#48 - September 2017

SEPTEMBER 2017 | ISSUE 48

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ISSUE 48 | SEPTEMBER 2017

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Poli cal issues breed doubt is ub ub btt in in Kenya Kenya en a A CPI Financial Publication

INSIDE:

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OPINION Why the quest for a single currency for West Africa won’t materialise soon

34

CASE STUDY Zimbabwe banks, economy buckles under liquidity crunch

36

TRAILBLAZERS Match-making

Dubai Technology and Media Free Zone Authority

Uncertainty reigns Poli cal issues breed doubt in Kenya

Uncertainty reigns

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Distinguished foundations to lead the future.

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EDITOR’S LETTER

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ello and welcome to the September issue of Banker Africa.

This month we feature our Kenya Country Focus on the front cover. The East African nation has been making headlines due to its ongoing election woes (more on this on page 6).

The ongoing drought which has plagued the country, and prompted response from the United Nations and partners, has resulted in rising inflation and a struggling business environment. On the upside it seems like many of the problems that Kenya has experienced in 2017 are unlikely to repeat themselves in 2018. However, this comes with the huge caveat that election-related problems do not spiral further out of control. Turn to page 20 to get the full analysis.

The Zimbabwean economy has continued to struggle, with the strict credit and liquidity constraints the banking sector faces meaning that banks are running out of cash. The full story can be found in our Case Study this month on page 30.

For our Trailblazer this month we feature WaystoCap. This Moroccan-based start-up runs an online B2B commodities marketplace, which has recently completed a $3 million funding round in the US, has targeted both importers and exporters and is seeking to change the way that trading is done in Africa.

“For example we have an importer who wants a container of spinach, instead of that importer having to go and find it, get quotes, try to verify the supplier and do all of that. All of the logistics are taken care of. All you have to do is submit the request to us,” said Niama El Bassunie, the CEO of WaystoCap. The full article can be found on page 36.

Until our next issue,

6

Explore what banking could be

IN THE NEWS 6 News analysis: Election woes in Kenya 7 Essential financial news from around the continent 10 Spotlight: Angola

Trusted mobile app security and authentication solutions

HAPPENINGS 12 Payments, banking and fintech at Seamless

13

East Africa

13 KPMG SA executives resign SEPTEMBER 2017

| ISSUE 48

ISSUE 48 | SEPTEMBER 2017

ISSUE 47 | AUGUST 2017

Political issues

2017

breed doubt in

Bringing Nigeria back Government policy and commodity recovery aid the West African na on

ISSUE 46 | JULY track

for West Africa

to get back on

a single currency

Ghana looks set

Kenya Why the quest for

A return to form

won’t materialise

MARKETS Kenyan trade moves con nental

25

COUNTRY FOCUS The retrea ng shadows

TRAILBLAZERS Unearthing value

22/08/2017 17:11

Uncertainty reig

Poli cal issues is breed doubt ub ub btt in in Kenya Kenya en a

ns

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INSIDE:

14

1

page 3-4 contents

048.indd 1

OPINION Why the quest for a single currency for West Africa won’t materialise soon

Zone Authority

Zone Authority Dubai Technology

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36

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and Media Free

INSIDE:

Dubai Technology

OPINION & decision making Ar ficial intelligence

Bringing Nigeria back Government policy Government p olicy and and commodity commodity recovery recovery aid aid the the West West African African na on na on

Publication

Publication

14

TRAILBLAZERS Revving up Rwanda

A CPI Financial

A CPI Financial

INSIDE:

36

A CPI Financial Publication

Ghana Ghana l

25 MOBILE LOANS Keeping score

and Media Free

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formck rn to A retu tra on track back on get back to get set to looks ooks set

Dubai Technology and Media Free Zone Authority

soon

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AUGUST 2017 | ISSUE 47

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46 JULY 2017 | ISSUE a.com www.bankerafric

34

CASE STUDY Zimbabwe banks, economy buckles under liquidity crunch

36

TRAILBLAZE Match-makingRS

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SEPTEMBER 2017 | ISSUE 48

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www.bankerafrica.com Chairman SALEH AL AKRABI

OPINION 14 Why the quest for a single

currency for West Africa won’t materialise soon West African monetary unity is still some distance out

GOVERNANCE 16 Why African banks are losing the

32 Islamic investing

fraud war—and what they can do about it William Lawrence, Regional Practice Lead: Fraud and Financial Crimes at SAS on how African banks can begin to tackle their fraud problem

MARKETS 18 Outlook continues to be bleak for

CASE STUDY 34 Zimbabwe banks, economy

Election instability has caused problems in the short term for Kenya

FINANCIAL INCLUSION 26 Emirates NBD Egypt’s next

strategic step Frederic de Melker, Head of Retail Banking and Wealth Management for Emirates NBD Egypt on how the bank taps into Egypt’s majority unbanked population

Nigeria represents a new opportunity for Islamic finance, says Mark Hucker, Managing Director, VG

WaystoCap brings African trade into the spotlight

TECHNOLOGY 40 The benefits of end-to-end digital banking

42 Moving continental 44 The onboarding process INVESTMENTS 46 End of the cycle

ISLAMIC FINANCE 28 Nigeria­—an Islamic opportunity?

buckles under liquidity crunch Strict credit and liquidity constraints have caused adverse effects on Zimbabwe’s banking sector, writes Tawanda Karombo

TRAILBLAZER 36 Match-making

SA banks

COUNTRY FOCUS 20 Uncertainty reigns

Zeinab Hashim, CEO & Managing Director, ADIB Capital highlights the firm’s successes and her experience of working in the Shari’ah compliant banking space

Richard A Johnson, Managing Director—Head of Business Development, Real Estate & Private Markets and Paul Guest, Executive Director— Lead Strategist, Real Estate & Private Markets of UBS Asset Management discuss the outlook for the global real estate sector

THE VIEW 50 Photo and chart of the month

Chief Executive Officer ROBIN AMLÔT robin@cpifinancial.net Tel: +971 4 391 4681

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London Bureau ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476

Contributors TAHIRU AZAAVIELE LIEDONG, WILLIAM LAWRENCE, FREDERIC DE MELKER, MARK HUCKER, TAWANDA KAROMBO, DHARMESH MISTRY, JACQUES HAREL, GREGOIRE DE CLERCQ

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analysis

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Election woes in Kenya

The 8 August election was overturned by the Supreme Court of Kenya (CREDIT: INDUSTRYANDTRAVEL/SHUTTERSTOCK).

In a surprising move the Kenyan Supreme Court annulled the results of the contested August election results

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he decision by the Supreme Court of Kenya to annul the results and demand a new poll within 60 days is not just an unprecedented move on the African continent, but an incredibly rare outcome worldwide.

Looking for positivity, this decision demonstrates the independence of the judiciary in Kenya, and the strength of its institutions—especially in a matter as controversial as an election in a short timeframe. The strength of institutions has often been pointed to as a determinant of the strength of the democratic process in a country, so there is certainly some longterm positive notes to be taken from this.

However, the move has left the country paralysed. Markets crashed on the day of the announcement with the NSE 20 Share Index, which covers the country’s largest and most-heavily trade companies, falling

over five per cent. Trading on the Nairobi Securities Exchange was also briefly halted (more in depth analysis of the macroeconomic situation for Kenya can be found in our country focus this month).

Furthermore, contested elections have a bad reputation in Kenya. Much clamour was made in the lead-up and immediate aftermath of the elections to avoid a repeat of 10 years ago when contested results led to bloodshed. The opposition’s decision to approach the matter via the courts, rather than through popular protest, should be applauded to an extent, and is certainly a better result than 2007.

International and domestic observers have voiced suspicions that there was some form of interference and intimidation taking place during the election process. However, the prevailing thought process was that President Uhuru Kenyatta’s margin of

victory would be enough for the courts to uphold the result.

Eyes turn now to the process of the electoral rerun in October. The Independent Electoral and Boundaries Commission (IEBC), the very organisation that the Supreme Court judged as failing at its role of running a fair election, seems resolute in its decision to run a new election within 60 days of the court verdict.

Lawyers from the National Super Alliance (Nasa), the opposition party, are seeking for criminal charges against the chair and chief executive of the IEBC, which may put the election rerun in jeopardy. The selection of new commissions is a process that in itself could take months, leaving the country in a constitutional crisis.

The opposition has expressed their joy in the decision by the court, whilst President Kenyatta has stated that although he respects the court’s decision, he personally disagrees with it.

Furthermore, he has called for all sides to respect the rule of law and peace.

More recently the Supreme Court has come under attack. Riot police have been forced to disperse supporters of President Kenyatta outside the Supreme Court, and threats against the body, and in particular Chief Justice Maraga, have increased.

Maraga condemned demonstrators in a strongly-worded statement, describing their actions as ‘unlawful’ and that they were ‘savage in nature’. This statement may be seen as a response to the President’s threat to ‘fix the judiciary’ should he win again in October.

All eyes will be on Kenya in October to see if the country is able to hold a new election before the 1 November 2017 deadline and avoid a potential constitutional crisis.

Kenya’s election commission had originally declared for Kenyatta as the winner of the 8 August election by 1.4 million votes, but the result was immediately contested by his rival, and leader of the opposition, Raila Odinga.

www.bankerafrica.com

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RATINGS REVIEW BANKS AND BUSINESSES Capital Intelligence Ratings announced that it has upgraded Commercial International Bank’s (CIB) Long-Term Foreign Currency Rating (FCR) to ‘B’ from ‘B-‘, following CI Ratings’ recent upgrade of Egypt’s Sovereign Long-Term FCR to ‘B’ from ‘B-‘. The Bank’s ShortTerm FCR was maintained at ‘B’. The outlook for the FCRs is ‘Stable’.

Capital Intelligence Ratings announced that it has affirmed the credit ratings of Crėdit du Maroc (CM), based in Casablanca, Morocco.

CM’s Financial Strength Rating (FSR) is affirmed at ‘BB+’, supported by the sound capital position, adequate liquidity and better loan asset quality. The outlook for the FSR is maintained at ‘Stable’.

Moody’s Investors Service, has downgraded the insurance financial strength (IFS) rating of Namibia National Reinsurance Corporation Limited (NamibRe) to Ba2 from Ba1. The outlook changed to stable from negative.

Capital Intelligence Ratings announced that it has upgraded Bank of Alexandria’s (BoA) Long-Term Foreign Currency Rating (FCR) to ‘B’ (from ‘B-’) and affirmed its Short-Term FCR at ‘B’. The outlook for the ratings remains ‘Stable’.

SOVEREIGNS S&P Global Ratings revised its outlook on the ‘B’ long-term foreign and local currency sovereign ratings on the Republic of Zambia to stable from negative. The stable outlook balances an improving macroeconomic picture against a number of negative rating pressures, including a wide fiscal imbalance and substantial debt stock.

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ON THE RECORD EFG Hermes inaugurates US office

The New York office will allow EFG Hermes to expand its pool of brokerage clients and function as a starting point for as the North American base for the Firm’s entire product offering.

Central Bank of Nigeria gives OFIs new Bank Verification Number deadline

The Central Bank of Nigeria (CBN) has extended the deadline for registration into the Bank Verification Number (BVN) project for Other Financial Institutions (OFIs) to 31 December, 2017 from the original deadline of 31 July, 2017.

Youtap launches mobile money QR code solution and apps for growth markets in Africa and Asia

The new solution gives any merchant or small business owner with a smartphone the potential to download Youtap’s Merchant App, self-register, and start accepting mobile money payments.

GFH acquires $1.2 billion infrastructure portfolio in Africa and Middle East

The acquisition has been funded by a $315 million capital increase taking GFH issued and paid up capital to $975 million. The portfolio acquired will make GFH one of the key land banks with more than 200 million square feet across Africa, GCC and India.

Moody’s Investors Service has affirmed the Government of Egypt’s long-term issuer and senior unsecured bond ratings at B3 and the outlook remains stable. The rating affirmation is based on Moody’s view that the B3 rating appropriately captures Egypt’s credit risk profile.

Very weak government finances will continue to constrain the rating.

Moody’s Investors Service has downgraded the long-term issuer rating of the Government of Tunisia to B1 from Ba3 and maintained the negative outlook.

Fitch Ratings has affirmed Ghana’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B’ with a stable outlook. Ghana’s ratings reflect the country’s medium-term growth potential and improving macroeconomic stability, which is supported by the authorities’ commitment to putting public finances on a sustainable path, said Fitch. This is balanced against high government debt, existing weaknesses in public finances, and low GDP per capita.

The deal will leave GFH in charge of over 200 million square feet in land across the GCC, Africa and India (CREDIT: POTOWIZARD/SHUTTERSTOCK).

www.bankerafrica.com

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in the

news

A QUICK WORD

I believe that the greatest challenge Africa has as a continent when it comes to attracting investment is in the way it is portrayed... As an investor, when all you have heard about Africa is corruption, how would you pass a positive investment decision to go and invest in the continent? The result is that the vicious cycle of neglect continues and is even reinforced.

—Tony Elumelu, Chairman, Heirs Holdings, at a gathering hosted by the UK Department for International Development.

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

AfrAsia Foundation launches its school for underprivileged children

The launch was held on 18 September 2017 at the school premises in Curepipe, Mauritius. The school will welcome over 30 vulnerable and underprivileged children of three to five years. A landmark achievement celebrating the 10th year of AfrAsia Bank, the AfrAsia Foundation is modelled on UN Sustainable The school will expand to cater up to 100 children.

Development Goals 2030.

