The African Business Review by TABR

BANKING & FINANCE

SEPTEMBER-OCTOBER 2013

Managing financial sector crisis in Nigeria through AMCON

Financial development in Africa and the role of institutions Development finance institutions: strengthening the African banking sector Sustainable business practices and enterprise risk adjustments

The future of global business. Read online now at www.theafricanbusinessreview.com The African Business Review app, coming soon for iPad and smartphones. For distribution enquiries, contact info@theafricanbusinessreview.com www.theafricanbusinessreview.com

ÂŠAshok hariharan www.flickr.com/photos/khosa

“It is clear… that any global firm interested in growth must see Africa as an essential part of its portfolio.” E. Neville Isdell, Chairman and CEO, The Coca-Cola Company, USA

CONTENTS

September/October 2013 FROM THE EDITOR 7 MASTHEAD 9

10 REVIEW Financial development in Africa and the role of institutions Raju Jan Singh

Opportunities for impact investing in Africa* Els Boerhof

Mobile financial services in Africa: Success, opportunities and challenges Mwangi Kimenyi

22 DEVELOPMENT Financing Africa’s infrastructure gap Mthuli Ncube FEATURE

Financial sector development and the diversification of African economies Omotunde E. G. Johnson

Growth of regional banks in Africa Suresh Chaytoo FEATURE

How China can better contribute to Africa’s business development Simon Commander and Yan Wang

37 ANALYSIS Managing financial sector crisis in Nigeria through AMCON Dr W. U. Ani

Strengthening the African banking sector: How development finance institutions can help Julien Lefilleur

Confronting inter-regional disparities in Nigeria Ayo Teriba

50 FOCUS Does foreign aid make economic sense? Finn Tarp 53 SUSTAINABILITY The sun’s energy has the potential to power economic growth and development in East Africa Janosch Ondraczek

Innovation in the field: Tapping the potential of Africa’s agriculture FEATURE

Greening the AU economy – adapting to climate change along a low carbon development pathway Michelle Barnard

* Articles in grey appear in print edition

4 | The African Business Review

Agriculture and sustainable development: British American Tobacco Nigeria (BATN) Foundation and Nigeria’s agricultural reformation agenda FEATURE

Sustainable business practices: Taking uncertainty out of enterprise risk Carey Bohanen & Swe Thant

69 LEADERSHIP The bid for developing quality leaders in African countries Senyo Adjibolosoo 76 COMMENT The quest for economic transformation in Africa Nicholas Depetris Chauvin

Obama needs Kerry’s help to accomplish Africa goals Alexander Benard

Technology, international development, and an inconvenient truth Ken Banks

82 CULTURE Interview with Lola Shoneyin

©2013 ABI Media. All Rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of ABI Media, Kemp House, Suite 966, 152-160 City Road, London EC1V 2NX. Where an opinion is expressed it is that of the author and does not necessarily coincide with the editorial views of the publisher or The African Business Review. All information in this magazine is verified to the best of authors’ and the publisher’s ability. However, ABI Media does not accept responsibility for any loss arising from reliance on it.

Throughout Africa and Asia, cowry shells were used as currency before the introduction of paper money.

The African Business Review | 5

FROM THE EDITOR*

Financing Africa

ven before its publication, the banking and finance issue of The African Business Review generated a great deal of excitement among our readers and contributors alike; the former, curious and thirsty for information about the various nonhomogenous financial sectors throughout that great continent, and the latter, eager for an outlet via which their views, honed by years of experience in their respective fields, can be expressed. Nothing stirs up an argument quite like Africa’s finances. Finn Tarp examines the contentious issue of aid, asking if it really helps and evaluating its role in growth. Other writers drill home what is fast becoming a slogan of African progress and development, that the private sector must play a much larger role in financing Africa’s frontier markets. This is futile however, without basic infrastructure in place, which many of Africa’s countries are lacking. Simon Commander and Yan Wang review China’s prominent role in building Africa’s infrastructure and make recommendations to enhance the nature of Sino-African relations. Shallow, relatively undeveloped financial sectors are an obstruction to growth in Africa, where insufficient financing options are made available to new businesses, and inadequate ownership structures hamper expansion of both entrepreneur and conglomerate alike. Raju Jan Singh examines the lack of depth in Africa’s financial sectors, and points out that the unavailability of credit information and information asymmetries might contribute to lower levels of lending. Julien Lefilleur indicates how far African countries still have to go, showing that statistically, much of Africa’s population remains unbanked, with little access to financial services or even an ATM. Development finance institutions can offer a myriad of solutions catering to Africa’s banking needs and strengthening the financial sector. Senyo Adjibolosoo again reminds us that true transformation begins with leaders that are steadfast in their commitment to change, emphasizing the importance of moral leadership that will further a nation’s interests. And it is indeed a sober reminder, for we are nothing but ‘coffee-shop revolutionaries’ if we cannot implement reform to effect true economic transformation and development of Africa’s financial sectors, supporting sustainable and lasting economic growth. Zara Ruban Deputy Editor *’Tunde Olupitan, our editor-in-chief, is travelling as we go to print.

The African Business Review | 7

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REVIEW Financial development in Africa and the role of institutions By Raju Jan Singh

Since the 1980s, many African countries have undertaken reforms to develop their financial sectors. They have liberalized interest rates, phased out directed credit, moved to indirect monetary policy instruments, restructured and privatized banks, and reinforced banking sector supervision and microfinance. Yet, despite all these efforts, financial sectors in African countries remain among the least developed in the world. Within Africa, the development of finance in the CFA franc zone is even more limited.1 Why is that?

The CFA franc zone is composed of two currency unions pegged now to Euro. The West African Economic and Monetary Union (WAEMU) comprises Benin, Burkina Faso, Cote dâ&#x20AC;&#x2122;Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. The Central African Economic and Monetary Community (CEMAC) includes Gabon, Cameroon, the Central African Republic, Chad, the Republic of the Congo and Equatorial Guinea.

10 | The African Business Review

ne way to assess the economic contribution of the financial sector is to look at the amount of credit it provides to the private sector. According to World Bank data, in 2012 credit to the private sector represented on average the equivalent of about 21 percent of GDP in Sub-Saharan African countries (excluding South Africa). The same ratio was about 33 percent for lowincome countries as a whole. Focusing on Sub-Saharan Africa more closely, financial sectors in CFA franc countries are even shallower. On average, in 2012, credit to the private sector in terms of GDP amounted to about 16 percent in the countries member of the CFA franc zone, compared with about 23 percent for the rest of subSaharan Africa (excluding South Africa).

CFA franc countries seem, however, to have undertaken similar efforts to liberalize and reform their financial sectors. As elsewhere in the continent, bank restructuring took place in the late 1980s and was followed by a strengthening of bank supervision with the creation in 1991 of a single supervisory institution in each of the two CFA franc sub-zones. Yet, one hears still too often complaints from the private sector, especially the small and medium enterprises, that banks are not “doing their job”. From the banks, one hears a willingness to lend – many banks are over liquid – if only they could find good projects to finance. So what could explain the limited development of the financial sectors in the CFA franc countries?

differences in institutional quality, namely the availability of credit information, and the strength and enforcement of property rights.

60 50 40 30 20 10 0

Domestic Credit to Private Sector, 1990-2012 (in percent of GDP) 35 30 25 20 15

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

SSA

Low-Income Countries

Source: World Bank

Domestic Credit to Private Sector, 1990-2012 (in percent of GDP) 30 25 20 15 10 5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

CFA Franc Zone

Non-CFA SSA

Source: World Bank

There is a growing body of literature arguing that macroeconomic stability and financial liberalization, while necessary, are not sufficient conditions for enhancing financial sector development and should be accompanied by other institutional reforms. In particular, recent research suggests that insufficient legal protection of creditor rights and information asymmetries about borrowers’ ability and willingness to repay debts could explain why some financial markets remain shallow. We have looked a couple of years ago at a sample of 40 countries in sub-Sahara Africa from the early 1990s and tried to pin down what factors could explain the differences in the development of their financial sectors.2 The level of economic development (i.e. GDP per capita), liberalized interest rates, and macroeconomic stability all played an important role, explaining about 50 percent, 15 percent, and 10 percent, respectively, of the differences between the levels of financial development observed in these countries. But these factors alone could not account for the limited development of the financial sector in the CFA franc zone. To explain the gap in financial development between the CFA franc zone countries and the rest of Africa, we needed to look at 2.

