisation would mean better access to credit and government support, whilst banks would benefit from having a larger number of customers to draw from.

To support this both regulatory and policy frameworks need to be put in place.

Furthermore, banks are constrained by a general lack of information to make an informed decision about lending to an SME coupled with the fact that small businesses may well not possess the collateral required to offset risk. A more standardised system of credit scoring and risk-rating could help to alleviate these problems, and this can already be seen in the region, with new innovative ways to help build a credit score profile for customers.

An example of this in action might be the more than $150 million in loans that have been issued by Kenya Commercial Bank (KCB) since March 2015 when the bank began its collaboration with M-Pesa to derive a form of credit rating based upon mobile phone data.

Helping to streamline the payments system may also be a factor to consider in order to increase the degree of lending to SMEs. With money moving more efficiently through the banking system, small businesses will be able to manage cash flow, manage overdrafts and service loans—making the bank more attractive to an SME looking for credit and reducing the credit risk of the loan to the bank.

Government support can be crucial in supporting banks and financial institutions in moving into the SME sector. One such way that this could be achieved might be by providing some guarantee of the principal of SME loans.

This has been a widely used practice in order to incentivise banks to lend in greater amounts to SMEs by reducing the level of risk the lender is faces.

Finally, banks and financial institutions can support the sector directly by providing education for small and medium business owners. This can range from workshops dedicated to teaching good business practice to simple awareness as to important product offereings that may increase the success of the business itself.

www.bankerafrica.com

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41 19/02/2017 16:37

TECHNOLOGY

Omnichannel banking is about seamlessly integrating customers with financial institutions across multiple channels (CREDIT: POPTIKA/ SHUTTERSTOCK).

Getting omnichannel banking right Kieran Kilcullen, Chief Commercial Officer, CR2 gives his thoughts on how to adopt an omnichannel banking strategy

R

ight now we are going through an ambiguous time where digital technologies represent both an opportunity and a threat for banks.

The number of banking transactions which are taking place digitally has long since outweighed the number of those taking place in branch, a mass customer movement which is evident globally as the capabilities of channels such as internet and mobile continue to expand. As such, adopting an omnichannel strategy is now much more than just a trend; it has become a necessity. However, what’s becoming increasingly evident is that there are far more people talking about the omnichannel story than there are banks doing it well as banks risk losing

42

market share in addition to the hearts and minds of their customers.

With so many players across the financial services landscape including analysts, vendors and banks alike now endorsing a shift to omnichannel banking, many parties are wrongly using the term omnichannel to describe a seamless banking experience at the fascia level. It is important for banks to understand that appearance is only one facet of a true omnichannel approach. While yes, effective and consistent branding is essential and affects customer’s sympathy towards your brand, it only answers half of a banks challenge. It is as important, if not more important to delve deeper and have the right offering and content that will meet your customers’ needs.

A simplified omnichannel architecture will help banks to improve ROI while also giving them the flexibility to better serve customers.

While banking is anything but simple, customers usually have uncomplicated expectations from their bank. They want their money to be safe, they want to bank securely at the best possible price, they want rewards and they want to bank anytime, anywhere, using any device. This means that they want to be able to not only perform transactions, but that they expect their bank to offer them appropriate products and services when and where they need them. A recent Forrester report stated that 50 per cent of banking customers regularly use more than one channel, showing that the “where” in this instance can

www.bankerafrica.com

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19/02/2017 17:32

in fact be more than one channel.

Today, banks are standing up and taking notice of these trends and are actively working towards integrating their delivery channels, first from siloed, then to multichannel and finally to omnichannel – the gold standard of banking strategies. This term, omnichannel, can often be interpreted differently.

A definition we love which comes from cloudtags.com states that omnichannel banking is the ability to have a continuous experience across banking channels and across devices that is completely bespoke—that is the promise of a new way of thinking.

At the very heart of an omnichannel solution such as CR2’s BankWorld Omnichannel, lies the ability to facilitate a bank in providing ‘everything at any time’, allowing customers to enjoy the exact same experience on each channel while sharing a simple common operational platform. With an omnichannel approach, all of a banks channels from ATM to mobile are harmoniously working in unison, giving consistency, the capability to deploy personalised product offers across channels, a seamless experience, cross channel campaigning abilities as well as convenience and flexibility. If that seems like a mouthful, it’s because the benefits of a well thought out and executed omnichannel strategy really are significant.