The school represents the AfrAsia Bank ‘Different’ footprint as the children after entry to pre-school will embark on a monitored journey that will take them through all stages of State education with tutoring and encouragement.

The school will be expanded in stages to cater for up to 100 children with the preschool education based on a combination of international methodology and Mauritian curriculum in cooperation with NGO Ti Rayons Soleil. Practical courses will also be offered to parents.

EFG Hermes concludes advisory for Native Markets on partnership with Intro Investments Holdings

Native Markets operates leading F&B concepts including the first premium bakery and pastry producer TBS, TBS Express, The Four Fat Ladies, Delicious Bakery as well as Patties Burgers. Native Markets controls over 40 retail outlets across its portfolio of brands, and is vertically integrated through a centralised production facility that supports its retail presence.

Commenting on this, Mostafa Gad, Co-Head of Investment Banking at EFG Hermes said, “EFG Hermes is proud to have facilitated this partnership, which will allow for further strong growth and institutionalisation of a leading homegrown concept built up by Egyptian entrepreneurs.

This transaction complements a very successful year that saw EFG Hermes investment banking division close ten high-profile transactions with an aggregate value in excess of $870 million in the first half of 2017.”

Nigerian Federal Government begins probe of contractors’ tax records

As part of efforts to improve tax compliance levels, the Federal Government of Nigeria has commenced reviewing the tax compliance records of all contractors who received payments from the Federal Government and its various agencies in the last seven years. This follows the results of a sampling exercise conducted by the Ministry of Finance which found that less than 20 per cent of contractors reviewed accurately stated the income received from the Federal Government in their tax returns, whilst many made no declaration at all.

Minister Kemi Adeosun stated that Nigeria’s low level of tax compliance was at variance with the collective desire to reduce dependence on oil and to become a prosperous nation that provides for all its citizens.

According to the Minister, “It was a matter of concern that those who earned money directly from Government, which is both traceable and verifiable, still failed to pay the correct taxes thereon.”

“VAIDS has now been open since 1 July and some applications have already been received. If the tax authorities reach a company before such company has applied for VAIDS, then the full audit process will be conducted. This could result in penalties, interest and prosecution. So companies and individuals who know they will be affected are urged to quickly take advantage of VAIDS,” she stated.

www.bankerafrica.com

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SHUAA Capital initiates procedures to commence Egypt re-entry for securities business

SHUAA Capital, a United Arab Emiratesbased integrated financial services firm, announced that it has formally begun discussions with Egyptian regulators for reintroducing its securities business into the Egyptian market.

Commenting on this, Fawad TariqKhan, General Manager of SHUAA Capital, explained, “SHUAA Capital believes there still exists significant untapped potential to serve clients eyeing the Egyptian market with our Securities business. Moreover, we have ambitious plans to extend our platforms SHUAA Capital brokerage operations were voluntarily further beyond our local jurisdictions, to allow clients both current and prospective, direct suspended during the 2008 global recession (CREDIT: ABDOABDALLA/SHUTTERSTOCK). access to other markets through a single trading account, blended with a suite of increasingly comprehensive brokerage services. We look forward to relaunching operations soon, with the guidance of the Egyptian authorities and regulators.”

BANK OF TANZANIA LICENCES NEW MORTGAGE FINANCE COMPANY The Bank of Tanzania has licenced a new housing finance company, called First Housing Company (Tanzania) Limited.

“The licence allows the company to carry out Mortgage Finance business in Tanzania as a housing finance company,” a statement issued by the Department of Policy Review and licencing Department in the Directorate of Banking Supervision said.

The First Housing Company (Tanzania) Ltd head office is located at 19 Obama Drive in Dar es Salaam. This is the first housing finance company to be licenced by the Bank of Tanzania.

In addition to mortgage finance firms, the Bank of Tanzania is also mandated to licence and supervise banks, financial institutions, credit reference bureaus, bureaus de change and lease finance companies.

Absa Bank Limited and China Development Bank conclude a $100 million agreement Absa Bank Limited, a subsidiary of the Barclays Africa Group (BAGL), has successfully concluded a five year $100 million Special Facility Agreement with the China Development Bank (CDB). This is the first major transaction between the two lenders and is geared towards providing funding to Small and Medium Enterprises (SME). This will also benefit BAGL’s existing and prospective SME clients across the continent, which will be reached through its 12-country presence.

“We are glad to partner with CDB on this landmark transaction, which also echoes the 2017 BRICS theme, ‘Stronger Partnership for a Brighter Future’,” said Craig Bond, Head: Partnerships, Joint Ventures and Strategic Alliances at Barclays Africa Group Limited.

The agreement will focus on funding SMEs (CREDIT: YUTTANA CONTRIBUTOR STUDIO).

9

New Africa infrastructure fund launched

The fund will focus on infrastructure across the continent (CREDIT: YUTTANA CONTRIBUTOR STUDIO/ SHUTTERSTOCK).

A.P. Moller Holding has together with PKA, PensionDanmark and Lægernes Pension launched a new infrastructure fund with a focus on Africa. The fund has received commitments of $550 million from anchor investors. The fund has a 10-year duration and has an initial target of 10 to 15 investments in total.

“We are very pleased with the significant support from the Danish pension funds and A.P. Moller Holding. Together, we will build and operate infrastructure business in Africa to support sustainable development and improvements in living standards across the continent. We will combine the best from industry in terms of project management and operational capabilities with the best from private equity in terms of agility and focus,” said Kim Fejfer, Managing Partner and CEO of A.P. Moller Capital.

“A.P. Moller Holding was established to build value creating businesses that have a positive impact on society. Africa, with a working-age population likely to reach more than one billion people in the next decades, has a pressing requirement for more investments in infrastructure.

In this respect, we are delighted to have established a new promising company in our portfolio with a strong team, who hold the right capabilities and experience to manage infrastructure investments in emerging markets,” said Robert Mærsk Uggla, CEO of A.P. Moller Holding.

www.bankerafrica.com

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news

spotlight [ANGOLA]

Capoinvest Limited signs a private investment agreement with the Angolan Government

Capoinvest Limited, the private investor in the Porto do Caio Project in Cabinda, has signed an investment agreement with the Angolan Government, represented by UTIP (Technical Unit for Private Investment), officially listing it as a foreign investor in the project.

“The Angolan Government is attracting inward foreign investment by establishing public private partnerships such as Porto do Caio. The signing of this investment agreement is a milestone for the Angolan economy and helps to attract further foreign national investors looking to realise the significant opportunities available at the port and associated zones,” said Jean-Claude Bastos de Morais, member of the board of directors, Capoinvest Limited.

“In addition to outstanding access to global and African markets, this project offers to local and international companies a series of benefits allowing for efficient operations at attractive costs as well as the possibility of benefitting from the free trade zone and other centralised operations.”

The FSDEA’s total assets increased to nearly $5 billion in 2016 (CREDIT: ESFERA/SHUTTERSTOCK).

Fundo Soberano de Angola announces audited results for 2016

Angola’s international trade is dependent on the country’s ports, which account for over 90 per cent of imports (CREDIT: WJRVISUALS/SHUTTERSTOCK).

Moody’s: Angolan Banks FAQ answers investors’ questions on correspondent banking pullback

In a new report Moody’s Investors Service answers investors’ questions about the credit implications for Angolan Banks, such as Banco Angolano de Investimentos, S.A. (BAI, BCA b3, LT local currency bank deposits B1, Negative), of the recent reduction in correspondent banking services.

In recent years, US-regulated banks have significantly reduced the level of dollar correspondent banking services they provide to other banks globally, due to stricter rules intended to prevent money laundering and the financing of terrorist activities.

This loss of dollar correspondent bank relationships has resulted in banks in Africa and other regions, experiencing difficulties in carrying out dollar transactions.

“Dollar correspondent banking relationships are vital to the Angolan banking system, given Angola’s dependence on international trade,” said Akintunde Majekodunmi, a Vice President at Moody’s. “Despite the efforts to reduce the level of dollarization in the domestic banking system, Angola will continue to rely heavily on correspondent banks for international transactions.”

Angolan authorities and banks are trying to address the compliance concerns of US regulators in order to restore dollar correspondent banking relationships, and some progress has been made.

Fundo Soberano de Angola (FSDEA), Angola’s sovereign wealth fund, announced its audited results for 2016, which reflect its positive fiscal position and investment activity for the year.

As of 31 December 2016, the FSDEA’s investment portfolio highlights are as follows: The FSDEA’s total assets increased to $4.99 billion from $4.75 billion in 2015; Fifty-eight per cent of the total portfolio was dedicated to assets in Sub-Saharan Africa, 10 per cent in North America, 12 per cent in Europe, and 20 per cent across the rest of the world; The Fund’s liquid investment portfolio posted a result of $22 million; Fixed income net investments were valued at $1.1 billion, representing 22 per cent of the total portfolio; Net variable income investments were valued at $695 million, representing 14 per cent of the total portfolio; Private equity investments increased by $0.26 billion since 2015; José Filomeno dos Santos, Chairman of the Board of Directors, FSDEA, stated, “The Fundo Soberano de has achieved financial profitability in less than three years of activity, despite the difficult international investment environment since 2013.

The capital gains of the FSDEA assets confirm unquestionable progress in the implementation of its investment policy drawn up by the n Government.

We are proud of the appreciation of private equity investments in the infrastructure and agriculture sectors, where important assets are predominantly in, such as Cabinda’s first deep-water port and large-scale farms. In 2016, these assets contributed significantly to the net results of the Fund.”

www.bankerafrica.com

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happenings

Payments, banking and fintech at Seamless East Africa

The event focused on the new and innovative trends shaping the banking and payments space

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his year Seamless East Africa was held at the Radisson Blu Hotel in Nairobi, Kenya, on 6-7 September. The conference saw attendance from domestic and international organisations, as well as high profile members from the banking, finance and fintech industry.

Opening the event was Jim Marous, Co-Publisher of the Digital Banking Report. Marous spoke about the changing way in which fintech is affecting lives. He spoke to how banks can begin to integrate themselves into people’s lives in the way in which other new technological innovations already have, and the need to engage in the technological revolution. “Many banks have the same core systems now as they did 40 years ago,” said Marous.

Specifically in regard to banks appealing to new diverse groups of people with digital technologies,

Marous said, “Most millennials are digital banking consumers, but not all digital consumers are millennial.”

The keynote address was followed by a CEO panel featuring Habil Olaka, CEO, Kenya Bankers Association, K. C. Li Kwong Wing, Group Chairman, SBM and Wilfred Musau, CEO, National Bank of Kenya. The rapid pace of change amongst banks constituted the first part of the discussion. Musau said, “It’s now a common conversation in boardrooms to talk about how we can change our business.”

Li brought the conversation first to the newly launched Mauritius Financial Centre stating that, “The Mauritius Financial Centre has a talent as a centre for finance in Africa,” before discussing SBM’s efforts to embrace cryptocurrency.

Li announced that SBM is looking to greatly expand the degree to which the bank will engage with cryptocurrency and the blockchain and said, “Cryptocurrency is a risk that needs to be taken.”

A panel held on the role of National Payment Switches was next on the agenda. Featuring specialists from

the payment switch sector, the panel covered how to help expand access to financial services and the way in which legacy core banking infrastructure needs to be re-evaluated.

In a panel held later on encouraging the adoption of blockchain technology, John Karanja, Founder, Bithub Africa, stated that, “Banks need to figure out a way to adapt to blockchain.”

Blockchain technology has the ability to revolutionise not only the way in which banks operate but also the speed and efficiency of banking offerings.

Open API was also a discussion for the day with Luke Kyohere, Founder & CEO, beyonis, tackling the subject of developing open mobile money APIs. Open APIs have been touted in the past as being the best way in which to promote a service for a wide range of uses across different services. Kyohere said that in order to create a successful Open API, three key criteria need to be met—accessible, available and well documented.

This is the fourth year in which the event took place and featured sponsorship

by Bluechain, BPC Banking Technologies and VISA, who were amongst the more than 40 exhibitors showcasing the latest in fintech innovation.

Most millennials are digital banking consumers, but not all digital consumers are millennial.

—Jim Marous, Co-Publisher, Digital Banking Report

www.bankerafrica.com

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KPMG SA executives resign Eight senior executives resign at KPMG South Africa as part of ongoing political scandal

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revor Hoole, CEO, Steven Louw, Chief Operating Officer, Chairperson Ahmed Jaffer and five other senior executives have resigned from KPMG SA following an internal investigation which found that the accounting firm had missed red flags in its auditing process of several companies owned by the influential Gupta family.

The events taking place at KPMG are part of an ongoing scandal in South Africa which have already triggered the collapse of the British PR firm Bell Pottinger and caused the consultancy firm McKinsey to launch an investigation into its own work in the country. The scandal is centred on ties between President Jacob Zuma and the billionaire Gupta family.

The resignation of executives at KPMG has been seen by some as a welcome development for corporate accountability South Africa. “KPMG executives have set a new South African benchmark: executives assuming responsibility for wrongdoing in their organisations. South Africans should thank the firm for setting a new standard with this decisive action,” said Jannie Rossouw, Head of School of Economic & Business Sciences, University of the Witwatersrand.

“Its executives have taken oversight responsibility for the action of others.”

KPMG has become an important piece of the ongoing Gupta scandal since leaked emails have shown that the accounting firm allowed a Guptaowned company, Linkway Trading, to file a Gupta family wedding in 2013 as a business expense.

The resignations are part of an internal investigation by KPMG into practices at its SA arm (CREDIT: LINE ØRSTAVIK/FLICKR).