Contribution to Explained Variance in Financial Development among Sub-Saharan Countries (in percent)

Source: Bank Staff calculations

We need to recognize that financial institutions operate with incomplete information. Entrepreneurs seeking financing have more information about their projects than their banks. Projects that differ in their probability of success are indistinguishable from the viewpoint of a financial institution. Banks have to gather information, or require collateral, to grant loans only to the most promising projects. In this setting, governance, property rights, or creditor information play a major role. How do the CFA franc countries compare in this regard? Let’s take the dissemination of information on possible borrowers for instance. In advanced countries, databases centralizing information on borrowers are often established by the private sector or maintained by central banks. These credit information registries collect information on the standing of borrowers in the financial system and make it available to lenders. This system improves transparency, rewarding good borrowers and increasing the cost of defaulting. Despite efforts to set up public credit information registries in CFA franc countries, however, their coverage is still minimal. In sub-Saharan Africa as a whole, less than 10 percent of the adult population is covered, a figure that pales compared to an average of about 45 percent in Latin American and the Caribbean, and almost 50 percent in Eastern Europe and Central Asia. Turning to the CFA franc countries more particularly, on average, less than 8 percent of their adult population is covered, compared with an average of 11 percent for the rest of sub-Saharan Africa. The coverage of existing credit bureaus should therefore be extended and include as much information as possible on the repayment profile of customers. This must be achieved while preserving an appropriate degree of privacy and safeguarding sensitive information. 50 45 40 35 30 25 20 15 10 5 0

Credit Information Coverage, 2013 (in percent of adults)

Sub-Saharan South Asia Middle East East Asia and Latin Eastern Africa and North Pacific America and Europe and Africa Caribbean Central Asia Source: World Bank

Ghura, D., K. Kpodar, and R.J. Singh (2010), “Financial Deepening in the CFA Franc Zone: The Role of Institutions”, in M. Quintyn and G. Verdier (eds.) African Finance in the 21st Century, International Monetary Fund and Palgrave MacMillan

The African Business Review | 11

Strengthening creditor rights should therefore deserve more attention in Africa and in CFA franc countries particularly. These, however, are equally complex processes. Strengthening creditor rights would require changes in legislation governing debt collection and collateral. Some reforms may have regional as well as national dimensions. Legislation on debt recovery would depend in turn on efficient property registration and land surveying in both cities and countryside. The geographic coverage of land registries is often extremely limited. While moving towards more formal property registration care should be taken not to undermine customary rights and transfer unintentionally property to richer segments of the population.

Credit Information Coverage, 2013 (in percent of adults) 12 10 8 6 4 2 0 CFA franc countries

Non-CFA sub-Saharan Africa

Source: World Bank

Property rights in Africa are also poorly defined and defended. Every year the Heritage Foundation compiles a property rights index. It measures the ability of individuals to accumulate private property, secured by clear laws that the state fully enforces. The index ranges from 0 to 100 with 100 reflecting the best score. Looking at this index, one notices that sub-Saharan Africa not only lags behind North America and Europe, regions where property rights are the most clearly defined and protected, but also behind other developing regions. More worrisome, property rights in Africa and in countries of the CFA franc zone seem also to have weakened over the past decade. The regional OHADA legal framework has led to a number of improvements, but significant deficiencies remain in its implementation. Debt collection and foreclosure on collateral are inefficient because of uncertainties in each countryâ&#x20AC;&#x2122;s civil procedures, and inadequate capacity and problems of governance in the judicial systems. Court proceedings are lengthy and unpredictable. These problems are common to many sub-Saharan African countries, but seem more acute in the CFA franc zone.

Strengthening creditor rights deserves more attention in Africa and in CFA franc countries particularly. This would require changes in legislation governing debt collection and collateral. Finally, it would be important to reform courts to improve enforcement. Training of judges and court registrars in commercial and financial matters could be strengthened to accelerate the process. Such training could also be accompanied by a policy of specialization for judges who wish to pursue a career in commercial and financial law. Meanwhile recourse to the legal and judicial system could be limited through the development of lease-purchase arrangements, and greater recourse could be made to arbitration by including arbitration clauses in lending agreements.

Property Rights Index, 2013 80 70 60 50 40 30 20 10 0 Sub-Saharan Asia and the South and North Africa Africa Pacific Central and the America and Middle East the Caribbean Source: Heritage Foundation

Europe

North America

Hence, while the financial liberalization since the late 1980s was necessary, it may not have been sufficient. Efforts to establish the conditions for the financial market to function may have fallen short, particularly with respect to the systemâ&#x20AC;&#x2122;s ability to gather information and use collateral. Improvements in information collection and dissemination, as well as in the legal and judicial framework, would be essential to creating an environment more conducive to credit expansion.

Property Rights Index, 1995-2013 50 45 40

About the author:

35 30 25 20 1995

2000

2008

2013

CFA franc countries Non-CFA Sub-Saharan Africa Sources: Heritage Foundation and Bank Staff calculations

12 | The African Business Review

Raju Jan Singh is the Lead Economist for Central Africa at the World Bank, based in YaoundĂŠ, Cameroon. Prior to joining the World Bank, Mr. Singh held positions at the International Monetary Fund in Washington DC, at the Swiss Ministry of Finance in Bern, and at Lombard Odier & Cie (private banking) in Geneva. He was also a consultant for the Swiss Agency for Development and Cooperation, working with the central banks of Rwanda and Tanzania, and taught at the Graduate Institute of International Studies in Geneva.

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DEVELOPMENT 22 | The African Business Review

Financing Africa’s infrastructure gap By Mthuli Ncube •

•

Infrastructure is a key driver of high and inclusive growth. The lack of efficient infrastructure hampers Africa’s competitiveness and productivity, reaching MDGs, and participation in the global economy. Africa has a large infrastructure gap in terms of access and quality. Closing it would require additional US$50 billion a year, but can boost Africa’s annual growth by 2% Infrastructure is a key operational pillar of the African Development Bank. The Bank is launching the ‘Africa50 Fund’ to raise resources from the private sector and governments. It will target bot infrastructure project preparation and investment.

frica suffers from a critical shortage of infrastructure. Its infrastructure coverage lags behind other developing countries, with power deficits presenting the biggest infrastructure challenge. The infrastructure deficit prevents Africa from reaching its full economic potential. Doubling existing infrastructure investment levels – about US$50 billion a year – will be a significant challenge. In most countries, especially oil importers, domestic resources are constrained by low savings rates, a narrow tax base, ineffective budget administration, and under-developed capital markets. In the aftermath of the global financial crisis, the prospects for increases in traditional official aid are bleak. Infrastructure financing from emerging markets is growing, but remains largely unpredictable. Private investments in infrastructure are hampered by regulation and a dearth of bankable projects on the continent. Meeting Africa’s infrastructure financing needs will thus require reforms of the business environment and innovation to address these barriers, including financial constraints.

Sources of infrastructure finance

African countries have been drawing on various sources of financing for their infrastructure projects, including: equity finance; debt finance; local and international sovereign bonds; corporate bank loans; grants; domestic revenues and funds from development financial institutions. Since infrastructure projects typically require large scale and long-term financing in a mix of local and foreign currencies, the infrastructure project bond that securitizes future cash flows has been gaining investors’ attention. Natural resources could also support a substantial part of Africa’s infrastructure development—indeed a number of countries have issued Eurobonds for infrastructure, on the basis of revenues from their natural resources. The development of African domestic government bond markets and access to international bond markets are fundamental to bridging the vast financing gap. Africa sovereign bonds have been attracting high levels of international interest as investors sought new and higher sources of yields. The reduced debt-to-GDP ratios, high growth and improved political environments on the continent also heightened >>

African Development Bank’s “AAA” Ratings Affirmed with a Stable Outlook

The stable outlook on the Bank’s rating balances its intrinsic strengths with the requisite of further building its resilience and adapting its business strategy to the changes in its operating environment. These are equally important for the Bank to continue maximizing its added-value for its shareholders and Regional Member Countries while protecting its balance sheetBusiness and financial soundness. | The African Review

he African Development Bank “AAA” ratings were affirmed with a stable outlook by the four leading international rating agencies that rate the Bank. According to Standard & Poor’s, Moody’s, Fitch and JCR (Japan Credit Rating Agency Ltd.), these ratings are underpinned by the Bank’s strong financial profile as well as prudent financial management and policies. These strengths helped the Bank to operate in a volatile operating environment marked by socio-political and economic turbulence in North Africa, and rampant crisis in the Euro zone. Rating agencies have also recognized the Bank’s shareholders’ support as a major factor contributing to the Bank’s excellent credit quality. This support was demonstrated by shareholders’ unanimous decision to approve the Sixth General Capital Increase tripling the Bank’s capital base.

www.afdb.org

investors’ interest -- in the first half of 2013 alone, African countries issued over $2 billion in international sovereign debt. At the same time, questions have been raised whether proceeds are indeed used for infrastructure outlays and even if so, whether sovereign bonds are the most efficient source of funding for infrastructure. For example, infrastructure project bonds, as used in Brazil, Chile, Malaysia, can reflect the long-term nature of infrastructure financing and can be a suitable form of funding. Still, besides being a potential source of infrastructure funding, issuance of international sovereign bonds facilitates development of the financial markets in Africa by providing benchmark for other government and corporate bond markets. African governments should also increase mobilization of domestic resources. Removing exemptions and strengthening tax administration would increase public tax revenues. To mobilize private savings, formal financial institutions could offer long term saving instruments, and governments could provide corresponding tax incentives. African governments can help by improving the regulatory and institutional framework as well as encouraging new forms such as Islamic finance institutions and private equity funds. With improvements in the investment climate and project processes, private investments and PPPs are scaling up, including in sectors traditionally dominated by the public sector. Total private investment into African roads grew from US$ 1.4 billion in 1990 99 to more than US$21 billion in 2000 - 05. A new wave of private road projects in South Africa, Mozambique, Kenya, Senegal, Côte d’Ivoire adds to the list. The toll road model has been successful on the continent under both public (South Africa, Tunisia, Morocco, and recently, Zimbabwe) and private systems (South Africa). The strongest recent growth in private investment has been in electricity generation through independent power producers.