For banks themselves, omnichannel primarily means better customer intelligence and visibility as well as the opportunity to generate revenue and reduce costs simultaneously.

Now, who wouldn’t be interested in that? As the bank gets a 360 view of the entire customer relationship including preferences, lifestyle and past purchases, this data can prove utterly invaluable. By using it wisely, the bank can efficiently and effectively target individual customers with products

Kieran-Sales: Kieran Kilcullen

and offers which suit them depending on their hobbies, life stage and any number of other contributing factors.

By having a bigger picture view of the full customer relationship including accounts, saving, cards held, income and purchase history, banks can unlock a host of business opportunities and can offer the best customer experience in the market.

Omnichannel banking is about moving transactions and people away from costly channels such as the branch and toward the functionally brilliant digital channels, saving your bank money and interacting with your customers on their terms. It is about moving away from a generic, onesize-fits-all approach and towards the customisation and personalisation that your customers now expect. In a world where you can find your own name on a can of Coke, it’s not exactly a stretch for customers to expect their bank to target them with timely and appropriate offers is it?

True omnichannel is about moving the entire process of banking from being informative, from just telling customer about products, to creating a two-way conversation with your customer where they can interact with actionable offers in real-time.

Since the financial crash, banks have had to look for new ways to generate revenue and reduce costs, essentially doing more with less.

While fintech organisations have been quick to jump on board with the fastpace of the technological revolution, banks, often still maintaining legacy systems, are being outdone by these agile competitors. In real terms, the fundamental question which banks need to ask themselves is how can I hope to compete with fintech organisations without going omnichannel? Without the edge a complete omnichannel strategy can give a bank, the threat of these new market disruptors is hard to ignore.

The Economist has recently reported that four out of five smartphone owners check their devices within 15 minutes of waking up and the average user does so 150 times a day. 10 years ago the digital landscape was a very different place, as it will be in another 10, or even two years’ time.

In order to keep up with the mountain of “next big things” being released onto the market, banks operating an omnichannel strategy have a distinct advantage. Within an omnichannel architecture, banks can quickly avail of the opportunities presented by new channels and incorporate them into their channel structure with ease simply by plugging them into the integrated platform, while banks operating their channels in solo mode will find themselves managing increasingly complex channels and struggling to keep any kind of perceived consistency.

Banks that do not adequately weight the need for an omnichannel approach face the potential risk of being left behind by their peers and new players entering the market. To truly stay ahead of the curve, banks need to step up and accelerate the true omnichannel change and finally get omnichannel right.

www.bankerafrica.com

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43 16/02/2017 17:36

TRAILBLAZERS

WomEng uses pink hardhats to break gender stereotypes.

Think pink We spoke with Naadiya Moosajee, Co-Founder, WomEng about the difficulties of getting women more involved in STEM

E

ngineering has typically been dominated by men, but WomEng, a company dedicated to the development of women and girls for the engineering industry, is looking to change that.

According to the most recent UNESCO Science Report despite women pursuing bachelor’s and master’s degrees in science and engineering at a greater level than men, as they represent some 53 per cent of graduates, the numbers abruptly drop off at a PhD level. This discrepancy results in men representing 72 per cent of the global pool of researches.

Squarely taking aim at changing this trend is WomEng which began in South Africa 10 years ago and has since expanded to Kenya, Mexico and Brazil, with additional expansions planned.

Over the course of the last 10 years, the

44 page 44-45 Trailblazers041.indd 44

company, with its partners, has managed to work with 10,000 girls and women at different levels to encourage and assist them to go into science, technology, engineering and maths (STEM).

“The programmes are set for different levels, so at a high school level we run programmes under GirlEng, which is our high school level intervention programme. We run a lot of different types of workshops and challenges for girls to get them aware of engineering and engineering type careers,” said Naadiya Moosajee, the Co-Founder of WomEng when asked on the subject.

The company adopted a symbol to aid in the breaking down of gender stereotypes—a pink hard hat. “We took something that was very masculine and representative of engineering and something very stereotypically feminine, the colour pink. You can just imagine the

call when we went to order 1000 pink hardhats the company thought we were completely crazy. But we are essentially using gender stereotyping to fight the gender stereotyping. It has been very effective for girls, who suddenly have the same amount of focus on engineering that the boys get in the form of a very much symbolic hard hat in pink and it makes engineering suddenly very accessible to girls,” Moosajee explained.