Furthermore, the firm has also retracted a 2015 report which had been used by state investigators as part of an operation to try and discredit now ex-Finance Minister Pravin Gordhan, one of President Zuma, and the Guptas, strongest critics.

KPMG has since admitted in statements that it did not act fast enough to rein in the Gupta companies. Auditor firms and consultancies play the crucial role of holding companies and state entities to account, particularly in a country like South Africa which has received significant coverage for being an example of ‘state capture’ in progress.

The firm has also announced that the ZAR 40 million it had earned from auditing Gupta-owned companies

since 2002 will be donated to anticorruption charities. In addition, the ZAR 23 million it had earned from the 2015 report will also be paid back. The Financial Times reported KPMG as stating that it should, “no longer be relied upon.”

“There is no doubt that KPMG’s report on a rogue unit completed for the South African Revenue Service has damaged South Africa’s image,” continued Rossouw. “But it has done more than that and raises the question whether South Africa suffers only state capture, or whether the rot is growing into economic capture of the whole country, what I term ‘country capture’.”

Both President Zuma and the Guptas have denied allegations of corruption.

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Why the quest for a single currency for West Africa won’t materialise soon West African monetary unity is still some distance out, writes Tahiru Azaaviele Liedong, Assistant Professor of Strategy, University of Bath

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t’s been nearly two decades since the idea of a single currency for West Africa was first mooted. Yet the sub-region is still far from having a common legal tender. What is ordinarily a good idea seems to have fizzled into a fantasy.

Now, the story is that the single currency has been scheduled for 2020. But there is scepticism about the prospects of this coming to pass, especially at a time when economic blocks like the European Union are struggling.

The decision to create a single monetary zone for West Africa was reached by Heads of State of the 15 member countries at a summit of the Economic Community of West African States, the region’s economic commission, in Lome, Togo in 1999.

At the time, a currency union of Francophone West African States already existed to facilitate economic integration among countries which use the CFA Franc (courtesy of the Communauté Financière Africaine, or the African Financial Community) as their currency.

To speed up the macroeconomic convergence necessary for a single currency across the entire sub-region, six Anglophone Heads of State met in

The goal of a single monetary zone in West Africa has become an elusive one (CREDIT: DAMIAN PANKOWIEC/SHUTTERSTOCK).

Accra Ghana in 2000 and agreed to create a second monetary zone for the Anglophone countries, with the ultimate aim of merging with the Francophone countries. The aim was to create a single and harmonised monetary union for all of West Africa by 2004.

The implementation of that common currency for West Africa’s

Anglophone countries was postponed four times before finally being jettisoned, dimming the hopes of a single currency for the sub-region.

The convergence criteria the Economic Community of West African States set for its member countries seem to be the bane of the single currency project.

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While the criteria are essential, they are also very high bars to scale for the countries concerned.

THE HURDLES TO OVERCOME

To implement the single currency, the regional economic body set some conditions.

First, it requires all countries to achieve a single digit inflation of five per cent or less, which is a difficult task. In Ghana, data shows that the average yearly inflation between 2000 and 2016 was 16.92 per cent, which is far from a single digit. Nigeria, the largest economy in the region, recorded an average inflation of 11.92 per cent between 2003 and 2016, a rate which far exceeds five per cent.

Moreover, West African countries are net importers, even of food. Nigeria, for instance, spends $6.5 billion annually on food imports. This sad situation compounds the inflation problem, which is made even worse by the region’s unfavourable exchange rates.

Second, the regional economic body requires all member countries to achieve budget deficit to GDP ratios of four per cent or lower before the single currency is launched. In other words, budget shortfalls should be four per cent or less of the total market value of all goods and services produced in the respective member countries. It will take a miracle for this to happen by 2020, three years from now.

How can Ghana, whose total debt to GDP stood at 73.3 per cent in 2016, be expected to attain this ratio? How about Gambia whose public debt stood at 108 per cent of GDP in 2015? Even Nigeria, which has one of the lowest debt to GDP ratio in West Africa, is far from the milestone. Essentially, budget deficits have soared and governments will continue to borrow to finance public expenditure.

If the convergence criteria are not revised to reflect the real macroeconomic situation in the sub-region, the single currency dream will remain work-in-

progress for the unforeseeable future.

This is because economic growth in the sub-region is slow, poverty is rife and the fundamentals for integration are far from realisation.

IS A SINGLE CURRENCY EVEN NECESSARY?

A single currency could help address West Africa’s monetary problems, such as the lack of independence of central banks and non-convertibility of some currencies. Ultimately, a single currency and its associated regional institutions could also boost investor confidence and promote trade within the sub-region.

But sadly, Africa does not trade with itself. Overseas trade represents 80 per cent of total trade on the continent.

Trade between African countries accounts for a woeful 10 per cent, compared to 40 per cent and 60 per cent between North American and European countries respectively.

The story is not different for West Africa where trade between countries is extremely low. The sub-region’s largest partner, the EU, accounts for 37.8 per cent of total trade. Meanwhile Nigeria, which has the largest economy in the sub-region, exported only 2.3 per cent and imported less than 0.5 per cent from other West African countries in 2010.

Has the trend since changed? No. In the current circumstances, the necessity of a single currency is untenable if trade is the main motivation, except the regional commission is hoping West Africa will trade more with itself or attract more investors after the launch.

But that will not happen overnight.

Even the Francophone countries which have used CFA Franc as their common currency since 1945 record less than 16 per cent of intra-union trade.

LOSS OF MONETARY SOVEREIGNTY

Launching a single currency will also require creating and empowering

15

new regional institutions, such as the West African Central Bank, to manage or supervise monetary policy for the member countries.

The regional commission has made it clear that it’s committed to do what’s necessary to achieve its goal, but what remains to be tested is whether this commitment is real or rhetorical.

The search for wealth drives African politics. Hence it will be interesting to see how politicians react when they lose sovereignty over the management of one of the major things that draws them into politics—money.

Nigeria is expected to play a catalyst role in the single currency project, but it’s also one of the most corrupt countries in Africa. In fact, nine of the 15 member countries of the sub-region ranked between 101st and 168th in the 2016 corruption index, out of a total of 176 countries.

To some extent, a single currency and a regional central bank will reduce corruption in the individual countries.

The big question is, will the politicians’ greed allow this to happen? Even if the single currency is successfully implemented in 2020, spectators should not be surprised by any chaos or renunciation of earlier political pledges when the reality starts to kick in.

This article originally appeared on The Conversation Africa.

Tahiru Azaaviele Liedong is an Assistant Professor of Strategy and International Business at University of Bath School of Management. His research focuses on business-government relations, corporate governance, strategy and international business. His work has appeared in British Journal of Management, Journal of World Business, Group & Organization Management and Academy of Management Best Paper Proceedings.

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Why African banks are losing the fraud war—and what they can do about it William Lawrence, Regional Practice Lead: Fraud and Financial Crimes at SAS, discusses how African banks can begin to tackle their fraud problem

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frican banks are under increasing scrutiny from both regulators and the public as internal and external fraud continues to tarnish the industry’s reputation. In some instances, most notably in Kenya, rampant and unchecked internal fraud has resulted in banks being shut down or placed in receivership.

There are two parts to this problem.

DIGITAL DISRUPTION

First, banks are struggling to keep pace with the rapid changes and innovations in payments technology and the additional risks these introduce.

New digital products and payment methodologies, including mobile payment apps, digital wallets, nearfield communication technology and contactless point-of-sale systems, introduce a paradigm shift in terms of the customer experience. Customers want to use these technologies securely and seamlessly and they expect their banks to facilitate that experience through instant money transfers and new ways for them to interact with their accounts.

Yet, this has presented new opportunities and network entry points

for fraudsters, as well as fresh security challenges for banks.

ROGUE EMPLOYEES

Second, internal fraud, often perpetuated by top and middle management, can go undetected for months or even years, as was the case with Imperial Bank in Kenya, where 27 lenders have either collapsed or been put under receivership. Typically, top management has the ability to circumvent checks and balances within banks and can coerce junior staff into processing transactions that they normally would not process.

In most cases, there is an overlap between internal and external fraud that involves collaboration between bank employees and external players.

For example, bank staff are able to identify high-wealth customers that may be susceptible to phishing attacks and can pass their contact information on to fraud syndicates.

One reason why banks aren’t detecting and preventing this type of collusion is that they still operate in siloes—and digital technologies are adding even more siloes. But more on that later.

William Lawrence

UNCHECKED FRAUD

First, in order to address the fraud problem among African banks, we need to understand the extent of that problem.

Let’s break it down by country.

In South Africa: PwC found that 39 per cent of fraud being perpetrated by internal actors emerged from middle management and that fraud committed by senior management is the hardest to detect because of the control, power and influence people in these positions hold.

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he South African Banking Risk T Information Centre reported that credit and debit card fraud is costing the country more than ZAR 600 million a year and that credit card fraud increased 13 per cent between 2015 and 2016.

In Kenya: The same PwC report found that bribery, corruption and procurement fraud were among the most prevalent forms of economic crimes in the country and that cybercrime is becoming a bigger threat as organisations try to adapt to the new digital world.

In Kenya, 61 per cent of respondents reported having suffered an economic crime in the past two years.

In Nigeria: In 2015, electronic fraud in the Nigerian banking sector accounted for 16 per cent of total fraud in the industry and has been identified as a hurdle to the adoption of cashless technologies in the country.

Between 2010 and 2015, ATM card fraud increased by a staggering 82 per cent although actual fraud loss decreased by three per cent.

Clearly, fraud is a pandemic and regulators are introducing stricter legislation to compel banks to address and prevent fraud.

BALANCING ACT

To do this, banks need to revisit their systems and processes to better detect and prevent fraudulent activity across the value chain. But how do they manage fraud and compliance risk while at the same time providing a great customer experience? And how do they find the overlap between internal and external fraud?

One thing is certain: current piecemeal systems are no longer fit for purpose. Banks still operate across siloed systems that don’t share

information and that act on transactions or customers in isolation. In this model, fraud and anti-money laundering are treated as unconnected issues because data is siloed across products, channels and geographies, which allows the fraudulent activity to go undetected.

Banks must take a holistic approach to fraud and risk management and develop a fraud technology strategy that begins by reducing the threat of fraud when the customer first establishes an account and continues all the way through to the moment an online transaction is approved. This real-time approach covers account opening, transaction monitoring and network analysis (uncovering links between internal and external fraudsters), supported by rules and models that are driven by advanced data analytics.

REACTIVE TO PROACTIVE

With fraudsters capable of circumventing banks’ existing authentication systems, the need for sophisticated analytics technology that enables investigators to take proactive action to eliminate online fraud at the source is becoming ever more crucial.

Capabilities embedded in the solutions, like electronic know your customer (KYC), identification and verification, and the capture of biometric data make subsequent authentication easier.

This end-to-end approach not only allows banks to implement a robust detection and prevention layer but also takes it a step further, to develop exploratory environments to create fraud alerts across multiple detection systems and platforms, including payments fraud, applications fraud, account takeover, bust out fraud and internal fraud.

SAFETY NET

The good news is that banks don’t need to rip and replace their existing infrastructure to bring disparate alerts

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and outputs from various detection systems into a single environment.

Solutions like the SAS Financial Crime Intelligence Unit (FCIU) act as a safety net underneath these systems, detecting issues that isolated systems may have missed, effectively providing a second line of defence. FCIU helps establish where there are siloed risks and to determine if there are emerging risks and trends, which can be combatted using visual techniques to build rules and scenarios.

Traditional authentication systems that provide unambiguous identification of users through things like usernames, bank codes and passwords are no longer sufficient in a digital world where cybercriminals are innovating faster than banks.

Banks must take a more sophisticated approach to online fraud detection and be in a state of constant readiness through careful data monitoring and management. Banks need to be able to link together a wide range of different data types, including financial account details, computer IP addresses and information about devices and usage patterns.

Advanced analytics solutions also support anomaly detection to determine new potential areas of fraud by examining current behaviours and to identify suspicious behaviours. Using this hybrid of analytics methods, banks can detect fraud cases early and accurately by allowing users to quickly and easily drill down to explore areas of risk not previously considered.

Ultimately, in this complex, fastmoving environment, hybrid analytics enables banks to not only understand today’s challenges and implement technology to address them, but also to deliver the necessary flexibility to enable banks to evolve and adapt to counteract the ever-changing approaches and behaviours of the threat.

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(CREDIT: KEVIN SHINE/SHUTTERSTOCK).

Outlook continues to be bleak for SA banks In a new report, Moody’s Investors Service has maintained its negative view of the South African banking system and provided some insight on the sector for the next 12 to 18 months

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n a research note released this month the agency stated that it plans to continue its negative outlook for the South African banking system. This decision was a reflection of Moody’s belief that the creditworthiness will remain under pressure over the next 12 to 18 months, with the main reason for this being attributed to weak operating conditions.

Moody’s expects that reduced investor and consumer confidence to lead to sluggish economic growth for South Africa. The agency noted that in particular the relatively volatile and unpredictable domestic political context is a cause of constraint on economic growth. Real gross domestic product (GDP) growth for 2017 is predicted at merely 0.5 per cent, with 1.2 per cent predicted in 2018. This is significantly lower than the Government’s own growth target of 5.4 per cent.

“Our negative outlook for South Africa’s banking system is mainly due to the weak operating conditions, which will challenge banks’ loan quality and profitability,” said Nondas Nicolaides, a Moody’s Vice President—Senior Credit Officer and co-author of the report.

“Low economic growth will weaken banks’ loan quality and profitability.”