Special challeneges green and regional infrastructure

Given the abundance of natural resources, African is well positioned to gradually transition to green infrastructure financing. For example, countries can tap carbon finance markets to finance low-carbon infrastructure. So far though, access to carbon credits by clean technology projects in emerging markets and developing countries has had mixed results across regions, with Africa lagging substantially behind. On a more positive note, new private investors are also emerging in sectors where infrastructure-related revenue streams from off-take agreements are not the only source of revenues. This includes co-generation in the power sector, where electricity is generated as a by-product of sugar and ethanol production in countries like Tanzania, Kenya, and Mozambique, and oil sector gaspowered electricity in Nigeria and Tanzania. Fostering a regional approach to infrastructure is another source of infrastructure financing through efficiency gains. The continent could save US$ 2 billion a year in energy costs by utilizing the existing regional power pools to their full potential. Similarly, developing a transnational highway network linking all capitals in sub-Saharan Africa could result in trade gains of up to US$ 250 billion over fifteen years. The Africa Infrastructure Marketplace (SOKONI) was established as a web-based platform to empower project sponsors and development officials to advertise projects and enable done governments and potential financiers to easily identify African projects of interest.

The role of the African development bank

The Bank’s recent activities span both knowledge generation and operations.

24 | The African Business Review

On the knowledge side, the Bank has recently developed the Africa Infrastructure Development Index to monitor the state and progress of infrastructure development on the continent. The index cuts across key components of infrastructure: net electricity generation; phone subscriptions (mobile and fixed); roads; access to water and to sanitation. As with other benchmarking tools, the index points out strengths and weaknesses of particular countries and informs the Bank’s operations. On the operational side, the Bank catalyzes funds through traditional and innovative methods for both the public and private sectors in order to facilitate private sector development. Over the past six years, the Bank has increased the volume of financing for infrastructure projects, as well as the proportion of financing that goes to regional projects. The Bank is also working closely with the AU and UNECA through the recently launched Program for Infrastructure Development in Africa (PIDA), and is developing a road map for the execution of a priority set of regional integration infrastructure projects. The AfDB’s support for infrastructure development in Africa delivered results. Between 2012 and 2012, 13,237km of roads were constructed or rehabilitated; 34 million people had improved access to transportation; 14,500km of electricity transmission lines were installed; 1,110MW electricity power generation capacity was installed, while 15 million people had improved access to water and sanitation and 168,000 jobs were created in the private sector. In July 2013, two outstanding Bank’s initiatives based in Uganda and Côte d’Ivoire, received Development Impact Honors from the US Treasury Department in an awards ceremony in Washington, DC. The AfDB is the first multilateral development bank (MDB) to receive recognition for two projects in the same year. The selected projects are the AfDB’s Emerging from Conflict/Multisector Support Project in Côte d’Ivoire, which focuses on restoring social services and reducing gender-based violence in post-conflict Côte d’Ivoire, and the Community Agricultural Infrastructure Improvement Programme in rural Uganda.

New initiative - Africa50 fund

The AfDB is championing a new initiative to ensure the delivery of transformational infrastructure. The Africa50 Fund is a new, credible and innovative vehicle for infrastructure financing in Africa to support Africa’s economic transformation and was endorsed by African Finance Ministers at the Bank’s Annual Meeting in Marrakech in May 2013. The focus of the Fund will be on bankable, growth supporting regional connectivity mega projects, including priority projects under the Program for Infrastructure Development in Africa that will deliver The Africa50 Fund will be a one stop shop turning concepts to operations through project development and finance with complementary instruments. The Africa50 Fund will work with regional entities to achieve goals for Africa by Africa. The Africa50 Fund aims to raise US$10 billion. Funding is expected to come from the AfDB, African countries, institutional investors (SWF and pension funds); global capital markets and emerging market development partners. It will be through equity, bonds and revolving project development funds.

About the Author:

Mthuli Ncube is the Chief Economist and Vice President of the African Development Bank. He thanks Zuzana Brixiova and Basil Jones for inputs into preparing this article.

“It is clear…

that any global firm interested in growth must see Africa as an essential part of its portfolio.” E. Neville Isdell, Chairman and CEO, The Coca-Cola Company, USA

The African Business Review ABI

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Growth of Regional Banks in Africa By Suresh Chaytoo

African banks are expanding into neighbouring countries and further afield, benefitting from their knowledge and expertise in familiar territory.

ver the last five years Africa has witnessed a growing trend for Africa’s home-grown banking groups to extend their franchises beyond their own borders, with about 15 of them already exploring new territories. Regionalisation has become a prominent part of African banks’ strategies as these historically local players continue their ongoing search for growth and a way to diversify their earnings as competition increases in their home markets. Obviously Africa’s high-growth economies are an attraction, but one of the key drivers of bank regional expansion is linked to clients expanding across the continent as they too take advantage of the opportunities Africa offers. Banks therefore are following their clients to areas where activity in the purchase and sales of goods are prevalent, perfectly addressing their own growth strategies. Building local knowledge and expertise is important and forms the foundation for any bank’s expansion plan. Consequently, proximity to a bank’s home country is a key competitive advantage, as banks are usually more familiar with their neighbours than with countries in distant destinations. A good example of successful regionalisation is the robust expansion of Kenyan banks like KCB, CBA, Equity Bank and Co-Op Bank into East Africa (South Sudan, Tanzania, Uganda, Burundi and Rwanda). In South Sudan, banks like KCB, for example have had first mover advantage and are now part of the biggest banking groups in the country. Also helping bank regionalisation is the growth of regional trading hubs between port cities (Nairobi, Kenya and Dar es Salaam, Tanzania) and between countries inland (like Uganda and Rwanda), opening opportunities for banking products and services. However, banks are also moving further afield to take advantage of high-growth markets. An example of this has been the rapid expansion of some Nigerian banks into Africa. UBA Nigeria and Ecobank have a presence in over 15 countries on the continent. While there may not be natural trade flows or client expansion into these new markets, Nigerian banks looked at avenues to diversify their funding base, taking advantage of earnings from high-growth sectors in growing countries. This strategy is a long-term play as earnings growth is usually much slower but intrinsic value is built in these franchises along with a brand and relationships. But the risks of regional development cannot be ignored. Unexpected regulatory changes within a country can be swift and can significantly change the economic landscape, something for which banks need to be prepared. An example is the recent requirement in Zambia for foreign-owned banks to increase their capital from US$5-million to $100-million. Credit risk and asset diversification are other key elements for banks to assess as they diversify into other regions. Often banks first initiatives in a new country are trade related but in order to compete with local players, they usually need to diversify to gain a deposit base and build traction in their earnings. This inevitably means a move into the retail segment at some point. However, growth in retail banking presents a two-pronged challenge. Firstly, a branch

32 | The African Business Review

network is expensive. In Mozambique, for example, a single branch costs in the region of $1-million to set up from scratch. Secondly, a growing retail base often leads to higher bad debts and banks need to be prepared for the fact that the retail space will attract higher non-performing loans than the corporate space. Getting the correct balance between corporate, investment and retail banking is the key to success for African banks expanding across the continent. But so far, banks are benefitting from their expansion into Africa – earnings are steadily growing and franchises are being built across the continent. A core theme which is emerging as part of this recipe for success is the successful integration of local talent with home country expertise. However, with time, regional expansion will become more difficult and expensive for new entrants which do not have an existing presence in African markets, unless they are prepared to pay a handsome premium to acquire a regional banking franchise. For those which have already taken the risk, it’s an exciting time and the development and expansion of African banks should mean they will soon be able to compete with any in the rest of the world, if they are not doing so already.

About the Author:

Suresh Chaytoo heads FirstRand Bank’s International Financial Institutions and Development Financial Institutions business. Suresh joined FirstRand Bank in January 2011 as regional head of Financial Institutions for Africa and Latin America with the responsibility for supporting FirstRand Bank’s strategic business expansion in Africa. He was appointed as sector director to head the business in May 2013. Prior to 2011, his previous assignments during his 20+ year career in banking include tenures as vice president and regional head of Financial Institutions (Middle East and Africa) for ICICI Bank Limited in the Kingdom of Bahrain, and head of Channel Finance at Citigroup South Africa. Suresh has also held positions within Structured Trade Finance and Corporate Banking during his career. He holds an MBA, a degree in Commerce and a CAIB (SA) qualification from the Institute of Bankers in South Africa.