INSPIRING GENERATIONS

At a high school level WomEng focuses on running workshops for girls aimed at helping them make better career and life choices, especially around STEM subjects. In addition they also get the girls hands on in engineering projects, building miniature buildings or cars, providing direct application of physics or mathematic skills.

A similar process can also be found in WomEng’s university programmes with a slightly different focus. “At a university level we found some of our partners saying that students were just not business ready—so there’s a gap globally between what universities are teaching students and what they actually know coming out of university.

So we run a big innovation challenge for female engineering students

www.bankerafrica.com

16/02/2017 17:37

GirlEng information sessions being held in Johannesburg encouraging girls to study engineering.

where we help them to go through a process where they actually get to start a business from idea all the way to pitching it to investors,” said Moosajee.

This process is mirrored in engineering projects Moosajee added, meaning that students get a chance to learn not only how to create their own businesses and be entrepreneurs in their own right, but also how to pitch solutions to potential bosses in their future employment.

“These students actually never thought that they could be entrepreneurs they just kind of had an idea of what they could go out and do as engineers. So this has opened a whole new avenue for them,” explained Moosajee. “We bring in a lot of women who are in the industry to come and have a conversation with them, as well and act as role models, to say for instance ‘with an engineering degree you can go and do so many different things’. Really the only limit is their own imagination from the time they have an engineering degree.”

GREATER DIVERSITY FOR GREATER SOLUTIONS

When quizzed why there needs to be a push to bring more women in engineering, Moosajee pointed out that everything in world is designed by

Annual industry networking event hosted by WomEng. Pictured are the Co-Founders of WomEng, Naadiya Moosajee and Hema Vallabh.

engineers, down to what is consumed on a daily basis. When 60 per cent of population is ignored it creates an imbalance and bias in the design of the world around us.

“This is a South African example I can give you. We do sustainable city design and in some of our communities there is a regulation which states that you have to be designed for a water tap every 500 metres as a minimum, but 500 metres for a woman at night is completely unsafe in lots of areas but because men don’t have that fear of walking around a night, that fear of being assaulted in the process of getting basic sanitary water, they didn’t think about that,” said Moosajee.

In addition, more women being involved in engineering and other STEM subjects means that you have more researchers and developers who are thinking differently, acting differently and coming to different conclusions than if it were just one homogenous group. Moosajee argued that this diversity is what breeds the best results for innovation, “You need to have both people who come from different backgrounds and think differently to bring out the best engineering solution.

Because engineering is ultimately a people science because everything we

do is actually about catering for people.”

When asked about what the plans are for the future, Moosajee replied with an ambitious claim. Having worked with some 10,000 girls over the course of the last 10 years, WomEng is now planning on targeting a million girls in the next 10 years. “We have been speaking to a number of partners and UNESCO, which is an organisation we have a really good relationship with, we are hopefully going to start rolling out with them in 2017 along with a number of other key organisations of our #1MillionGirlsInSTEM campaign which is to over the next 10 years increase education and empower a total of a million girls through science, technology, engineering and mathematics.”

Naadiya Moosajee, Co-Founder, WomEng

www.bankerafrica.com

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45 20/02/2017 15:08

INVESTMENTS

Opportunities abound in Kenya Anne Muchoki, Chairperson of the Kenya Investment Authority sat down with Banker Africa and spoke about the state of the Kenyan economy and the growth of foreign direct investment

T

he Kenya Investment Authority (KenInvest) plays a key role as part of one of the three pillars of Kenya’s ambitious Vision 2030 programme designed to transform Kenya and improve the quality of life for all its citizens.

Despite developments in the global economy over the past year Anne Muchoki, Chairperson for KenInvest, believes that the goals set for KenInvest and the wider Kenyan economy are still achievable.

“Growth of Kenya’s economy and FDI into the country has been strong and is actually accelerating despite recent developments in the global economy. Our outlook is thus very optimistic and we are still pursuing the double digit economic growth target of Kenya Vision 2030.”

Muchoki added that historically global economic downturns and uncertainties had impacted Kenya through a reduction in demand for the country’s exports and a deterioration of trade caused by global commodity price decline.