Banks’ credit risk profiles are also expected to increase according to the ratings agency. Non-performing loans (NPLs) are set to rise to 3.5 per cent of total loans by the end of 2018, up from 2.9 per cent as of December 2016. One upside that can be considered a buffer against asset quality deterioration are the solid capital metrics reported

by South African banks, however, with capital buffers remain well above regulatory minimums. Moody’s predicts in its central scenario that capital buffers will remain resilient and protected by profits, but temper this with observations that capitalisation could weaken significantly more than peers under its severe stress test analysis.

Furthermore, from a funding perspective, institutional short-term deposits represent a significant percentage. As such, Moody’s argues that this will make achieving Basel III’s net stable funding ratio (NSFR) in 2018 a challenge. The agency does add, however, that banks have been able to build good liquidity buffers in recent years. In addition, the limited use of

foreign-currency funding by banks is a further positive development, and supports the resilience of banks’ funding profile.

The ongoing economic environment is likely to have an impact on profitability. A lack of business opportunities and growing loan-loss provisions will have an impact on banks’ revenues. Net interest margins will also come under pressure due to lower interest rates. Moody’s expects that banks’ return on assets will sit around one per cent in 2017-2018, down from 1.3 per cent in May 2017.

Finally, the agency adds that Government support will likely remain stable and that there will not be a rating uplift. A formal bank resolution framework which is due to be in place within the next 12 months may have an impact on ratings, however. Moody’s states that once the resolution regime is operational the agency may consider applying its advanced loss given failure (LGF) analysis to all of the rated South African banks, which may lead to rating uplift to deposit and senior debt ratings from baseline credit assessments of said banks.

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Uncertainty reigns Amidst the current developing political situation, this month we turn our eyes to Kenya, a country which has positioned itself as the commercial centre for East Africa has had a challenging year

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(CREDIT: FEDELE FERRARA/SHUTTERSTOCK)

here has not been more apt a time to examine the economic landscape of a country for this regular feature than in this month’s Kenya Country Focus. At the time of writing the presidential election held in August this year, Kenya’s most expensive in history, has been annulled by the country’s Supreme Court, and plans are underway to hold a re-run in mid-October—an unprecedented move in Kenyan politics which we have covered in more detail earlier in this issue. Elections in any country have always caused a degree of uncertainty in markets, so we shall endeavour to take stock of where the country stands from an economic perspective with this in mind.

The unexpected decision by the Supreme Court caused financial markets to drop. Trading was briefly suspended on the Nairobi Stock Exchange 20 Share Index, which

comprises the country’s most traded stocks, whilst more than five per cent in value was wiped off amidst panic selling. The situation has continued to deteriorate, with the US issuing a travel ban over possible electionrelated violence in the face of the upcoming re-run.

An ongoing drought has been plaguing the country since the beginning of 2017. This has exacerbated a range of social issues, in addition to adversely affecting economic activity in the East African nation. In testament to its severity the United Nations along with its humanitarian partners in early September set up an appeal for $106 million to step up relief efforts. The agricultural sector has been hard-hit by this drought, which has only served to compound the country’s unemployment problems, as well as add pressure on government to shore the country up against further natural disasters.

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The drought has also resulted in a lower-than-expected revenue growth for Kenya, according to Fitch Ratings.

The agency predicted earlier this year that this has contributed to a growing deficit, with Fitch estimating the FY17 deficit at 7.1 per cent. Kenya’s FY17/18 budget signalled plans to shrink the deficit to six per cent of GDP and support public debt sustainability.

Overall, the Government forecasts shrinking the deficit to four per cent of GDP in FY20, with the FY18 budget aiming to cut the deficit chiefly by reducting expenditures to 26 per cent of GDP, from an estimated 28 per cent in FY17, according to Fitch Ratings.

Gross domestic product (GDP) growth is set slow to 4.8 per cent this year, down from 5.8 per cent last year, according to FocusEconomics consensus panel in its FocusEconomics Consensus Forecast Sub-Saharan Africa—October 2017. Fitch Ratings pointed to slower credit growth and uncertainty due to elections this year as two key factors for slower growth.

Q1 results show that the economy slowed to a growth rate of 4.7 per cent, down from 6.1 per cent in Q4 2016. Indeed, earlier this year the IMF announced that Kenya had been overtaken by its neighbour Ethiopia as the largest economy in East Africa. In addition, Kenya’s rapid GDP growth in recent years has been maintained by high levels of public sector investment but the FY18 budget has suggested that this support will begin to slacken.

BUSINESS SLUMPS

Support for continued high levels of growth will now have to be found elsewhere, with private sector-led growth being the most important. In this regard, an improving business environment has proven positive for continued growth. However, continued political problems will slow the chances at recovery and growth as social unrest

is likely to linger. Further contested results following the October re-run would prove to be “calamitous for the economy”, according to Nihad Ahmed, Economist at FocusEconomics.

The composite Purchasing Managers’ Index (PMI), produced by IHS Markit and Stanbic Bank, has fallen to an alltime low following the contested election in last month. The survey recorded a record low in August of 42.0 (a figure below 50 represents contraction in purchasing demand, with a figure above representing the reverse).

This figure represents a dramatic fall from July’s record of 48.1.

FocusEconomics in its Consensus Forecast Sub-Saharan Africa—October 2017 suggests that this decline in plunging business activity due to a slump in domestic and international demand, with new orders dropping for the first time in the history of the survey. Again, ongoing political issues are the main culprit here, with uncertainty weighing heavily on the

21

economy causing high inflation which has weakened citizen’s purchasing power and reduced demand.

Furthermore, in response to this firms have reduced new hires and cut employees, resulting in a drop in employment for the first time in the survey’s history.

INFLATIONARY WOES

Inflation rose month-on-month in August to eight per cent, up from 7.5 per cent in July, moving inflation once more to outside the target range set by the Central Bank.

Indeed, the July figure itself was an outlier for this year, being the first time in six months that inflation has not exceeded the Central Bank’s upper limits.

Annual average inflation reached 8.4 per cent in August, a four-year high.

The drought was one causal factor for this, with prices in key staple foods increasing significantly earlier in the year with a reduced supply—with inflation peaking in 11.7 per cent in May. FocusEconomics Consensus panel

AFDB TO FINANCE KENYA-UGANDAN ROAD The African Development Bank Group (AfDB) earlier this year approved $253 million of loans to the Governments of Kenya ($147.3 million) and Uganda ($105.7 million) for the upgrading of 118 kilometre (km) road section connecting the two countries as well as the construction of the 32km Eldoret town bypass, in Kenya.

The 118km road, which will connect Kapchorwa in Uganda to Kitale in Kenya, will provide an all-year-round access point for citizens, farmers and trade. The project also includes a construction of a One Stop Border Post in Suam to facilitate trade between the two countries, travellers and transport operators.

The upgrading of the road will reduce the travel time in Uganda (KapchorwaSuam) from four hours to 1.5 hours and in Kenya (Suam-Kitale) from 1.5 hours to 45 minutes.

“The proposed intervention is also in line with the Bank’s Ten Year Strategy and meets four of the High Fives by contributing to the integration of the EAC countries; improving the quality of life by providing socio-economic facilities to people in the zone of influence; increasing agricultural production through access to markets and the reduction transport cost, which lowers the cost of doing business that will play pivotal role in industrialisation,” said Amadou Oumarou, Director of the Infrastructure, Cities and Urban Development Department of the Bank. cont. on page 23

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22

KENYA

by the numbers PRIMARY MARKETS I SHARE IN %

POPULATION

GDP GROWTH 10% 8%

46.73

6%

million

4%

EXPORTS

2% 0%

Source: IMF World Economic Outlook Database (April 2017) – estimated

LONG-TERM TRENDS I 3-year averages Population (million)

2013-15

2016-18

2019-21

43.0

46.7

50.7

60

78.1

99.8

1.394

1,670

1,966

5.7

5.4

5.8

GDP (USD bn) GDP per capita (USD) GDP growth (%)

-7.8

-7.0

-4.5

46.9

54.1

53.7

6.4

7.5

5.9

Fiscal Balance (% of GDP) Public Debt (% of GDP): Inflation (%): Current Account (% of GDP):

-8.2

-5.6

-5.3

External Debt (% of GDP):

27.4

29.8

30.5

Source: FocusEconomics Consensus Forecast Sub-Saharan Africa–September 2017

USA 7.9% Other EU-28 7.9% Netherlands 7.0% UK 5.7% Asia ex-Japan 9.8% MENA 11.1%

Other SSA 6.4% Uganda 10.7% Tanzania 7.7% Zambia 5.8% Other 20.1%

IMPORTS

100

EU-28 12.5% Other Asia ex-Japan 8.5% China 30.0% India 15.5%

Other MENA 8.6% United Arab Emirates 5.7% SubSaharan Africa 5.6% Other 13.6%

GDP by Expenditure I share in %

2007-09 2010-12 2013-15

120

Net Exports

90

Source: Africa Economic Outlook 2017

EASE OF PAYING TAXES

% 37.4 total tax rate

Manufacturing

60

40

Other Industry

30

Government Consumption

20

Services

0

Private Consumption

-30

Source: FocusEconomics Consensus Forecast Sub-Saharan Africa-September 2017

Source: PwC Paying Taxes 2017 analysis

Investments

60

0

Projected in 2018

2007-09 2010-12 2013-15

Agriculture

80

Projected in 2017

Ranked 125 out of 189

ECONOMIC STRUCTURE GDP by Sector I share in %

6.1% 6.5%

COMPETITIVENESS Ranked 96 overall

Ranked 36 for innovation

out of 138 Source: Global Competitiveness Report 2016-2017/ World Economic Forum

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cont. from page 21

for October estimates that inflation for 2017 to average at 9.4 per cent, and 6.5 per cent for 2018.

Despite inflation remaining outside of the Central Bank’s limit of 7.5 per cent for much of the year, the Bank has held the main policy rate steady at 10 per cent, as of its 18 September monetary policy meeting. This fell in line with market expectations and was motivated with expectations that food supplies would improve and reduce inflationary pressure.

Following an IMF staff visit earlier this year, Benedict Clements, who led the visiting team, said, “The authorities reiterated their commitment to macroeconomic policies that would maintain public debt on a sustainable path, contain inflation within the target range, and preserve external stability.

To that end, the IMF staff team urged the authorities to achieve the fiscal deficit target envisaged under the programme

OUR NUMBERS Banker Africa’s analysis of the top banks in Kenya has revealed some interesting results. In this chart we rank the ‘Best Banks’ in Kenya. This ranking is based upon two primary factors of equal weight—dollar growth year-onyear and overall size of the bank.

BEST BANKS RANK

BANK

1

Kenya Commercial Bank Kenya

2

Equity Bank Kenya

3

Diamond Trust Bank Kenya

4

Co-operative Bank of Kenya

5

I&M Bank

6

Barclays Bank Kenya

7

Guaranty Trust Bank Kenya

8

CFC Stanbic Bank Kenya

9

African Banking Corporation

10

Credit Bank

INFLATION I CONSUMER PRICE INDEX 2.0

15.0

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

1.0

12.0

0.0

9.0

% -1.0

% 6.0

-2.0

Aug-15

Feb-15

Aug-16

Feb-16

3.0 Aug-17

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

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

for 2016/17,which accommodates a substantial increase in foreign-financed public investment.”

A CAP ON GROWTH?

The Kenyan banking sector has been experiencing significant slowdown this year following the introduction in September 2016 of a lending rate cap four per cent above the Central Bank’s rate, currently at 10 per cent.

The intention by authorities was bring down the cost of credit for private businesses and individuals, thus promoting financial inclusion.

However, the cap has led to a slowdown in credit as banks have been unable to properly price risk and have become reluctant to lend, leading to a tightening of underwriting standards.

Banks have in general become more selective about to whom it will grant long-term credit to, as well as finance riskier emerging industries. This provides an additional hazard for the Kenyan economic outlook as continued growth is often financed by bank lending and private sector credit growth. Fitch Ratings note that these sectors, which have flattened since 2015, have further slowed since the rate cap.

Overall, pessimism colours the outlook for banking growth for the rest of 2017. Mahin Dissanayake, Country

Our outlook for the [banking] sector in 2017 is negative, as banks grapple with macro risks and government intervention to reduce loan rates.

—Mahin Dissanayake, Country Director for Kenyan banks, Fitch Ratings Director for Kenyan banks, Fitch Ratings said, “Our outlook for the sector in 2017 is negative, as banks grapple with macro risks and government intervention to reduce loan rates.”

In private conversations, some banks have suggested that the cap has meant that methods of on-boarding more customers are being explored in order to offset the impact of lower interest rates. Time will tell how successful these initiatives are, and whether banks will be able to reach these previously unbanked customers cont. overleaf

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cont. from page 23

The Central Bank of Kenya has held steady with interest rates so far throughout 2017 (CREDIT: SANDRA VAN DER STEEN/SHUTTERSTOCK).

in a now more competitive environment amongst telecommunication and fintech providers.

Some positivity can be seen in the overall regulation. The Kenyan Central Bank has previously demonstrated a willingness to intervene and resolve weak banks, and it is unlikely that this trend will subside.

FOREIGN INVESTMENT

Key destinations in investment have traditionally been in five major areas, the first of which is infrastructure and construction. Traditionally the Government has been a leader in this area, with major investments being made in transportation links, although this does represent an area for expansion to foreign investors should the Government decide to slow down the rate of expansion.

Secondly, the agricultural industry has been a target. Traditionally the sector has constituted a significant portion

10%

Benchmark Interest Rate

13.1

%

Bond yield (19 Sept)

of revenue generated in Kenya. As a contributor to GDP, both tea and coffee, the country’s two most widely grown crops, are both significantly important.