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ANALYSIS Managing financial sector crisis in Nigeria through AMCON By Dr. W. U. Ani

This paper examines the recent banking sector crisis in Nigeria and chronicles the attempts by the monetary authorities to tackle the problem, especially through the establishment of the Asset Management Company of Nigeria. The Nigerian model of AMCON seems to operate more than a special purpose vehicle in view of the operational framework backing it to continuously acquire the excess of non-performing loans of commercial banks. There is urgent need to revisit the operational modalities of AMCON to make it more responsive to its core mandate of resolving non-performing loan challenges of the banking sector in Nigeria.

t is now almost generally accepted that the 2005 bank consolidation exercise in Nigeria had some positive impacts on the banking sector and the overall economy (Ani, et al 2011, 2012). Following

the exercise the banking system was transformed from 89 banks to 25 through regulatory merger and acquisition and later to 24 through market-induced merger and acquisition. Further revisions have since taken place involving the reversion of one bank to a regional bank and the nationalization of three other banks. Bank branches grew from 2,900 in 2005 to almost 5,500 in mid-2009. Apart from these operational changes, the exercise led to the deepening of the capital market, resulting in massive increases in market capitalization of listed equity from 300 billion Naira in 1999 to 10.59 trillion in 2007. Of these, about 42 per cent were attributable to the banking sector alone ( Stock Exchange Fact Book, Various Issues). Further more, the banks were positioned to actively participate in a wider range of activities, including financing of infrastructure and the oil and gas sector. However, while the consolidation exercise lasted, certain developments in the economy and within the banking system itself put the banking sector at serious risk. This paper examines these crisis situations in detail and chronicles the attempts by the monetary authorities to tackle the problem, especially through the establishment of the Asset Management Company of Nigeria. The

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rest of the paper is organized as follows: Section two is devoted to detailed examination of the financial sector crisis; section three considers the response of the monetary authorities to the financial crisis, and especially a quantitative justification for the AMCON takeover of toxic assets of banks; and section four examines the activities of the asset management company of Nigeria. We present conclusion in section five.

Financial sector crises in Nigeria

In mid-2008 when the global financial and economic crisis set in, the domestic financial system was already engulfed by several interdependent factors that led to the re-emergence of an extremely fragile financial system similar to the pre-consolidation era. These factors included macroeconomic instability caused by large and sudden capital inflows, major failures in corporate governance at banks, lack of investor and consumer sophistication, inadequate disclosure and transparency about financial position of banks, critical gaps in regulatory framework and regulations, uneven supervision and enforcement, unstructured governance and management processes at the CBN/weaknesses within the CBN, and weaknesses in the business environment. It is apparent therefore, that when the global crisis eventually hit Nigeria, the banking sector was ill equipped to weather the storm in spite of bank recapitalization. In the real sense the financial crisis had an adverse effect on both the oil and gas sector and the capital market where the Nigerian banks were exposed to the tune of N1.6 trillion as at December 2008. The result was a sharp deterioration in the quality of banks’ assets which immediately led to concerns over banks’ liquidity. Indeed, the Nigerian banking sector was thrown into severe crisis as many of the banks became distressed. While citing the CBN Governor, PricewaterhouseCoopers (2011: 150) has identified nine internal factors that exacerbated the financial sector crisis in Nigeria post bank consolidation as follows: 1. Capital inflows and macroeconomic instability. In this regard banking system liquidity closely matched oil price volatility. Increases in bank deposits allowed lending to expand. In the period 2004 to 2009, banking assets grew on average by 76% per annum. Because the economy could not absorb the excess liquidity from oil revenues, funds flowed into the capital markets. Market capitalisation of the NSE increased 5.3 times between 2004 and 2007 (Vision 2020 Statement). The value of bank stocks increased nine times in the same period (NSE FACT BOOK, Various Issues) 2. Poor corporate governance The Central Bank concluded that governance failed because boards ignored the unethical practices of executive management. 3. Lack of investor and consumer sophistication. Many people made investments with little understanding of the inherent risks. Consumers were subjected to bad advice, poor service and hidden fees. 4. Inadequate disclosure and lack of transparency. The Central Bank has stated that returns were often inaccurate, incomplete and late. There is also evidence that banks colluded with other banks to enhance financial positions. 5. Critical gaps in regulatory framework and regulations. The Financial Services Regulatory Co-ordinating Committee (FSRCC), the co-ordinating body for financial regulators, did not meet for two years. The excess capital in the banks allowed malpractice and regulatory arbitrage to go unchecked. There was no framework for consolidated bank examination. 6. Uneven supervision and enforcement. The Governor stated that the Supervision Department at the Central Bank was

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not structured properly to supervise or enforce regulations. There was no internal accountability for: • • • • • • •

risk management; corporate governance; fraud; money laundering; cross regulatory co-ordination; enforcement; or legal prosecution.

To complicate matters, banks frequently ignored the examiners’ recommendations. 7. Internal weaknesses at the Central Bank. The internal reporting systems at the Central Bank were inadequate and dysfunctional. Corporate governance was described as laissez-faire. 8. Weaknesses in the broader business environment. The primitive business infrastructure includes a long and expensive legal process, a lack of reliable credit agencies and an inability to conduct effective credit assessments. To prevent a systemic bank crisis the Central Bank removed the CEOs of the unstable banks and injected Tier II capital of N620 billion (US$4 billion) into these banks. 9. Demise of the universal banking model. The Central Bank has terminated the universal banking model. It concluded that the excess of capital encouraged banks to develop financial supermarkets at the expense of core banking principles. The universal model had been used by the banks for speculative and proprietary trading. The new model prevents investments in non-bank subsidiaries and banks are required to divest such investments to holding companies. There are now three types of banks in Nigeria: • • •

Commercial banks (broken into three classes – regional, national and international); Merchant banks; and Specialized banks: Microfinance, mortgage, noninterest (regional and national) and development finance institutions.

It is apparent that when the global crisis eventually hit Nigeria, the banking sector was illequipped to weather the storm in spite of bank recapitalization. Financial sector reforms by monetary authorities

The global financial crisis strained the gains made in the Nigerian financial services sector from the banking sector consolidation. The experience in the industry in the wake of the crisis, however, mirrored global trends. Following from the impact of the global financial crisis, a section of the banking industry was badly affected as some banks were in grave condition and faced liquidity problems, owing to their significant exposure to the capital market in the form of margin trading loans, which stood at about N900.0 billion as at endDecember 2008 (Sanusi, 2010: 10). The amount represented about 12.0 per cent of the aggregate credit of the industry or 31.9 per cent of shareholders’ funds. Furthermore, in the wake of the high oil prices, a section of the industry extended huge facilities to the operators in the oil and gas sectors, particularly those operating at the downstream segment. As crude oil prices tumbled, most of these

facilities became non-performing and banks that were significantly exposed to the sector were badly affected. As at end-December, 2008, banks’ total exposure to the oil industry stood at over N754.0 billion, representing over 10.0 per cent of the industry total and over 27.0 per cent of the shareholders’ funds (Sanusi, 2010: 10). The excessive exposures resulted in the weaknesses (liquidity problems) exhibited by some of the banks towards the end of 2008. As part of its liquidity support, the CBN Discount Window was expanded in October 2008 to accommodate money market instruments such as Bankers’ Acceptances and Commercial Papers in order to avert a liquidity crisis (Sanusi, 2010: 10). In the third quarter of 2009 the Central Bank of Nigeria commissioned a special audit of the country’s banking sector which resulted in nine of the country’s 24 banks being declared “unhealthy” (Mishnah, 2011). Banks failed the audit on liquidity, asset quality, capital adequacy and poor corporate governance practices concerns. The audits identified a number of banks that were in precarious financial positions. Eventually the Central Bank of Nigeria intervened by replacing the management of the affected banks while a good number of them are currently being prosecuted.