“However, the magnitude varied substantially, depending on the causes of the decline in world growth and domestic developments.

46

Kenya’s current account deficit now stands at seven per cent of GDP up from 10 per cent in 2014. This has resulted largely from the recent decline in global oil prices, which saw a reduction in value of oil imports in 2015. Although global commodity prices declined generally, prices of tea increased by about 13 per cent in 2015 making Kenya a net winner from the commodity price volatility.”

Further potential cause for volatility in Kenya can be found in the decision made by Britain in a referendum in June of 2016 to exit the European Union. The outcome caused the rapid depreciation of the British pound to its lowest level in some 30 years, as well as sparking market instability globally.

Kenya has traditionally had strong trade, investment and tourism links with the United Kingdom, accounting for approximately seven per cent of Kenya’s total exports in 2015 and is amongst the top three sources of FDI inflows into Kenya.

“Kenya has relatively diversified trade partners and hence export growth prospects remain fairly resilient in the wake of Brexit. Given the UK is a major source of foreign direct investment (FDI) to Kenya, a reversal in capital flows to Kenya from the UK could

Anne Muchoki

constrain investment. Depending on the actual direction the Presidency of Donald Trump in the USA, another major source of FDI into Kenya, takes the same concerns are valid.

“On the positive side, data from UNCTAD (2014 and 2015) show an increasing trend in the share of FDI into Africa from developing economies.

India and China continue to be notable

www.bankerafrica.com

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16/02/2017 17:39

investors in Africa. Non-traditional sources such as UAE have emerged as important sources of FDI flows into Africa in recent years. Therefore, flows from these emerging markets might negate any UK and/or US capital reversal. On tourism, visitors from the UK account for a significant share of international arrivals into Kenya. An economic downturn in the UK may therefore, have implications on tourism earnings,” added Muchoki.

In Banker Africa Issue 28 from November 2015 Muchoki had stated that Kenya was aiming at boosting its FDI to KES 150 billion a year and maintaining a GDP growth of 10 per cent per annum as part of the Vision 2030 goals. She affirmed that these goals are still feasible despite changes in the global economy.

“The Kenya development blueprint, Kenya Vision 2030 had projected that the rate of economic growth would reach 10 per cent by 2012 and be sustained thereafter up to 2030. However, due to various factors this rate not been achieved yet. In 2015, data from Kenya National Bureau of Statistics (KNBS) shows that the economy expanded by 5.3 per cent and 6.2 in the second quarter of 2016. World Bank, through its Kenya Economic Update report of March 2016, projects a 5.9 per cent growth in 2016, rising to six per cent in 2017. In the October 2016 edition of World Economic Outlook by IMF, growth in Kenya is projected to rise to six per cent in 2016 and 6.1 in 2017 aided by investment in the transport sector, pickup in electricity production, and recovery in tourism.

“KenInvest’s 2013-2017 Strategic Plan projected an additional KES 150 billion worth of investment each year from 2013/14 through to 2016/17.

For the last three years of the plan, the Authority has registered KES 414 billion worth of investment against a target of KES 450 billion missing the

Data from UNCTAD (2014 and 2015) show an increasing trend in the share of FDI into Africa from developing economies. India and China continue to be notable investors in Africa.

— Anne Muchoki target by only eight per cent. In the first quarter of 2016/17, we recorded investment total to KES 50.5 billion and if this trend is maintained, we are likely to achieve our target for this year and maybe for the overall period.”

The Kenyan government announced a cap on banking loan interest rates of four per cent above the Central Bank of Kenya’s benchmark rate. In addition it also set the minimum amount of interest to be paid for bank deposits at seven percentage points below the central bank’s interest rate.

When asked whether this would interfere with the Investment Authority’s FDI goals, Muchoki replied

that, “The main aim of the law is to provide cheaper credit. It is expected that demand for loans will go up.

However, although the demand for loans will go up banks might favour lending to the government which is considered less risky than lending to the private sector.

“Overall, we believe that the Committee at the Central Bank that determines the CBR has the knowhow and capacity to set the rate in line with the critical needs of the economy, thereby keeping it on a strong growth trajectory. This way, the attractiveness of the country to FDI will be sustained or even enhanced.”