Finance and information, communications and technology (ICT) investment has also been an important

destination for investment. Kenya has an excellent track record with financial innovation, which has often been twinned with advancements in the technology space. The ICT Authority, sponsored by the Kenyan Government, specifically has the mandate to increase investment in the ICT realm.

Finally, energy investment has been a rising target for investment.

Recent discoveries of profitable oil and gas reserves in Kenya has raised awareness about the potential for this sector and increased the focus on further exploration.

In Clyde & Co’s Africa Investment Guide 2017, the firm points to the traditionally positive view that investors have had of Kenya as a focal point for trade and investment in East Africa, in addition to its status as an entry point into the regional marketplace. Important investments in infrastructure and transportation links in particular, have helped to secure the

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country as a regional commercial hub.

However, the political situation has caused major upset in this thinking.

Policy-makers should aim for the rest of 2017 to try and rebuild the goodwill and status of Kenya as a destination for investment through providing the stability that the country has lost since the August elections.

PURCHASING MANAGERS’ INDEX 60

55

50

UNCERTAINTY REINS 45

40 Aug-15

Feb-15

Aug-16

Feb-17

Aug-17

Note: Stanbic Bank Purchasing Managers’ Index. Readings above 50 indicate an expansion in business conditions while readings below 50 point to a contraction.

Source: Markit and Stanbic Bank.

MOODY’S: KENYA’S RATED BANKS FACE CHALLENGING CONDITIONS In a research report last month, Moody’s Investors Service argued that although Kenyan banks will continue to face challenges in the months ahead, with muted loan growth and mounting asset quality pressure, the ratings agency expects the country’s three largest banks to maintain healthy profits and strong capital buffers which provide substantial protection against downside risks and help support the bank’s credit quality. All three banks carry long-term local currency deposit ratings of B1 with a stable outlook on the global scale, whereas Moody’s has introduced some differentiation on the national scale rating, with Equity Bank at Aa1.ke and Co-Op Bank at Aa2.ke.

The report undertook a peer analysis of the three largest banks in Kenya, Equity Bank Kenya, Co-operative Bank of Kenya, and KCB Bank Kenya. In the report, Moody’s pointed to the drought that has hit the country as a driver for increased food and fuel prices, in addition to a muted investor sentiment in the face of this year’s elections. This environment has proven challenging for the three largest banks in Kenya, Moody’s added.

“The Kenyan banking system is experiencing a patch of low credit growth and mounting asset quality pressure,” said Christos Theofilou, an Associate Vice President at Moody’s. “Lending rate caps at 14 per cent have exacerbated a slowdown in credit growth that began early last year, after banks tightened lending criteria in response to a spike in nonperforming loans.”

Overall, however, Moody’s expects that despite the differing business models of the three banks, it expects them all to maintain healthy profits and strong capital, unlike tier two banks. This will provide a buffer against downside risks and will act as a contributing factor in supporting credit quality.

The agency also commentated that profitability at these three banks is among the highest amongst peers. KCB, Equity Bank and Co-Op Bank will also be supported by their substantial capital buffers which will help overall solvency and ensures some ability to withstand unexpected losses.

Overall, the economic future for Kenya lies with uncertainty. The main drags on economic progress throughout 2017, such as the drought, and the cost of running a second election, are unlikely to be repeated in 2018. This will give the future Government an opportunity to continue a policy of balancing the budget and bringing the escalated debt burden into line. Furthermore, attempts will need to be made to improve the unemployment situation in order to engender sustainable growth.

However, the surprising move by the Supreme Court to annul the August election will have far reaching consequences. Uncertainty in the stability of the Kenyan economic and political landscape will need to be resolved before a return to growth can be certain.

Current economic issues have been set aside for too long as political uncertainty and instability has continued to thrive. This has meant the return of Kenya to the growth years of its recent history has been deferred, making solving the current issues of the political and economic climate that much more pressing.

Care must also be taken to ensure that economic growth is allowed to thrive. Controls put on the banking sector have so far been proven to stifle access to credit. This issue will need to be resolved by the incoming Government with either a removal or, more likely, a reassessment of the policy.

www.bankerafrica.com

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inclusion

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Emirates NBD Egypt’s next strategic step: tapping into financial inclusion as a market segment Frederic de Melker, Head of Retail Banking and Wealth Management for Emirates NBD Egypt shares his views on how the bank continues tapping into Egypt’s majority unbanked population

Frederic de Melker

T

he journey for Emirates NBD Egypt’s Retail Banking arm since setting out in 2013 has been a successful one.

After acquiring a bank with a basic retail proposition, we transformed it into a dynamic enterprise where client focus, employee satisfaction, product innovation and digital advancement formed our main ingredients for success.

Early on, we focused on getting the fundamentals right. That meant appropriate customer segmentation and introducing basic digital capabilities like online and mobile banking platforms. Although such digital channels are commonplace in developed markets, we knew that in Egypt, like many other emerging markets, they were considered the new frontier of banking.

Following this, we set our sights on tapping into Egypt’s majority unbanked population through financial inclusion. This is a largely unexplored aspect of banking in Egypt and its neighbouring countries but where great opportunity awaits. For us as a bank, it was important for our growth aspirations but it also formed part of our commitment to social responsibility.

For Egyptian citizens, financial inclusion empowers them to participate in the formal economy and specifically, the formal job markets. Citizens can better mobilise their savings, set up businesses and create further

educational opportunities for their children. Through this, individuals and communities can enhance their welfare standards, both now and for future generations. Cumulatively, this helps ensure nations like Egypt can accelerate their transition from an informal to a formal economy.

The central question then is whether Egypt has the volumes for this to be a successful venture for a bank and current market data shows this is the case. According to the World Bank’s Little Data Book on Financial Inclusion, savings at financial institutions in Egypt accounted for only 4.1 per cent of the population aged over 15 in 2015, with a further 11.8 per cent of this group putting their money into an informal savings club. Additionally, only 6.3 per cent of citizens had a bank loan, with 21.5 per cent of citizens borrowing from family and friends.

Compared to Egypt’s population of nearly 100 million, it reveals the staggering opportunities but which also need to be weighed carefully against

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inclusion

the challenges of capturing Egypt’s unbanked population.

For us, these challenges focused on the themes of ‘relevance’ and ‘reach’. Starting with relevance, we knew we had to find a way of making Emirates NBD important in the eyes of our prospective clients. This was not necessarily easy given that for many Egyptians, paying for transactions in cash is still perceived as the only credible method of payment and this forms part of the DNA of local communities. With an unwillingness to give up the tangibility of real cash, it means banks are not perceived as critical pillars of society and in turn, we needed to effectively ‘create’ demand for our services.

Such demand in turn, requires ‘reach’ but which is also challenging given building an extensive branch network is costly in a large country like Egypt. Instead, our answer was found in the digital technology mentioned earlier, including mobile and online banking channels, as well as ATM and Interactive Teller Machine technology, as just a few examples.

Is Egypt ready for a full digital banking transformation? With any wide-scale digital shift, mobile phone usage is an important factor and recent data from the Egyptian Ministry of Communication and IT indicates that Egypt is in fact, digitally-ready with mobile phone penetration exceeding 100 per cent. Whilst 30 per cent of Egyptians are connected to the internet, the rate of new mobile internet users is also growing 18 per cent annually and that will now accelerate with Egypt’s growing 4G internet capabilities.

To address the challenges of ‘reach,’ we knew it was important to align ourselves culturally with our future clients. We built a portfolio of over 100,000 governmental salary card employees who started receiving their wages electronically.

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Emirates NBD Egypt has formed a strategic long-term partnership with FC Barcelona as a key part of its financial inclusion agenda.

Through this, we could understand and better predict the collective behaviours of these clients after switching from cash wages, explore new sales and service channels, and develop new products.

Thirdly, building partnerships was also critical in expanding our reach across Egypt. One example was with a bill-payment agent with branches and kiosks across the country, whilst another partnership was formed with a leading telecommunications company.

All had the underlying goal of aligning our services and creating additional reach for both them and us.

We have also used partnerships to address the issue of ‘relevance,’ including forging a long-term partnership with Spanish football club FC Barcelona. We knew sport and specifically football represented something of value and interest to the local community in Egypt, and that partnering with such a popular club would immediately get the attention of our prospective client-base.

We will shortly launch a co-branded card with FC Barcelona, enabling our clients to get a foothold in the formal

banking sector with a product that meets their financial needs, and with benefits like fan-club membership expanding as the card is increasingly used. By linking the membership card to our mobile application, clients can see their balances, and take advantage of other savings and loans products within a wallet. We also plan to support our clients to better manage their wealth through a mobile tool that helps them achieve their short and long-term financial decision-making.

Today, we continue reviewing new partnership opportunities and platforms so our clients’ wealth is within personal reach at all times and to maintain our relevance. Because this partnerships approach is more reminiscent of a fintec organisation and many aspects of our strategy to penetrate Egypt’s unbanked population are new, ongoing dialogue with our regulators has also proven critical. This ensures we can continue introducing new ways of banking without any loss of regulatory control for them, whilst we are also watching closely as Egypt’s regulatory framework continues evolving in this new digital banking era.

www.bankerafrica.com

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islamic

banking

Nigeria – an Islamic opportunity?

Nigeria represents a new opportunity for Islamic finance, says Mark Hucker, Managing Director, VG

T

he IMF Working Paper An Overview of Islamic Finance (July 2015) concluded that “…Nearly 20 per cent annual growth of Islamic finance in recent years seems to point to its resilience and broad appeal, partly owing to principles that govern Islamic financial activities, including equity, participation and ownership”.

However, that growth has been focused up until now in a relatively small number of countries where the sector has reached systemic importance (defined by the Islamic Financial Services Board (IFSB) as when Islamic banking assets comprise more than 15 per cent of total banking sector assets).

So what will fuel the next phase of growth in Islamic finance and which countries offer the greatest opportunity? Of course demographics will be a key factor—many countries with a large Muslim population have only a small and relatively informal Islamic finance sector and therefore have the potential to grow in scale and sophistication. But equally economic growth and financial participation will be critical as these populations become savers, investors and entrepreneurs. Opportunity should ultimately drive availability!

Nigeria certainly passes the population ‘test’—it is the most cont. on page 30

Mark Hucker

www.bankerafrica.com

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BANK OF THE FUTURE Owned by some 18,000 domestic and international shareholders, with over 500,000 customers, SBM Holdings Ltd is a leading financial holding company listed on the Stock Exchange of Mauritius. Besides Mauritius, SBM Group is present in Madagascar and Kenya. The Group also has offices in India, which will become a wholly owned subsidiary in the near future, and a representative office in Myanmar. SBM Group is also expanding into the region mainly in the Indian Ocean and East Africa. In line with its expansion plans, the Group has recently been granted a banking licence in Seychelles subject to conditions which it has undertaken to fulfil. Its portfolio of services covers banking, nonbanking financial services and non-financial investments. Innovation, flexibility, accessibility and reliability are at the root of the SBM reputation and brand.

Established in 1973 as its banking entity in Mauritius, SBM Bank (Mauritius) Ltd is the Group’s flagship. With a domestic market share of over 30%, the Bank delivers solutions for its diverse customer base: Consumer, SME, Corporate, International and Financial Institutions.

SBM’s major products and services are: • Global Business & International Banking • Investment Solutions • Treasury Services • Cross Border Financing • E-commerce • Trade Finance • Wealth Management • Investment Banking To tap the potential of emerging markets, the Group is gearing up for further expansion plans in the East African, Indian and Asian regions, thus further strengthening the existing continental links with Mauritius.

T: (230) 202 1111 E: sbm@sbmgroup.mu www.sbmgroup.mu

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cont. on page 28

populous country in Africa, with 186 million inhabitants in 2016 (according to official statistics) and also one of the fastest growing in terms of demographics (+52 per cent since 2000), according to the World Development Indicators database.

Of these, an estimated 50 per cent are Muslims, or close to 100 million people. Although the possibility of banks established on Islamic principles was provided for as early as 1991, they only became a reality in 2012 while other Islamic offerings such as Sukuk (Islamic bonds) and Takaful (Islamic insurance) have been slow to gain traction (more information can be found in Legal Framework Regulating Islamic Finance in Nigeria: A Critical Appraisal of Hurdles against the Effective Shari‘ah Governance (A Critical Appraisal) by Magaji Chiroma, Aishatu Kyari Sandabe, Mohammad Asmadi Abdullah, Abdul Haseeb Ansari).

In terms of economics, Nigeria also ticks most of the boxes. It overtook South Africa in 2014 to become the continent’s largest economy by GDP and is second only to Saudi Arabia in terms of Organisation of Islamic Cooperation (OIC) members on the same basis.

Perhaps even more importantly, Gross National Income (GNI) per capita grew by 196 per cent between 2000 and 2016 or almost four times as fast as the population itself according to the World Development Indicators database.

Although some of the momentum was jeopardised by weak commodities’ markets and particularly the fall in the price of oil in 2016, the World Bank has projected that the country is expected to return to growth in 2018/19.

So what are the challenges and barriers to growth in the Islamic finance sector in Nigeria? The authors of A Critical Appraisal identify the lack of a distinct legal framework, the

reliance for ultimate supervision on the secular Central Bank of Nigeria (CBN) and a proliferation of independent Shari’ah advisory boards at financial institutions. However, GCC countries (and others) have grown rapidly despite continuing to struggle with similar challenges around consistency and central regulation. Some of these challenges are being tackled by the

Ranked

136th 176 out of

in Transparency International’s Corruption Perception Index in 2016

Rated

169 190

th

out of

in the World Bank’s Doing Business 2017 Report

work of international standards bodies (such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)).