AMCON will ensure that shareholders recover part of their lost investment and assist in reducing the debt overhang that has slowed down the recovery of the capital market. Establishment of the asset management company of Nigeria

billion, which was fully subscribed to by the Federal Government and held in trust by the Central Bank of Nigeria and Federal Ministry of Finance (Inc.) in equal proportion of 50.0 per cent. According to CBN (2011) objects of the Corporation include: assisting eligible financial institutions to efficiently dispose of eligible bank assets; managing and disposing of eligible financial assets acquired by the Corporation; and obtaining the best achievable financial returns on eligible bank assets or other assets acquired by it pursuant to the provisions of the Act. AMCON commenced operations in December 2010 with the issuance of consideration bonds (subsequently, tradable bonds would be issued) worth N1, 036.3 billion of which N740 billion was earmarked for purchase of the non-performing loans in five commercial banks. The breakdown is as follows: Wema Bank N15.2 billion; Intercontinental Bank N146.0 billion; Bank PHB N140.0 billion; Oceanic Bank N200.0 billion, Union Bank N239.0 billion and others N295.8 billion (CBN, 2011: 19). The rescued banks were expected to enjoy two sets of funds injection: one was to buy up their non-performing loans and the other, to cater for their capital adequacy. In all, the Corporation has signed a debt purchase agreement with 21 banks in the country, in which over N2,000.0 billion worth of non-performing loans would be purchased before the end of the first quarter of 2011 (CBN, 2011: 19). At the end of 2010 AMCON took over N2.43 trillion (US$15.98 billion)* of toxic assets (PWC, 2011). These assets have been exchanged for consideration bonds. The plan is that the AMCONissued bonds will later be swapped for FGN (Federal Government) guaranteed bonds to be issued by AMCON. In total, 21 banks have sold toxic assets to AMCON. This figure includes nine of the 10 rescued banks in 2008 and 12 other indigenous banks that were not subject to the Central Bank rescue plan. It has been reported that the 12 non rescued indigenous banks have toxic assets of N581 billion (US$ 3.82 billion). AMCON had planned to replace N1.03 trillion (US$6.77 billion)* worth of consideration bonds issued to 21 lenders in December 2010 with fully tradeable bonds by 31 January 2011. Table 1 below shows the justification for the establishment of the corporation. Visit www.amcon.com.ng for the details.

One of the initiatives carried out to date by the Central Bank alongside its ongoing reform programme is the establishment of the Asset Management Corporation of Nigeria (AMCON) (PWC, 2011). In an effort to stabilize the financial sector, the Asset Management Company of Nigeria (“AMCON”) was created by the CBN and Ministry of Finance (“MOF”) as a means of purchasing non-performing loans from the banking sector to recapitalize the unhealthy banks, which should boost confidence and subsequently liquidity within the sector. Financial implications of liquidating intervened The AMCON is a multi-purpose resolution vehicle that is banks empowered to purchase non-performing Bank Deposits Due to Banks Total (N’Mn) Total (US$’Mn) assets from banks as well as inject needed Union 729,566 51,274 780,840 5,205 Oceanic 552,766 211,014 763,780 5,092 capital in the form of appropriate securities Intercontinental 563,024 276,847 839,871 5,599 (Tier 1 or Tier 2). In the case of distressed Bank PHB 700,782 145,477 846,259 5,642 Afribank 355,531 2,936 358,467 2,390 banks, the AMCON will therefore play the ETB 163,023 48,268 211,291 1,409 key role of facilitating mergers, acquisitions Unity 202,156 4,707 206,863 1,379 Finbank 158,493 17,712 176,205 1,175 or capital injection by new investors. The Spring 131,927 24,200 156,127 1,041 Boards of Directors of the banks have led Wema 101,652 101,652 677 Grand Total 3,658,920 782,434 4,441,355 29,609 and reached an advanced stage of discussion with interested parties. Source; Asset Management Corporation of Nigeria. The Ministry of Finance and the Central Bank of Nigeria remain convinced that with the setting up of this corporation, the nation is According to AMCON the rationale for its establishment in Nigeria close to a final resolution of the banking crisis and the repair of bank is hinged on what would have happened in the absence of the balance sheets. Also, AMCON will ensure that shareholders recover intervensionist agency. Accordingly, failure to resolve the banking part of their lost investment and assist in reducing the debt overhang crisis would have led to the following: that has slowed down the recovery of the capital market. The Asset Management Corporation of Nigeria was jointly established by the -- Continued shut down of credit markets, increased job losses Central Bank of Nigeria (CBN) and Federal Ministry of Finance -- Negative impact on Nigeria’s credit rating and risk rating, (FMF Inc.) as a distress resolution vehicle to address the challenge as a result of banks’ negative shareholders’ funds of the toxic assets in the banking industry. The Act, establishing the -- Negative impact on the real sector. The intervened Banks Corporation, was passed into law by the National Assembly during had: the first half of 2010, while the President gave his assent on July • N4.4 trillion deposits and Interbank takings, 19, 2010. The authorized share capital of the Corporation is N10.0 including over N2 trillion of Public Sector funds

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• 8-10 million customers; and • 50,000 staff Contagion impact on other banks – with total banking deposits of N10.9 trillion As evident from the recently announced Nigeria Deposit Insurance Corporation (NDIC) settlement of depositors of failed banks at 3 kobo per Naira Diminished confidence by foreign creditors and investors.

Conclusions

AMCON currently has over N3 trillion of toxic assets in its custody bought at prices that were negotiated with CBN appointed managers of rescued banks. It is doubtful if this could be described as fair pricing as being canvassed by those positioning to benefit from these huge assets now in possession of a government controlled body. There are some pertinent questions that satisfactory answers have not been fully given. For instance what determined which assets the rescued banks will sell to AMCON? Could some of these assets that were sold have been restructured and recovered and written back into the books of the banks?

What determined which assets the rescued banks will sell to AMCON? Could some of these assets that were sold have been restructured and recovered and written back into the books of the banks? Perhaps more worrisome is that AMCON is also empowered to buy all bank toxic assets above five per cent of the banking industry. What does this mean? Besides encouraging non-prudential lending in the banking sector, it may be argued that this also a careful camouflage to ensure that the CBN creates an impression that the banking system is healthy. There is no other economy to our knowledge where you have a body standing by to buy off toxic loans above a certain percentage from banks. We provide answers to some of these questions in the next volume of this paper. The truth we drop here however is that it is likely the CBN has positioned AMCON to take over the loans that it has given that would most likely go bad. This is to cover the back of the CBN and prevent public outcry. AMCON is an emergency bank rescue vehicle. The purpose of such a vehicle is to intervene just within a period of time to resolve banking challenges and not to be the toxic loan tunnel arm of the CBN or the existing commercial banks. Inspite of obvious shortcomings of AMCON, here are some of its itemized achievements. NPLs • AMCON acquired over 12,500 Banking sector NPLs worth N1.845 trillion (Discounted Value of $11.6 billion within set deadlines. • AMCON purchased over 95% of NPLs in the industry with banking sector NPLs at less than 5% • Restructured N600 billion ($3.85 billion) of NPLs acquired in 2011

Bridge banks • AMCON acquired three bridge banks – Mainstreet (Afribank), Keystone (Bank PHB), & Enterprise (Springbank) from the NDIC for a total of N765.3 billion (c.$4.91 billion) and prevented a potential liquidation

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•

Funds injected through bonds issuances have brought their NAVs to zero, attained the minimum capital base of N25billion (c.$160 million) and minimum capital adequacy ratio of 10% as stipulated by the CBN. AMCON appointed financial advisers to provide advisory services towards determining strategic exit options for AMCON’s shareholdings in the Bridge Banks.

Amcon is an emergency bank rescue vehicle. The purpose of such a vehicle is to intervene just within a period of time to resolve banking challenges. Intervened banks • AMCON injected capital into Oceanic, Intercontinental, Finbank, ETB & Union through bond issuances of N1.566 trillion (Discounted Value of $10.06 billion) to prevent failure of these banks. • All of the intervened banks have been successfully capitalized, with some presently merged and others under new management. Socio-economic impact • AMCON prevented a systemic crisis in the financial services industry and the liquidation and collapse of several banks. • AMCON improved banks’ balance sheets so banks can focus on lending to the real economy and support economic growth. • Prevented a run on customers’ deposit, prevented job losses and restored confidence in the financial services industry.

References:

Akpabio U. (2011), “Pains of Central Bank of Nigeria’s Intervention’” Nigeria Guardian. Online Accessed 11/07/2011. AMCON (2012) Update on Achievements, retrieved from AMCON website. www.Amcon.org.ng Ani, W. U. et al (2012) “The Effect of Foreign Exchange Reforms on Financial Deepening: Evidence From Nigeria”, American Journal of Business Management vol3 Bank for International Settlements (BIS) (1994). “64th Annual Report”. Basel, Switzerland: BIS. Kaufman, G. G. (1994). “Bank Contagion: A Review of the Theory and Evidence”. Journal of Financial Services Research (April): 123- 50. Mishnah, S. (2011) “AMCON – reconstructing the Nigerian banking sector”. Viewpoint PricewaterhouseCoopers (PWC) (2011). Unlocking Potentials, Perspectives on Strategic and Emerging Issues in Africa West Coast Banking. www.pwc.com/za Accessed 26/07/2011. Sanusi, L. S. (2010) Global Financial Crises Impact In Nigeria, Nigerian Financial Reforms and The Roles of Multilateral Development Banks and IMF. Submission to the House Financial Services Committee of the US Congress Hearing on the Global Financial Crisis. November, 16th.

About the Author:

Dr. Wilson Ani is a chartered accountant having with over sixteen years of experience. He has taught for over twenty years in various institutions of higher learning in Nigeria and currently is a senior research fellow in Finance and Banking at the Michael Okpara university of Agriculture, Umudike, Abia state, Nigeria. He has to his credit a number of well researched textbooks and has written many articles, published in reputable journals. He is married with children and is a Christian Minister, committed to world evangelization.