Investment Opportunities in Kenya Agribusiness—various agricultural products, technology to increase productivity and adding value to produce.

Manufacturing—agro-processing, textile and leather processing. In addition to electronic goods, automotive goods and non-traditional paper products.

Mining—gold and precious stones and potential for extensive exploration of petroleum oil.

Tourism—Kenya’s third largest foreign exchange earner, significant opportunities in conferencing, eco-friendly tourism in parks and cruise ship tourism.

ICT—incoming and outgoing call centres and software. Opportunities for expansion of science and technology centres, IT centres and training centres.

Energy & infrastructure—oil and LPG supply and distribution in addition to Kenya’s rural electrification and water supply programmes.

Infrastructure of all kinds will see demand for investment in light of Vision 2030’s goals.

Banking & finance—Kenya’s financial sector is the largest in East Africa and requires investment to allow micro-finance to reach its full potential, in addition to investment banking, lease hire and housing finance.

Social sectors—health facilities, health tourism, technical institutes and other health and education sectors are opportunities for investment.

www.bankerafrica.com

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47 16/02/2017 17:39

INVESTMENTS

Trade finance continues to be low risk Newly released data from the International Chamber of Commerce affirms the low risk nature of trade finance against comparable asset classes

Trade finance is an important component in ensuring that goods are properly delivered and financed (PHOTO CREDIT: POGONICI/SHUTTERSTOCK).

T

he International Chamber of Commerce (ICC) has released its sixth annual Trade Register. The report covered $9.1 trillion of exposures and 17 million transactions, more than it has ever done before. The ICC claims that the data verifies trade finance as presenting banks with little credit risk.

Short-term products are particularly low risk, according to the Trade Register, with a default rate (weighted for exposure) of 0.08 per cent for Import Letters of Credit (L/Cs), 0.04 per cent for Export L/Cs, 0.21 per cent for Loans for Import/Export and 0.19 per cent for Performance Guarantees.

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Furthermore, medium and longterm products were also shown to be low risk in the report. This was partly driven by the fact that in-scope transactions are covered by OECDbacked Export Credit Agencies (ECAs), of up to 95 per cent of their value. The average default rate of medium to long term trade finance was found to be 0.44 per cent with a loss given default (LGD) of 5.3 per cent. This drives an expected loss of 0.024 per cent.

The report noted that whilst these figures are low compared to many other asset classes, they are marginally higher than the figures that have been reported previously between 2007

and 2014, due to increases in both default rate and LGD. In a press release the ICC stated that, “While the latest data reveals a slight upward trend in default rates from 2013 onwards—due to a mix of one-off events, such as the default of a large importer, and more systemic factors—the overall trend still confirms the low risk nature of trade finance.”

“The Trade Register aims to objectively further increase the attractiveness of trade finance to banks, and in turn, benefit global trade and financial inclusion,” says Daniel Schmand, Chair of ICC Banking Commission. “It also confirms that trade finance should be increasingly recognised as a reliable asset class by institutional investors, with scope for high yields and low volatility.”

“Year on year the Trade Register has demonstrated the low credit default risk nature of trade finance instruments,” says Alexander Malaket, Chair of the Trade Register Project and Deputy Head of the Executive Committee of the ICC Banking Commission. “Trade finance is crucial to global trade flows, which in turn are the driving force behind global economic growth across industries and markets. This is precisely why we continue to enhance the quality and the robustness of the data and related advocacy, aiming to provide objective data for discussions between regulators and industry stakeholders.”

www.bankerafrica.com

19/02/2017 17:34

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THE VIEW PICTURE OF THE MONTH

International Monetary Fund Managing Director Christine Lagarde (L) shares a laugh with Central Africa Republic Prime Minister Simplice Sarandji (R) at the Bengui International Airport in Bangui, Central Africa Republic on 24 January 2017 (CREDIT: IMF STAFF PHOTOGRAPH/

STEPHEN JAFFE/FLICKR).

This month we asked our readers on bankerafrica.com and twitter @bankerafrica...

What will be the biggest challenge in 2017?

50 page 50 The View 041.indd 50

20% GLOBAL ECONOMY

17% COMMODITY PRICES

FISCAL UNCERTAINTY

CORRUPTION

WAR

8%

12%

15

%

28%

POLITICAL INSTABILITY

POLL

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