Perhaps greater barriers from an international perspective stem from fears of corruption and the perceived difficulty of doing business in the

country. Although the President, General Muhammadu Buhari has pledged to fight corruption, there is a long road to travel—Nigeria ranked 136th out of 176 in Transparency International’s Corruption Perception Index in 2016 and was rated 169th out of 190 in the World Bank’s Doing Business 2017 Report.

These challenges add significantly to the cost and risks of doing business in the country.

Ultimately, the size of the opportunity, and specifically the Islamic opportunity, should drive the right answers for Nigeria and foreign investors. As political, economic and regulatory structures mature, the barriers to entry should decline and success should breed success (in the same way that crisis and corruption were self-fulfilling prophecies across the continent for many years). The OECD estimates growth in GDP for the continent forecast to average five per cent per annum to 2040. Capital Economics has estimated than an $85 trillion required in cumulative inward investment over the same period there is considerable space for Islamic and conventional financial services.

Jersey committed itself to working with Africa through Jersey Finance’s report Jersey’s Value to Africa—the role for international financial centres in delivering sustainable growth in developing countries published in November 2014 and VG believes that Islamic financial solutions to support inward and outward investment (to and from Nigeria) will be a key part of that partnership.

Mark Hucker is the Managing Director of the VG, a financial management company based in Jersey with a specialisation in Islamic finance.

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Channeling Data Streams for Competitive Advantage How SASÂŽ Event Stream Processing Is Driving Innovation and Solving Complex Challenges Today, data is constantly flowing in and out of organizations from electrical and mechanical sensors, RFID tags, smart meters, scanners, mobile devices, vehicles, live social media, machines and other objects.

As more devices, machines and industrial assets connect and communicate real-time data, ecosystems connecting businesses will harness this data to radically change the way they function and act.

Now is the time to take the leap and harness your streaming data to drive your business Forward.

Read more. www.sas.com/za/cds SAS and all other SAS Institute Inc. product or service names are registered trademarks or trademarks of SAS Institute Inc. in the USA and other countries. ÂŽ indicates USA registration.

Other brand and product names are trademarks of their respective companies. Š 2017 SAS Institute Inc. All rights reserved. G28381US.0317

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Islamic investing In an exclusive interview with Banker Africa, Zeinab Hashim, CEO & Managing Director, ADIB Capital highlights the firm’s successes and her experience of working in the Shari’ah compliant banking space

B

efore joining ADIB Capital what were your previous roles in this industry? And how has your education contributed to your success?

That is a very interesting question because my early education was actually science-oriented with a Master’s of Science in solid state physics and a Bachelor of Science in chemistry and physics from the American University in Cairo. It was only my second graduate degree—a Masters of Public Administration from the Kennedy School of Government, Harvard University— that strengthened my position in the financial sector and finally brought me to ADIB Capital. I believe however that a multifaceted education is an excellent basis for understanding ever-evolving industries and the constant innovation that greatly attracts investments.

Before joining ADIB Capital I was Treasurer of National Bank of Egypt.

Between 1976 and 2005, I was also the Treasurer for Barclays Bank Egypt and for Citibank Egypt, Tunisia, Turkey, Gabon and Jordan.

How does ADIB Capital serve the investment needs of ADIBEgypt’s customer base?

ADIB Capital delivers tailored Shari’ah-compliant financial solutions

ADIB Capital is focused on three lines of business in Egypt including Mergers and Acquisitions, the Debt Capital Market and the Equity Capital Market, advising and arranging Shari’ah Compliant financing, including syndications, with an emphasis on supporting national infrastructure projects.

What differentiates ADIB Capital’s investment banking offerings from its competition?

Zeinab Hashim

to its diverse client base, including government, private sector companies and middle market firms. Since its establishment in October 2012, ADIB Capital has executed transactions worth EGP 18 billion and boasts a solid pipeline that has witnessed exponential growth, contributing to ADIB Egypt’s brand image and cementing its position as a market leader, substantiated by Bloomberg rankings.

I believe our most important asset and standout characteristic is having a team whose members have in-depth market knowledge and who are able to gauge market sentiment from a conventional banking perspective and apply this knowledge to utilise Shari’ahcompliant products that provide equally, or even more effective market solutions compared to conventional alternatives.

Our team is able to meet the demands of a very specific clientele with a preference for Shari’ah-compliant solutions but who will not compromise on the return on their investments either. We constantly reevaluate our existing products and introduce new ones that address emerging needs or gaps in the market.

One such offering are Sukuk which— once executive regulations are passed -will be utilised as a new financing tool to specifically —but not solely—meet asset managers’ investment needs.

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What are the most popular products and services your investment banking clients utilise?

Our most popular products are those used in raising funds in a Shari’ahcompliant manner. These include Mudharaba, Murabahah, Ijarah and Istisnah and Forward Lease. As noted, their popularity stems from their ability to meet the demand for both Shari’ah compliance and competitive return on investment. Financial advisory for such products compared to conventional banking products is essentially the same and therefore concepts need not be fundamentally rethought.

How has ADIB-Egypt’s Investment Banking changed in your tenure?

Since our founding in 2012 we have established a solid foot-hold in the market, supporting our clients’ investment needs. ADIB Capital’s deal closures have contributed to ADIB Egypt being listed in Bloomberg EMEA’s market leader rankings since 2013 and cementing its position in 2016.In 2016 ADIB-Egypt ranked first Islamic Financing Bookrunner in Egypt and 11th in Eastern Europe, Middle East, and Africa (EEMEA) with a three per cent market share, more than double its share in 2015.

What are your thoughts on the Islamic investment landscape currently? What are the key areas to invest in?

The Islamic investment landscape is not really different from its conventional peers. As long as sectors meet potential investors’ criteria such as being consumer-driven they will attract investors from both sides of the spectrum. The healthcare, education, food and beverage and retail sectors have a long-term positive outlook as do several other industries,

particularly those involving Egyptian manufacturers for import substitutes with proven export track records.

We also believe that there are a significant number of untapped resources in the Islamic domain that represent an opportunity for our investment clients.

What have been some of ADIB Capital’s most successful financing agreements?

One of our milestone agreements that we are tremendously proud of was accomplished last year. We were awarded International Finance News’ “Mudharaba Deal of the Year” award for our landmark Egyptian Electricity Transmission Company (EETC) EGP 2 billion transaction. This was in fact the second time we have won this award, after 2014 and it remains a great honour for us.

The EETC is an affiliate company of the Egyptian Electricity Holding Company (EEHC) focused on managing, operating and maintaining the electric power transmission grids on extra and high voltages across Egypt, ensuring their optimal economic usage. Our agreement helped drive its on-ground transformation and financed the expansion of EETC’s transmission network.

Do you see ADIB Capital as playing a role in driving the Egyptian economy forward and contributing to the country’s infrastructure and progress?

Absolutely, in fact we consider providing tangible support to the economy by helping secure financing for vital infrastructure projects and domestic industries a top priority.

ADIB Capital has a long-standing track record supporting Egypt’s energy needs and the aforementioned agreement with the EETC is a clear example.

In 2012 ADIB Capital acted as the Initial Mandated Lead Arranger, Bookrunner, Facility and Security

33

Agent for the East Delta Electricity Production Company (EDEPC), on a Syndicated Mudharaba deal worth $110 million. ADIB Capital began financing energy sector projects early on and seeks to expand its efforts in this field, particularly with recent oil and gas discoveries promising a highly profitable future for the industry and the possibility of diversifying activities to incorporate more complex processes that will greatly benefit the economy in the long run.

ADIB Capital also acted as the IMLA and Bookrunner for the EEHC in an EGP 1.6 billion transaction in April 2015, as well as the Global Coordinator in a EUR 40 million transaction in April 2017. ADIB Capital also previously acted as the IMLA and Bookrunner for EETC in February in an EGP 2 billion deal and as the IMLA and Bookrunner in a $150 million transaction with the Egyptian General Petroleum Company (EGPC) in September 2015, as well as acting as the Financial Advisor in a $200 million transaction with the same authority.

Though vital, ADIB Capital’s success is one aspect of ADIBEgypt’s overall success, how do perceive your parent company’s most recent successes?

Each subsidiary has a role to play helping contribute to ADIB-Egypt’s overall success. ADIB-Egypt’s most recent financial statements—for H1 2017—are testament to its stellar achievement, affirming the upward trajectory of its performance indicators.

ADIB Egypt has successfully launched innovative products and services and continues to upgrade and expand its network infrastructure, bolstering its presence and enhancing the experience of customers. ADIB Egypt’s performance has been recognised regionally and globally winning numerous international awards over the past few years.

www.bankerafrica.com

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study

Hyperinflation of the Zimbabwean dollar caused the country to abandon the currency for a basket of multiple currencies (CREDIT: FEDOR SELIVANOV).

Zimbabwe banks, economy buckle under liquidity crunch Strict credit and liquidity constraints have caused adverse effects on Zimbabwe’s banking sector, writes Tawanda Karombo

Z

imbabwe’s financial services sector is buckling under crippling liquidity constraints and bankers have been battling to contain the situation that has seen cash run out and payments for foreign purchases delayed amid sharply rising prices in the economy.

The southern African country uses a basket of multiple currencies hedged against the United States dollar after it abandoned its own currency in 2009 at the height of hyper-inflation.

Benedict Chikwanha, Chairman of NMB Bank says the finance group has continued to “operate in an environment characterised by nostro

funding challenges, interest rate and non-funded income price controls, cash shortages, job losses” and deflationary pressures.

Banks in Zimbabwe have had to switch to stricter credit underwriting standards and enhanced efforts to contain non-performing loans and operating costs. This has seen non-

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performing loan ratios for banks such as Barclays Zimbabwe decline to below five per cent.

Others such as Ecobank Zimbabwe and Standard Chartered have turned to electronic platforms and mobile apps to cut down on costs. Other banks are also linking up with mobile money platforms such as EcoCash, which is operated

by Econet Wireless and whose user numbers have risen to five million.

“Banks have to cut down on costs and find alternative payment methods and platforms to enable depositors to transact. We cannot meet demands for cash withdrawals owing to the liquidity problems we are facing so we are forced to be innovative instead of turning away clients from transacting,” said a finance manager with a Zimbabwean bank.

The Zimbabwe Banking Sector, Swiping Through report released by IH Securities recently says that “the use of mobile banking has been increasing over the months and went from $388.9 million in January 2016 to reach an

all-time high of $792.5 million” by the end of April 2017.

“Because of the convenience of mobile banking, we expect this figure to continue to increase as banks continue to partner with telco providers to increase convenience to customers. Card based transactions increased in the month of April to $506 million from $451 million in March 2017,” added the report.

But the current wave of liquidity constraints in the banking sector has prompted the Reserve Bank of Zimbabwe to introduce local bond currency—coins and notes that have equal value to the greenback. The governor of the reserve bank, John Mangudya, says the government will introduce a further $300 million in bond notes, taking the total since introduction in November last year to about $500 million.

However these have not yielded much needed respite to the currency woes afflicting Zimbabwe. The bond notes have started to lose value fast, with traders now putting a premium of about 35 per cent in exchange for foreign currency.

“There are retailers who are practicing the three-tier pricing system for bond notes, bank cards and the dollar,” said Deputy Reserve Bank Governor Khupukile Mplambo. “We want to be clear that this is illegal. We have an act we can invoke,” she warned.

Banks in Zimbabwe are still running out of cash while exporters such as platinum and chrome miners have to surrender their export earnings to the central bank and have their accounts credited with local bond notes.

Business executives in Zimbabwe have raised concern over this, saying it will impact on financial payments for goods procured from outside Zimbabwe. The Confederation of Zimbabwe Industries has lobbied for full adoption if the South African rand currency, arguing that manufacturers

35

procure most of their inputs and stock from there but the government has turned down this.

Alex Mhembere, Chief Executive Officer of Impala Platinum owned Zimplats, the biggest mining company in Zimbabwe said his company has “been discussing” with the reserve bank regarding the directive to have exporters surrender 80 per cent forex earnings. He highlighted that companies were “worried about the impact” it may have in terms of procuring goods.

“The central bank says we will still be able to procure goods for production. As long as we are given ability to continue to procure goods, we don’t mind whether he money is in our accounts or in the RBZ account,” explained Mhembere.

Fund managers such as Old Mutual have started to invest in non-monetary assets while companies such as Econet Wireless are now paying quarterly dividends to clear balance sheets of monetary values that could be eroded. Econet also had to carry out an offshore capital raise to pay off a maturing debt facility.

British American Tobacco (BAT) Zimbabwe and brewer, Delta Corporation, which is owned by ABInBev have had delays to dividend remittances to foreign shareholders and bank advisors are advising that the funds be used to procure raw materials.

The reserve bank has to approve all foreign bound foreign currency payments using a strict priority list but the country has recently failed to pay for electricity imports from Mozambique and South Africa as well as to pay for key medicines.

Tawanda Karombo is a business, economics and finance journalist covering Southern Africa and based out of Harare.

www.bankerafrica.com

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trailblazer

Niama El Bassunie, CEO, WaystoCap said that the company is trying to create an end-to-end trade ecosystem.

Match-making WaystoCap brings African trade into the spotlight, linking intra-Africa trade as well as international exporters and importers from and to the African continent

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aystoCap, an online marketplace born in Casablanca, Morocco, is making waves not only in the intra-Africa trade business, but also into and out of Africa. The online B2B commodities marketplace, which recently completed a rumoured $3 million funding round in the US, targets both importers and exporters, changing the way trading is done in Africa today.