Strengthening the African banking sector: How development finance institutions can help By Julien Lefilleur

The African banking sector has been growing strongly for several years now – and yet it still remains relatively under-developed, both in comparison with other regions of the world and also in relation to the size of the continent’s economies. Small, fragmented and insufficiently competitive, it is only partially capable of meeting the financing needs of the African private sector. By helping to facilitate the emergence of sufficiently large banking groups and by organising syndication markets, development finance institutions (DFIs) can on the one hand help to boost the sector’s financing capacity and on the other improve its performance. Similarly, even though African banks have an overall funding surplus they nonetheless find it difficult to obtain the long-term funds that would enable them to finance long-term investments. Here again, DFIs can help to organise the market so that the longterm refinancing possibilities that exist locally are leveraged more effectively. A small, fragmented and under-performing financial sector

ub-Saharan Africa has the world’s least-developed financial sector. With the exception of South Africa, total African bank assets amount to less than USD 300 billion: around one tenth the size of China’s largest bank, or equivalent to the third-largest bank in Sweden. Even after taking GDP disparities into account, the Sub-Saharan African financial sector remains very under-developed, with penetration rates ranging between 30% and 40%1 (half the average for developing countries). Access to the banking sector is very limited, with fewer than five bank branches for every 100,000 inhabitants – the lowest rate in the world (see maps 1, 2 and 3). In addition to its very small size, the African banking sector remains highly fragmented: the largest banking group in SubSaharan Africa (SSA) has total assets of USD 17 billion – one third the size of the leading bank in Cyprus – and only a dozen banking groups have total assets in excess of USD 5 billion. Africa hosts more than 500 banks, including many very small banks that are inefficient because they are unable to generate returns of scale, lacking innovation, and often under-performing. These banks are therefore incapable of generating a healthy and competitive environment, and confine themselves to low-risk activities within highly profitable niche markets, such as public debt, foreign exchange or money transfer (Western Union, etc.), with hardly any impact on privatesector financing. As a result of this under-development in Africa’s 1.

Excluding South Africa

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banking sector, total private-sector credit is no more than 20% of African GDP,2 the lowest rate in the world. Ghana offers a good illustration of this situation: despite having a large number of banks (27), for total assets of less than €10 billion, the indicators reflect a sector that is relatively uncompetitive (average lending rate over 25%, net interest margin above 8%, ROA of 2.4%), quite inefficient (cost to income ratio of 60%, non-performing loans rates between 15 and 20%) and highly profitable (ROE of 18% and profit before tax margin of 31%; PWC, 2012). The WAEMU (West African Economic and Monetary Union) zone’s underperforming banking sector offers another example: with a statutory minimum capital requirement of just FCFA 5 billion (€7.6 million), the region has around 100 banks (by comparison, Nigeria has 22 banks – and its GDP is five times higher) – yet private-sector credit is no more than 15% of GDP; a large number of these banks – generally small in size and often state-owned – are virtually insolvent, destined to disappear or be taken over, surviving merely because the regulatory authorities lack the drive to restructure the sector. Co-existing alongside these smallscale banks are the large banks, limited in number and operating in an oligopoly, imposing high margins on captive markets with little incentive to improve their operating performance. Africa is the continent where the dominant banks enjoy the highest level of power within their market: Honohan and Beck (2007) shows that, across a representative sample of African countries, the top three banks hold a market share of 73%, as compared with 60% in the rest of the world.

The expansion of banking networks remains highly dependent on the proximity of the markets concerned in historic, cultural, institutional and regulatory terms. DFIs could help these banks to penetrate markets that are less natural and accessible for them.

Yet even though these leaders occupy dominant market positions they still remain small in absolute terms and are therefore limited, in terms of financing major operations, by prudential constraints (single obligor limit). In the absence of an efficient syndication market, a significant proportion of the financing needs of African economies – particularly in the areas of agribusiness, infrastructures, petrol and mining industries – is covered by external financial systems (donors, international banks, suppliers’ credits, etc.). Yet at the same time a significant proportion of the African banking system’s funding is flowing out of the continent (map 4).3 This paradoxical situation – especially extreme in the countries with the least developed banking sectors (Central and West Africa) – in large part reflects the fragmentation of the local banking systems and their inability to coordinate and mobilise their resources for major projects. 2.

For comparison, this ratio exceeds 100% in high-income countries.

This is not a new situation: over the period 1980–2009, Africa was a net creditor with respect to the rest of the world, with a net capital outflow valued at between USD 600 bn and USD 1400 bn (almost equivalent to current African GDP); ADB and GFI, 2013.

Map 1: Number of commercial bank branches per 100,000 adults and depositors with commercial banks per 1,000 adults - World Source: Author calculations, based on the Financial Access Survey database.

Map 2 : Banking sector total assets, private-sector credit and bank deposits (%GDP) – Africa Source: Author calculations, based on the Africa Development Indicators database and Beck and Ed Al-Hussainy (2009).

Map 3: Bank deposits (%GDP) – World Source: Author calculations, based on Beck and Ed Al-Hussainy (2009).

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Map 4: Net foreign assets and offshore bank deposits / domestic bank deposits – Africa Source: Author calculations, based on the Africa Development Indicators database and Beck and Ed Al-Hussainy (2009).

Substantial restructuring needed

A banking sector of this kind is inefficient and needs to be restructured in order to boost competition levels, while at the same time facilitating the emergence of banks large enough to meet the needs of the entire local private sector. To date few countries have undertaken a restructuring of their banking sector, however; and those that have completed this process remain the exception. Nigeria is one of these exceptions and today its restructuring is beginning to bear fruit: several banks have reached a size where they are generating economies of scale, and can finance major transactions in the local private sector. With six of the seven largest banks in SubSaharan Africa, the Nigerian banking sector has become competitive, capable of offering substantial volumes and competitive financing terms. Numerous countries have announced similar consolidation measures, following Nigeria’s example (WAEMU and CEMAC zones, Ghana, Kenya, etc.) – but are dragging their feet with respect to implementation. Box: The three development phases of Africa’s banking sector Phase 1: The banking sector has two or three major banks, often inherited from the colonial era, in an oligopolistic or even quasimonopolistic position. These banks provide very little finance to the private sector – and when they do it is short-term only, and at very high rates – concentrating on high-return, low-risk activities, primarily financing the state and the country’s main private and state-owned businesses. Alongside these banks, a few inefficient specialized banks, many of them state-owned and akin to development banks, operate in niche markets (housing, SMEs, agricultural finance, etc.). Overall, the country’s banking activity is primarily focused on taking in shortterm funds from depositors in order to provide short-term finance to risk-free counterparties (the state in particular) or to invest the funds outside the country, in the financial systems of developed markets. The countries in this development phase are mainly in central Africa (Congo, Democratic Republic of the Congo, Central African Republic, Chad) and to a lesser extent in West Africa (Guinea). Phase 2: The banking sector develops progressively with four to five dominant banks, in an oligopolistic position, but beginning to generate economies of scale. A number of private universal banks appear alongside these banks – still small, but well managed, efficient, and with a high growth potential. The specialized banks still survive. The sector has a very high number of banks given the size of the country, but competition is still limited because the small banks lack resources, expertise and innovative capability, they are limited in terms of financing volumes and some of them are focused on maintaining a position in niche markets (foreign exchange, serving community groups, Islamic finance, etc.). Competition develops among the four to five dominant banks, which start to offer attractive financing terms to the leading players in the market, but still lack the capacity – even when they enter into syndication – to finance major operations. A syndication market is not developing and external

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financial systems continue to play an important role in financing investment. Overall, the country’s banking activity, which is focused mainly on the short term, consists of financing the state and the major local corporations, while the retail segment is developing (often using salary domiciliation and the deduction of repayments at source – as a way to secure the bank – limiting this service de facto to civil servants or to the employees of major corporations). Kenya, Ghana, Côte d’Ivoire and Senegal are examples of countries in a fairly advanced phase 2 stage. Phase 3: The banking sector has undergone a wave of consolidation: the small, inefficient banks have disappeared and the number of banks with critical mass and significant market shares has risen. The number of banks has fallen significantly and a healthy level of competition is starting to develop across the various customer segments, with the focus (on the assets side) on the major privatesector companies and on individuals (democratisation of banking services and widespread access to mobile banking). The banks begin to penetrate the less easily accessible SME sector, limiting themselves to large, highly structured SMEs or those contracting with major corporations, allowing the banks to use these contracts as security. The sector has sufficient capacity to finance the majority of local transactions and a syndication market is beginning to develop. The banks are rapidly expanding their networks to raise funds, growing their depositor bases. The banking sector’s penetration rates within the economy are rapidly increasing and banks are offering innovative and diversified products (microfinance, leasing, mortgage finance, warehouse financing, etc.). Finally, the main banks in the market are attaining a size that allows them to begin a phase of expansion into neighbouring markets. Only two countries, South Africa and Nigeria, can be considered as being in phase 3 (Ghana and Kenya might soon join them if their incipient consolidation phases are successfully completed). The evolution of Nigeria’s banking sector in recent years provides a good illustration of the transition from phase 2 to phase 3: from 89 banks in 2004, the country progressed to 25 banks in 2006 (first wave of consolidation), and then to 22 in 2011 (second wave), of which 11 currently have balance sheets in excess of USD 5 billion and 5 have started to expand beyond their national borders.