“One of our focuses is targeting international suppliers who want to get into African markets. For example we have an importer who wants a container of spinach, instead of that importer having to go and find it, get quotes, try to verify the supplier and do all of that. All of the logistics are taken care of. All you have to do is submit the request to us, and one of our account managers will take care of it,” explained WaystoCap Chief Executive Officer (CEO) Niama El Bassunie.

The end-to-end assistance by WaystoCap to its clients, frees them up to concentrate on the business of sales and distribution on the ground instead of sourcing and verifying the goods. This service is proving popular amongst WaystoCap’s clients–they have had thousands of traders sign up to their platform since its inception in 2015, with an average transaction value of $30,000.

“We deal with international trade into Africa, and also help African exporters sell their products outside the continent.

This is mostly agricultural commodities and is very important for us because we truly believe this will help the continent develop. We export in a way that is sustainable, we want to make sure the business actually develops and grows so that it can move along the value chain.

We think this will also have a massive impact on the socio-economic value chain,” said El Bassunie.

One of the largest forms of trade in Africa is between African countries,

37

and this is something that WaystoCap wants to further develop by bringing manufacturers, producers and businesses together building networks of traders and trade finance suppliers to make transactions quicker and easier for all involved.

“If you go online and type in B2B marketplace, we are not the only ones, nor the first ones but, what we do is different,” said El Bassunie. “We are trying to create more of an ecosystem that enables trade. Our dedicated account managers will help you trade, on the insurance front we make sure you can find the most competitive offers, we are with you from point A to Z and that is what differentiates us from the people out there–we are actually with them the whole way.”

FINDING PARTNERS

Any trade partner that WaystoCap works with must first and foremost be registered. If the partner wants WaystoCap to help them with insurance and other financial aspects of trade, then the partner’s financials and accounts are required so that the company can be verified.

“We verify that the company exists and that they have a network.

We have an office in Cotonou, Benin, which helps with the on-the-ground work and verification,” said El Bassunie.

Since the business started, it has mostly been working with the SME segment on the buyer side in Africa.

WaystoCap believes that working with small businesses will have a strong socio-economic impact in the region.

“Large corporations today in Africa have their own procurement processes.

Maybe somewhere down the line we will engage big corporates, but our biggest process today is looking at SMEs who have either traded before and want to get new products into their range, or want to find more competitive products,” stated El Bassunie. cont. overleaf

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The start-up works with strategic partners within Africa to ensure its efficiency, which include Coface, a trade insurance company to protect suppliers against payment defaults, as well as a trade finance company. WaystoCap currently targets soft commodities and agricultural products, as those are the primary products available for trade in the region it operates in.

FUNDRAISING JOURNEY

Before WaystoCap started fundraising, El Bassunie wanted to make sure that the company was cash-positive, to show potential investors that what the company is doing has strong business fundamentals, and that the economics actually work.

“We were cash positive by June 2016, and at that point we decided that we wanted to fundraise because we wanted to expand and do things a bit more quickly. We tried locally [to fundraise], which was very challenging, because the investors wanted collateral in return for investment - there was a misconception about investment and rewards. That was when I realised we were not going to find the right investor here, so we started to look outside of Morocco,” El Bassunie said.

The total amount received from the seed-round of fundraising is currently undisclosed, but according to TechCrunch the amount stands between $2.5 million to $3 million. A significant amount, particularly when converted in the African marketplace.

TechCrunch further noted that the money is courtesy of a range of investors that include Y Combinator, Battery Ventures, Soma Capital, Palm Drive Capital, Amino Capital, Endure Capital, Story Ventures, Lynett Capital, Neon Capital and 4DX LLC. Y Combinator partner Michael Seibel, Golden founder Jude Gomila, SixDoors CEO Pascal Levy Garboua were among the angel investors to take part.

WaystoCap is a marketing platform designed to facilitate trade into, out of, and within Africa.

“We closed our round in April, which was great. The funding really helped us to start executing the plan that we had, which was to begin the company’s next phase of growth. We expanded our team and got more developers so that we can develop a lot quicker and actually have the privilege of choosing the best minds for the job. When you don’t have the best funding, you cannot hire the best people. Funding allows us to do that,” noted El Bassunie.

The funding also enabled WaystoCap to open its subsidiary in Benin, and allowed the company to be more present in the market in terms of procurement.

“We have used the money to optimise our capital allocation. The risk is, when you do raise quite a bit of money, especially in the seed round, it can vanish quickly, so you have to be careful on how you allocate it and make sure you track everything you do. You need to make sure you are using it for things that will give a return,” stated El Bassunie. “It is a really long journey and for anyone who is fundraising out there it is important to find the right investors and be transparent.”

The company is planning to further expand its verticals, which currently stand at 12, and develop a new platform to match buyers and sellers more efficiently.

Evolving ecosystem WaystoCap primarily focused on food products when it began, because that was the only thing that was exported from Morocco. The company then we expanded into other markets such as Turkey, China, Malaysia and other places, and then into other verticals.

“We are pretty open at this stage to expanding our verticals. This is one thing that fundraising has helped us with and that is looking into other verticals and other markets. Before because we had a smaller team we didn’t want to get too widespread, but now we are able to,” said Niama El Bassunie, CEO, WaystoCap.

www.bankerafrica.com

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Front and back end integration can lead to efficiency gains, says Mistry (CREDIT: MMAXER/SHUTTERSTOCK).

The benefits of end-to-end digital banking When banks use a single core digital platform for their front and back ends they can offer a better service, retain customer data and become significantly more efficient, helping drive revenue and profit growth and protect their market share, writes Dharmesh Mistry, Chief Digital Officer, Temenos www.bankerafrica.com

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here’s a serious and growing division in banking that needs to be overcome—and I’m not talking about high street vs. online. I’m talking about the division between the distribution and manufacturing that means banks are losing out when it comes to efficiency and even market share.

Banking bifurcates into the design and manufacture of products and their distribution. The distribution side uses channels and routes to market— mobile, online, phone, social media etc; the manufacturing side develops the products—the loans, current accounts, mortgages, savings products etc. In the future we’ll see more banks do just one or the other.

In the old days, when there were just branches through which to do business and customer information was kept in files this was fine. Today, banking is so much more complicated, driven by an explosion in products, channels and regulations. Some banks can already see that it will be difficult to excel at everything and so are concentrating at either being great at managing customer intimacy (distribution) or creating products that are highly configurable (manufacturing).

The problems arise because the bifurcation has created silos that operate discretely and which have to be connected manually. For example, when a loan has been designed and produced in manufacturing, all the details have to be transferred to the distribution side, duplicating effort. In addition, the number of potential routes to market is far too great for any bank to cover comprehensively. With the coming of Europe’s Payment Services Directive 2, which will open up banking and customer data to third parties (creating

new, as yet unimagined routes to market), the number of channels is only going to proliferate.

THE ANSWER IS END-TO-END DIGITAL BANKING

Put simply, end-to-end digital banking is when both the front end (the customer facing side) and the back end (the transactional side) run on one digital core platform. The benefits are huge, not least because it means the two ends can talk to each other, gaining from each other’s value to create more than the sum of the parts. It really is a case of one plus one equals three.

Banks can combine the data they have on a customer’s journeys with the data they have on what that customer is prepared to pay for and tailor products and services in a timely and more effective way. And the manufacturing information is automatically available to the front end.

The duplication of effort of creating the product in the back end and then inputting all the parameters and details for the front end, for example, is eliminated. The system becomes more efficient and effective, and customer experience is vastly improved—even truly personalised.

Distribution is today dictated by customer preferences and banks need as broad an offer of routes to market as possible. For a start there’s online, mobile and social media; within mobile, there’s Google Assist or Siri; within social media there’s Facebook and WhatsApp. The list goes on and each route demands bespoke development, eating up resources.

The smart banks are concentrating on a few core routes and work with other providers on supplementing these. For example, I have a British TSB account but rather than access my

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balance on the TSB app I use Cleo, a virtual banking assistant, on Facebook.

For me, it’s easier and more intuitive and I like that it’s based around a conversation. But if I want to set up a new direct debit, I have to go via the bank channel. The beauty of this system for TSB is that I can use my chosen route to banking, which was developed by a third party, and TSB retains my data—a highly valuable resource.

The more data a bank has, the better it can understand the customer, drive the relationship forward and make it stronger. Who wouldn’t want to know that your two-week total spend is significantly higher than usual, risking an overdraft, or that you paid 10 per cent more for your utilities this year than last? Such insight can help you to manage your money better, adding value to the relationship, making it stronger.

When the bank is end-to-end digital, the data can also be used to tailor products to an individual customer quickly and efficiently.

Front end behaviour data is used to identify when and how a bank approaches the customer about a new product that is tailor-made in the back end for them—it might be a savings account with an interest rate staggered to encourage affordable saving that takes into account the customer’s average spend and income. This simply would not be possible in a traditional two-system bank.

The current way banks work is not fit for the 21st century. Customers expect and demand a better service; the market rewards those that offer it. End-to-end digital banking is the answer. It is more efficient in terms of resources and more effective at customer engagement. It’s the future of personal banking.

www.bankerafrica.com

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Securing the continent Jacques Harel, CEO, BIRGER., discusses cybersecurity risks facing financial institutions and the company’s cybersecurity services

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he last time we spoke you discussed plans for BIRGER. to expand operations on the African continent, how is this progressing?

BIRGER. started expanding its activities in the African continent in 2014 when we were awarded a technology project by an insurance company with newly acquired operations in Kenya, Rwanda, Tanzania and Uganda. Moving to Africa was a logical extension to our Indian Ocean regionalisation strategy, which we had started in 2010 and by 2014 we had four offices outside our Mauritian head office in Comoros, Madagascar, Rodrigues and Seychelles.

Our expansion on the African continent was accelerated when we partnered with Symantec to develop a Cyber Defence Centre in Mauritius.

Its objective is to provide managed cybersecurity services from Mauritius to the Indian Ocean Islands but more specifically to the African continent.

BIRGER.’s cybersecurity offering is made up of our Cyber Defence Centre, advisory services, training services and value added services. Over the past year, we have been busy offering these services to both financial institutions and government bodies in the Indian Ocean Islands and East Africa.

What challenges have you faced with this expansion?

Our expansion on the African continent has been progressive, starting with a technology project in 2014 delivered by our team located in Mauritius,

and there after we have incorporated companies in Kenya, Tanzania and Uganda as well as in Rwanda, which is now our East African regional hub.

Incorporating these companies in East Africa has been done with the usual administrative challenges, but these have been addressed with good professional advice available in East Africa. The challenging issue that we face for our expansion is to identify and recruit competent and reliable professionals.

It is known that globally there is a shortfall of security professionals and in East Africa it is also the case. Our requirement to recruit competent and reliable cybersecurity professionals is very challenging. Hence to address this issue, we have decided to approach local universities to detect competent and reliable professionals for our operations.

Can you explain a little bit about the cybersecurity centre and what your aims are with it?

Symantec, world leader in delivering cybersecurity solutions, powers our Cyber Defence Centre (CDC) located in Mauritius. Our CDC offers managed cybersecurity services with a 24/7/365 operation model.

To offer our managed security services, we collect metadata at our customers’ premises from various sources namely endpoints, servers and firewalls. The metadata is standardised, compressed and encrypted on a Log Collection Platform (LCP). The LCP sends the encrypted data over a secured internet connection

Jacques Harel

to Symantec’s Data Warehouse. The metadata is correlated and analysed against 250,000 variables using Symantec’s Global Intelligent Network (GIN). The results are then sent from Symantec to our CDC Analysts in Mauritius where they review the results before taking the required actions to provide the managed security services.

What are the biggest cybersecurity risks facing financial institutions?

The digital transformation that our world is currently witnessing is being driven by the exponential increase of connected devices. These connected devices are mobile phones, computers, tablets but also physical security devices, domestic appliances and cars. These connected devices are becoming more complex and have flexible software capabilities. The combination of these elements provides a larger surface of attack to cybercriminals.

Today financial institutions have a wider-connected ecosystem covering

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A SUMMARY OF THE OPERATIONS AND PROCESS OF THE CDC

Source: BIRGER.

various devices, which make them more vulnerable and are potential cybertargets. This larger surface of attack is exacerbated with other factors such as: Lack of employees awareness towards security.

Evolving working models on a 24/7 availability and working remotely.

Complex IT systems.

Lack of competent security professionals.

The first risk facing financial institutions is the loss of its data such as customers’ details, account numbers and passwords. Cybercriminals may use a technique known as phishing to get hold of such data.

The second risk faced by financial institutions is financial risk.

Cybercriminals may use a technique known as ransomware. This would imply that they would seek to take control of a computer and its content, which would be released once a ransom is paid. We have witnessed two Ransomware attacks this year namely WannaCry in May and Petya in June.

The third type of risk for financial institutions is reputational risk that could be caused by a DDOS (Distributed Denial of Service). In the event of a

DDOS attack the financial institutions would be overwhelmed by requests for transactions, driving the whole IT system down hence not being able to provide the required services such as internet banking and website.

What can banks and financial institutions do to mitigate these risks?

To mitigate these risks banks and financial institutions must secure their human resources, their processes and their technologies to ensure that the whole ecosystem is secured.

Cybercriminals will attempt to exploit any vulnerability, which will enable them to penetrate into the targeted ecosystem.

Hence, our initial recommendation is for regular security audits to be carried out to identify potential vulnerabilities and to attend promptly to these vulnerabilities by applying the required patches to avoid cybercriminals to exploit these manually or by using automated tools.

Securing a wide ecosystem is a multi-disciplinary approach where technical know-how is required but human factor is also very important to minimise these risks. We would recommend that all banks and financial

institutions improve their security posture by deploying the following three-pronged approach.

The first step is to PREVENT any potential cyberattack of happening is by securing both its physical premises and its IT systems. The second step is to DETECT promptly when there is a threat or a cyberattack. The third step is to RESPOND in case of an event, which implies that banks and financial institutions should be resilient if they are attacked.

Do you have any new product innovations on the horizon that you can discuss?

The launch of our CDC powered by Symantec in September 2016, is a pioneer project and a major innovation for the African continent. Our CDC has put Africa on the cyberdefence map.

In July 2017 BIRGER. concluded a Cyber Security Survey, in various countries of the Indian Ocean Islands and East Africa. The results will be published during the third quarter of this year. Based on the survey’s findings we shall refine our security offerings for the African continent and we will also be opening more offices in countries of Africa where proximity cybersecurity services are required.

www.bankerafrica.com

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The onboarding process Gregoire de Clercq, EAMER Marketing Director at Kodak Alaris Information Management breaks down several ways in which to improve customer onboarding time for banks and financial institutions

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ustomer onboarding or client onboarding (CoB), as we call the process of ‘entering’ new customers in the organisation is an important moment of truth. It’s when you really make the difference, deliver upon the promises why people became a customer to start with and the stage when the seeds of customer retention and high customer lifetime value are planted. When it’s done poorly, customer onboarding is where the seed of churn are planted. In some industries onboarding takes more time and is more complicated, due to among others the complex nature of the service and the loads of information and data that are involved.

Banking and financial institutions that get customer onboarding right can improve customer satisfaction, reduce costs, enhance regulatory compliance, lower churn and gain better insights into customer preferences.

Customer onboarding is a critical first stage in customer experience.

After all, first impressions make lasting impacts. Evidence suggests we form first impressions in about 1/10 of a second, and that they stick with us for the duration of a relationship.

Because of this, better, faster customer onboarding translates into growth: most business leaders agree it is cheaper to retain a customer than it is to acquire one. Also, 94 per cent of customers who

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have a “low-effort experience” will buy from that same company again.

Not only that, but once your customers are happily onboarded, they return the favour with of lower-touch annuity revenue.

To get both sides of the equation happy, you need to make the process

as easy as possible. That starts by reducing complexity. In the era of data chaos, routine processes like customer onboarding frequently become bogged down by the sheer volume of data and documents. This leads to an onboarding process that takes too many steps and zig-zags between

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paper and digital touchpoints. This of course is not a good start to a longterm customer relationship.

STREAMLINE CUSTOMER ONBOARDING IN FOUR STEPS

The good news is that improving the customer onboarding process doesn’t have to be a massive undertaking.

Making small improvements to customer onboarding can have a sizable impact. Change in this regard is both critical and possible—we chose the word ‘hacks’ to describe the tips below because these incremental steps have substantial pay-offs, and don’t take a great deal of time or resources.

You can move the needle—today—by streamlining customer onboarding: 1. Standardise where you can.

Connect where you can’t.

Repeatability is key to increasing efficiency. If your customer onboarding looks different every time, it’s important to establish standards for interaction with new customers, including everything from the order of email and phone communication to required documentation at different stages.

It is true that some customer needs will vary and require special attention. A standard process gives you a straight line to internal efficiency, but it doesn’t give all your customers the flexibility they need in the real world. Not every customer can come into the office to make a copy of their identification, for example. But in this case, when you can accept a picture taken from a smartphone, a customer’s experience is smoother, and they’re onboarded faster. Even better, modern web-capture solutions can connect to your backend systems, reducing

manual effort on your part to input customer information.

2. Use paper as an input, not an endpoint.

Customer onboarding typically relies heavily on paper. In finance, examples are account/ card applications, credit reports, and loan origination documents.

For law firms, it could be intake forms, depositions, and release forms. Every industry has a mountain of paper documents that come with new business.

Customer onboarding with paper as an input is able to process information at the speed of business. Rather than relying on paper—which can only be in one place at once time—as a final record, modern customer onboarding uses web capture to quickly scan, categorise and distribute customer information to internal stakeholders.

3. Automate needs assessment where possible.

On a first visit with a new client, much of your upfront time may be spent asking questions that are fairly routine, or gathering documents that could be submitted before the appointment. Where possible, automate. Create an online survey for onboarding questions, or allow web submission for needed signup forms.

You save massive amounts of time on busy work, and your customers are able to complete their parts at their convenience.

4. Reach out early with helpful welcome resources.

Greeting your customers with helpful documentation and tutorials not only indicates

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thoughtfulness, it also improves the speed of onboarding. Welcome packets and online libraries do this by serving as customer support that works for you: customers can get their questions answered on-demand.

If left on your website or product passively, your new customers may have to go hunting for information when they need it. Much like websites, where first impressions are formed in 50 milliseconds, customers will have quick reactions to your product.

Don’t let your customers get discouraged and give up after they’ve committed to your product and your business. Proactively reach out with helpful tips and information, so they feel comfortable using your offerings and know they have support available a click away.

A great way to do this is with a welcome series of emails. After they sign up, use marketing automation tools to serve them up a collection of emails with tips on getting started and getting the most out of your service or product.

You can also bring new levels of engagement with automated physical mailer delivery. Lob.com is a new service that enables you to “programmatically send physical mail at scale.” The value to your organisation is in significantly reduced costs and increased speed.

As far as experience is concerned, customers need to know you’ve done this before. You are experts at delivering great experiences with your products and services. When they are greeted by a clear outline, informed of the steps upfront, and guided effortlessly through the process, the positive first impression will pay dividends.

When it comes to efficiency, it’s a simple concept with tangible implications: making a plan is always a good first step toward improvement.

www.bankerafrica.com

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Real estate has often been a popular investment destination (CREDIT: WATCHARA RITJAN/SHUTTERSTOCK).

End of the cycle Both Richard A Johnson, Managing Director—Head of Business Development, Real Estate & Private Markets and Paul Guest, Executive Director—Lead Strategist, Real Estate & Private Markets of UBS Asset Management discuss the outlook for the global real estate sector

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eal estate markets: where are we now?

The resilient appeal of real estate is driven by a number of factors: low bond yields, the hunt for steady income and the importance of asset diversification and need for stability. Unconventional monetary policies in the form of quantitative easing and ultra-low interest rates have, in recent years, boosted the relative appeal of the asset class, while the consequential increase in capital flows have caused a surge in transaction volumes.

Volumes are now down from their peak but remain robust. This continued strength reflects a reluctance to let go of assets given uncertainty as to how

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to re-allocate capital attractively. Many markets present a price gap between buyers and sellers, with owners of real estate, even with leverage, generally under no pressure to sell while buyers are not willing to pay ever higher prices given the interest rate outlook.

Returns—where are we going?

In many ways a slowdown in transaction activity and price growth is positive for the market. The increasing rents we’re commonly seeing will gradually enable higher purchase prices justified by the income outlook. Many US and European markets have eased back from the above long term returns they had been delivering and now reflect, in yield terms, a level closer to the long term average. Whilst expensive in absolute terms, relative to bonds these yields are still generally attractive.

Total returns globally have slowed as a result of reduced yield compression and capital value growth. The supply side response, with minor exceptions, has been muted in this cycle. In part this is due to lending regulation as well as concern over the extent and strength of the recovery. In the best locations, this means rental growth has been accelerating with returns consequently driven primarily by income.

Differentiation in projected total return between markets and sectors is narrowing as the cycle draws on— unsurprising given that the period of rapid yield compression is ending.

Income returns tend to be quite stable over time both within and across markets, while capital growth can vary tremendously depending on a market’s stage in the cycle.

Property performance has changed; in addition to slowing capital value growth and reduced volumes, fundraising new capital can be more challenging. The shift in outlook to rising interest rates begs the question

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how property will compare to other asset classes over the next cycle.

This time it’s different?

Historically, rising interest rates have coincided with strengthening property returns, thanks to an improving economy and rising rents. This time it’s different: property returns are slowing as rates rise because a period of exceptional capital value growth driven by ultra-low interest rates and excess liquidity has come to an end.

There are three reasons why this latest ‘Golden Age’ of property will not end in tears. These are supply and debt; quality, and; demand and diversification.

We have seen construction much more subdued this cycle than previously, largely thanks to a lack of development finance and uncertainty about the economic recovery’s resilience. This has led to historically low vacancy rates in some markets, coupled with much less leverage than was common pre-2007. A fall in values today is less likely to result in negative equity and fire sales than post 2007.

The spread between high and lower quality real estate is wide compared to the last cycle. Investors rarely overpay for risky real estate, which has simply been, and remains, incapable of financing. The spread between prime real estate and the risk free rate is equal to or above its long-term average, meaning there is some cushion to absorb higher rates without necessarily eroding values. Real estate will not be immune to changes in the interest rate or inflationary dynamic, but there is more evidence in favour of a gradual adjustment than a sudden correction.

We have long emphasised, for investors concentrating on a single city or country portfolio, that this is the time to focus on enhancing income and driving value growth. Real estate asset management may actually require proactive management again;

Paul Guest, Executive Director—Lead Strategist, Real Estate & Private Markets, UBS Asset Management

What we are seeing, which is typical of late cycle behaviour, is an increase in opportunistic funds looking at frontier markets—e.g. Sub Saharan Africa, residential in Central Asia.

– Paul Guest–

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this can be done through a variety of asset-specific initiatives, such as value-add redevelopment, which can make sense in locations where supply is tight. These strategies improve fund performance over the short term and should enhance value, whether to sell or hold, for the medium term.

What else is out there?

We expect higher inflation and a rise in market interest rates, but at a more moderate level than previously. In today’s environment, however, there are considerable tail risks, whether linked to politics, regulation or economics. Some tails are fatter than others, but the result is a wide range in possible outcomes even for the most transparent markets. Furthermore, some low probability events, like a currency collapse, have huge downsides for property performance so, whilst unlikely, their risk-weighted impact is significant.

These sizeable tail risks argue in favour of broad diversification, especially at a time when the breadth of performance outcomes is narrowing.

Market and sector allocations need to be actively considered. This is true at all points of the cycle, but when the gap in potential performance is wider, picking outperformers is relatively easier. When the gap is narrow, the risk of being wrongly positioned for such gains; i.e. overweight in an underperforming market, is much larger.

Therefore, maintaining a portfolio that is broadly neutral vis-à-vis your benchmark provides downside protection in the face of an uncertain future. We would argue in favour of being prudent and diversified, and focus on protection or enhancement of value rather than seeking alpha.

Global trends indicate intense demand for assets in the major markets whilst competitive nature is driving capital into regional markets and alternative

sectors rather than to markets perceived as unstable.

What comes next?

The shortage of good quality real estate on the market has created record levels of dry powder which has resulted in capital being driven into niche sectors, many of which have a sound rationale but which lack the depth to accommodate the levels of liquidity targeting them.

It has also driven an increase in build-to-core strategies, with even traditional institutional investors looking to build and hold in markets where they are having trouble accessing core.

Evidence to date suggests that emerging markets will not soak up this excess capital; transaction volumes in Russia, Brazil and India are not appreciably growing, whilst in China the changes in volumes are driven more by shifts in government policy than in any top-down view on emerging markets. What we are seeing, which is typical of late cycle behaviour, is an increase in opportunistic funds looking at frontier markets—e.g. Sub Saharan Africa, residential in Central Asia. There is some rationale for these strategies but the relatively good present day liquidity may evaporate if the cycle turns, and these may be the first markets to go, regardless of the underlying macro rationale.

The future interest rate outlook presents a challenge, particularly for prime real estate in the best locations.

If the Federal Reserve continues its modest tightening, the risk premium will narrow and this could nudge up yields, eroding capital values somewhat. So what to do? The markets are now giving investors income rather than capital. Perhaps therefore, it is best to embrace that, diversify, keep leverage under control and asset manage your properties.

Richard A Johnson, Managing Director—Head of Business Development, Real Estate & Private Markets, UBS Asset Management

In many ways a slowdown in transaction activity and price growth is positive for the market. The increasing rents we’re commonly seeing will gradually enable higher purchase prices justified by the income outlook.

– Richard A Johnson –

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Excellence through innovation Rewarding pioneers in Islamic finance

Islamic Business & Finance AWARDS 2017

12th DECEMBER 2017 Emirates Towers Hotel, Dubai

Voting commences Mid-October through end of November

For more information please contact CPI Financial’s events team Tel: +971 4 391 4682 or Email: events@cpifinancial.net

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PICTURE OF THE MONTH

TEDxGbagada officially kicked off this year’s events on 7 September 2 0 1 7 w i t h T E DxG b a g a d a Adventure. This event consisted of a journey around Lagos to explore three core ideas: the impact of technology on manufacturing, smart farming and the beauty of nature through sustainability and animal rescue. The TEDxGbagada Adventure gave participants the opportunity to interact with ideas and watch a TEDx talk (CREDIT: GCIS/GOVERNMENTZA/FLICKR).

Tanzania’s economic growth has (slightly) improved wealth generation GDP growth

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Tanzania’s economic growth has (slightly) improved wealth generation (CREDIT: WORLD BANK/ATLAS/QUARTZ)

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First bank in Egypt, the Middle East and Africa CIB “World's Best Bank in the Emerging Markets”

by Euromoney

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