Closer analysis shows that the four regions identified in Africa – West Africa, Central Africa, Southern Africa and East Africa – present a diverse picture. While Southern Africa shows indicators close to those of emerging markets, closely followed by East Africa, Central Africa and to a lesser extent West Africa are lagging a long way behind, with the world’s lowest financial system development indicators. These two regions are still mainly in phase 1, or in early phase 2 (see box). With private-sector credit/GDP rates of less than 5%, the Central African Republic, Chad and Congo have the world’s least-developed banking sectors. Southern and East Africa have most of their countries in phase 2 – some of which are close to entering phase 3 – and have successfully developed several regional banks (banks such as I&M, Equity Bank or BancABC, not mentioning South Africa’s banks). All of these observations show the considerable potential for development in Africa’s banking sector. The lack of depth in the financial systems is quite clearly holding back the development of the local economy, and of the private sector in particular. More than 60% of companies questioned in SSA regard the cost of finance as an impediment to growth and nearly half see access to finance as a factor limiting their development. These rates are the highest in the world, far surpassing the levels observed in other developing markets (17% and 15% respectively; Honohan and Beck, 2007; Demirgüç-Kunt et al., 2008).

Fostering new pan-African “leaders”

In order to benefit fully from the opportunities the continent offers, the African banking sector needs to identify pan-African “leaders” capable of carrying capital-intensive pan-African operations.

Development finance institutions (DFIs) can contribute here, with targeted initiatives designed to support banking groups that are well positioned to play this role. Apart from existing groups (Ecobank, BOA, UBA) – which already receive help from DFIs – two kinds of players are likely to prove good candidates: regional groups which have already attained critical mass, and major banks in the African financial centres. Players in the first group include Orabank or BGFI Bank in Central and West Africa, I&M, Equity Bank or Kenya Commercial Bank in East Africa, and BancABC in Southern Africa. These banks have good knowledge of the markets but limited resources. They could benefit from capital injections by DFIs – like those by FMO in Afriland First Bank, Proparco in I&M, and Orabank or IFC in Equity Bank. As for the main African financial centres, with the exception of Central Africa each of these regions has a leading country in terms of financial sector development: Nigeria and Morocco for West Africa, South Africa for Southern Africa and, to a lesser extent, Kenya for East Africa (see map 5). These four countries could lead the way at regional level. Even though South Africa and Morocco do not belong to Sub-Saharan Africa, this geographical area represents their natural growth territory. However, banks in these four African financial centres have traditionally stayed within their geographical boundaries, and their pan-African expansion is a recent development: Moroccan banks in Francophone West Africa, and Nigerian, South African or Kenyan banks in Anglophone Africa. Their expansion into relatively unfamiliar and relatively inaccessible markets still remains limited. The largest banks in these countries (First Bank of Nigeria in Nigeria, FirstRand Bank in South Africa, etc.) are still very focused on their domestic markets. This is where DFIs have a role to play: in encouraging and supporting these banks beyond their borders.

Map 5: Total banking assets of African countries Source: Author calculations, based on the Africa Development Indicators database

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Proparco and FMO supported BMCE’s regional growth through this very strategy, by contributing to the establishment of closer ties with BOA Group, while the International Finance Corporation (IFC) invested in BCP Maroc to finance Group Banque Atlantique’s buyback in West Africa. Similarly, DFIs are supporting the development of the network of Nigerian and South African banks which have already ventured abroad (UBA, GT Bank, Zenith Bank, Access Bank, Standard Bank, etc.). Nonetheless the expansion of these banking networks remains highly dependent on the proximity of the markets concerned – proximity in historic, cultural (especially the business culture), institutional and regulatory terms. In West Africa, for example, while Nigerian banks are taking dominant positions in Anglophone countries (Ghana, Sierra Leone, Gambia, etc.), they are much more timid in the WAEMU zone where Moroccan banks – virtually absent in Anglophone markets – are pre-eminent. DFIs could therefore step up their cooperation by helping these banks to penetrate markets which are less natural and accessible for them.

In order to benefit fully from the opportunities the continent offers, the African banking sector needs to identify pan-African “leaders” capable of carrying out capital-intensive pan-African operations. Long-term financing needs

In their drive to support the development of a local, pan-African banking sector, DFIs have so far focused their initiatives on very traditional funding, based on long-term debt and equity, in order to provide banks with the long-term resources they lacked. Now, however, other, more innovative solutions and forms of support should be considered. First of all, giving the banks access to international markets could reduce their long-term refinancing dependency on DFIs. Groups such as Ecobank have fundamentals that would enable them to obtain good financing solutions in these markets, but investors outside Africa lack the necessary awareness. DFIs could help by integrating African banks in the international financing systems – by guaranteeing their first bond offerings, for example. DFIs could also help local banks to utilise the resources available in their domestic market more effectively. For example, insurance companies and other social security funds have significant long-term capital at their disposal but – due to a lack of knowledge of the banking sector – may be reluctant to invest this with banks over the long term. A significant proportion of these funds, when not invested in developed countries’ banking markets, is placed locally – in government debt securities. By guaranteeing loans lent by these institutions to local banks, DFIs would help to feed these long-term resources into the banking sector and finance a more productive sector. Similarly, most African banking sectors have excess shortterm funds, which although very stable, cannot be used to finance long-term investment due to banking regulations. In order to make better use of these resources, DFIs could explore the possibility of offering liquidity guarantees: providing banks with refinancing in case of a liquidity crisis, which would enable them to convert a larger proportion of their short-term resources into long-term resources. Finally, in order to help banks extend the maturity of their funds, DFIs should also consider stimulating long-term interbank market refinancing, or encourage banks to develop local bond markets.

Developing synergies between the various markets

Developing banks’ resources is not the only way to increase their response capabilities. Better use of resources would also overcome the constraints imposed by their limited size. Developing the syndication

46 | The African Business Review

market could prove especially useful in this respect. As syndication develops on a country-by-country basis, “transnational” syndication remains very rare: only bank groups with subsidiaries in several countries (like Ecobank, BOA Group, Standard Chartered, Standard Bank, etc.) are able to initiate these syndications and they generally remain within the group. DFIs certainly have a role to play in organising this market and encouraging increased bank cooperation. They could, for example, develop their coordination capabilities by offering local banks intermediation services. This pathway remains under-explored by DFIs, whose syndication attempts are usually limited to the projects they are involved in, which are bankable in hard currency. Yet it would stimulate local currency finance markets, over which DFIs have very little control. From a more general point of view, and always with a view to developing the capacity of local banks, it might be possible to increase cross-border cooperation by encouraging banks operating in different markets to develop synergies. Partnerships like the one between Nedbank (based in South Africa) and Ecobank (present in the rest of Sub-Saharan Africa) are few. Most Ghanaian banks, for example, have no partner banks in the WAEMU region, even though Ghana is located in the middle of the area, which greatly limits the scope of the transactions they can undertake with clients active in this region. DFIs could, for example, facilitate regional trade by guaranteeing African banks vis-à-vis their banking counterparts in neighbouring countries (as they do for international trade between Europe and Africa, for example). Generally speaking, a cross-sector approach by DFIs would enable them to connect banks likely to develop synergies, thereby stimulating regional banking integration and the dissemination of knowledge between different markets. This support would develop banks’ understanding of their neighbouring markets, helping to strengthen the overall capability of Africa’s banking systems.

References:

African Development Bank and Global Financial Integrity, 2013. Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980–2009, joint report, May 2013, http://www.gfintegrity. org/storage/gfip/documents/reports/AfricaNetResources/gfi_afdb_iffs_and_the_problem_of_net_ resource_transfers_from_africa_1980-2009-web.pdf Beck, T., Demirgüç-Kunt, A. and Honohan, P., 2008. Finance for All? Policies and Pitfalls in Expanding Access, The World Bank: Washington, D.C. Beck, T. and Ed Al-Hussainy, 2010. Financial Structure Dataset, Revised: November 2010. Beck, T. and Honohan, P., 2007. Making Finance Work for Africa, World Bank Publications. International Monetary Fund. Financial Access Survey Database, http://fas.imf.org/ PWC, 2012. Ghana Banking Survey, PricewaterhouseCoopers, Working Paper. World Bank. Africa Development Indicators Database, http://data.worldbank.org/data-catalog/africadevelopment-indicators

About the Author:

Julien Lefilleur joined Proparco, the French development financial institution (member of the French Development Agency group), in 2004. Having fulfilled a number of different positions – mainly in the Banks and Financial Markets department – in 2010 he opened Proparco’s regional office for West Africa in Abidjan. Julien Lefilleur is also founder and Editor in Chief of the Proparco magazine Private Sector & Development. He is a graduate of École Centrale de Paris with a PhD in economics from the Sorbonne University.

FOCUS Does foreign aid make economic sense? By Finn Tarp

Foreign aid is often seen as different from other forms of investment, and some argue that rather than having a positive effect it tends to distort economies and may potentially slow growth and development. In this article, the author argues that this is not the case and cites UNU-WIDER research, which shows that foreign aid has had a positive effect on growth

14 | The African Business Review 50

on average in the long run. Furthermore aid has been crucial in supporting the broader development process through expanding life expectancy, cutting child malnutrition and maternal deaths, facilitating transitions to democracy and reducing overall poverty.

any developing countries have enjoyed impressive economic growth in the last few decades. The Economist reported in 2011 that six of the 10 fastest growing economies of the 21st century so far are in Africa. This is a fact. It is also a fact that continued economic growth will be crucial in Africa post-2015. Has foreign aid had something to do with the economic turn-around, and can international cooperation help support growth in the future? The simple answer is, yes indeed. At the same time, academic and policy debates about whether aid spurs or hinders economic growth rage on; and we often see views expressed in the popular literature that argue that aid does not work; is a futile endeavor; and should rather be ended. These positions are however typically not based on the best evidence available. Arguably, it is time to move the discussion about foreign aid, growth and development beyond ideology and preconceived ideas, and focus on what hard data and sound evidence can tell us.

Academic and policy debates about whether aid spurs or hinders economic growth rage on; and we often see views expressed in the popular literature that argue that aid does not work; is a futile endeavor; and should, rather, be ended. The evolution of the aid-growth debate

The academic literature on the aid-growth relationship can usefully be divided into four generations, reflecting changes in both economic methodology and paradigms of development. First, in the early years (roughly until around 1980) development was typically seen as a stable and linear relationship between investment and growth; and many studies assumed that aid had a positive effect on growth. Aid was simply plugged in to help close gaps in savings and/or foreign exchange, and thus facilitated growth enhancing investment. The general consensus was also that while aid does indeed tend to increase investment and savings, it does so by less than the total amount given, suggesting, perhaps unsurprisingly, that some aid is consumed rather than invested. A second generation of studies was born in 1987 when Paul Mosley and his co-authors identified the so-called micro-macro paradox. This work raised justified doubts about the underlying growth model, suggesting both that expecting all capital investment to translate into economic output, and expecting all aid to be used as investment, were overly bold assumptions. Other doubts about previous research on the macroeconomic effect of aid were also raised. In particular it was pointed out that in order to be accurate, studies needed to take into account that countries receive aid precisely because they are poor, and their economies are performing badly (i.e., the so-called endogeneity problem). Concerns were also raised that aid seemed in some cases to be misused by dictatorial regimes; and finally the impact of aid did not seem to show up in macro-economic cross-country studies. These doubts about the assumptions at the core of previous research, as well as the new availability of panel data, which allowed researches to look into the impact of aid both across and within countries over time, motivated the new approach of the third generation from the early 1990s. The attentive reader will probably remember the famous 1994 heading: “Aid Down the Rathole”, which The Economist used when the study of a London School of Economics professor, Peter Boone, was reviewed. His work did not stand unchallenged for long. World Bank economists Craig Burnside and David Dollar argued already in 1997 that aid works, but only sometimes, and that for aid to have an effect the right conditions, namely good fiscal, monetary and trade policy, had to be in place. Thus, the third generation ended up being cautiously optimistic about

aid’s impact, even if there was disagreement about the circumstances under which aid works and has this positive impact. Big efforts were also made internationally to promote more aid-giving at the 2002 United Nations International Conference on Financing for Development, also known as the Monterey conference. This optimism is not reflected in the fourth generation that became influential around 2005. The then Chief Economist of the IMF in 2008 published a paper where he and his co-author argued that at the macro level it is difficult to identify ‘any systematic effect of aid and growth’. This seemed to be a resurrection of the micromacro paradox first identified by Mosley, and the non-existence of impact was used widely in the public debate to motivate aid criticism. When looking for reasons it was, for example, argued that aid is associated with Dutch Disease whereby the exchange rate tends to appreciate with foreign currency inflows and undermine exports. Other arguments put forward include political economy dynamics (keeping poor governments in place), and that aid inflows can weaken governance by encouraging corruption and rent-seeking activities in general. The problem with many of these explanations is in practice that while they may convey interesting theory and stories, few have actually tried to test them systematically with available data. So, conflicting conclusions continue to abound.

Analytical challenges

It is interesting that so widely different conclusions have been drawn in the aid–growth debate, given that studies are in many cases based on the same publically available data. One major analytical difficulty is the question of causation. Aid is given to countries that are poor and have difficulties. When they grow and do better donors tend to give less aid. So, it may look to the uninformed eye as if less aid is a good thing. It is of course a good thing to do better, but this by no means implies that aid did not support the growth to begin with. This analytical challenge is clearly not unique to the aid-growth debate and must be taken properly into account in any meaningful analysis. Moreover, one often hears that since econometric models do not find a statistically significant effect of aid on growth then such a relationship does not exist. Yet, absence of evidence is by no means equivalent to evidence of absence. The fact that the relationship does not always seem to be statistically significant may have many causes, including problems with the length of time the dataset covers or the care with which the econometric analysis is done. In particular, it is critical to disentangle the mechanisms through which aid may effect growth, and vice versa. Can this be done? Yes – and recent research by UNU-WIDER has done so.

The ReCom research programme led by the UN University World Institute for Development Economics Research (UNU-WIDER) has five themes covering the most important facets of development today; social sectors, gender equality, governance and fragility, environment and climate change, and importantly questions of growth and employment. The aid-growth question was taken as the point of departure to start uncovering what works and what could work in foreign aid. UNU-WIDER brought together some of the best researchers in this area, and asked them to review, assess and add their new insights to the debate. A series of studies (based on all available analytical approaches) has by now been published in leading

The African Business Review | 51

academic journals, and what do they show: •

• •

An inflow of aid at the level of 10 per cent of GDP spurs a more than 1 percentage point increase in annual per capita growth rate on average. Thus foreign aid has facilitated economic growth at the aggregate level over the long term (i.e. the period 1970-2007). Views that posit a non-existent or negative impact of development aid on growth have typically been based on miss-specified models and errors in data interpretation. When foreign aid is evaluated as an investment, it has had a annual internal rate of return of 16% since the mid-1970s.

Thus, the overall ReCom conclusion is that aid has had a very respectable effect on growth. This effect is in fact equivalent to what economists would generally expect based on current growth theory. So, there is no micro-macro paradox to be explained. In sum, aid has worked in promoting growth, and has worked well. At the same time, no informed individual will of course argue that foreign aid has worked with equal effectiveness everywhere and that failures have not been experienced, as has been the case with private investments. And development, which foreign aid is designed to support, is risky business.

the entirety of foreign aid. Rather, it should encourage researchers, practitioners and policy makers to redouble their efforts to better understand the reasons why aid has not worked in some contexts, and learn as well from the situations where it has indeed worked well.

Investment in physical capital and health are two clearly identifiable channels through which aid promotes growth; increased aid spending in these areas is likely to spur development in recipient countries. In this context it is critically important to keep in mind that aid is a public resource which can be put to do things private business money typically will not do. The issue in financing development is therefore not “Trade-not-aid” as sometimes argued. It is “Trade-and-Aid”. Aid and trade are not substitutes, they are complements. Resources (including aid) can be misused and have no or little effect. And aid is at the end of the day too small to do the job on its own. So, the lesson for policy-makers is: Use aid, but use it wisely together with appropriate supporting policies and investments. Then development will follow.

The issue in financing development is therefore not “Trade-not-aid” as sometimes argued. It is “Trade-and-Aid”. Aid and trade are not substitutes, they are complements. Resources (including aid) can be misused and have no or little effect. And aid is at the end of the day too small to do the job on its own. Beyond growth Has aid supported poverty reduction?

Growth cannot and should not be the only measure of performance in foreign aid, as the discussion about the Millennium Development Goals (MDGs) illustrate. It is therefore encouraging that UNUWIDER’s up-to-date ReCom research has shown that development assistance also has a positive effect on a number of intermediate factors which are seen as drivers of growth and development. Investment in physical capital and health are two clearly identifiable channels through which aid promotes growth; increased aid spending in these areas is likely to spur development in recipient countries. Education is another important area. More specifically UNUWIDER research finds that an average annual inflow of US$25 aid per capita over the period of 1970-2007 reduced poverty by around 6.5 percentage points, raised investment by 1.5 percentage points in GDP, augmented average schooling by 0.4 years, boosted life expectancy by 1.3 years, and reduced infant mortality by 7 in every 1,000 births. So aid increases growth and helps promote social development.

Final remarks

Is growth important for development? Yes, it is. As the economic pie grows there is more to share all around, and this “more” can then be used for furthering development to provide the possibility for dignified lives for the many, rather than just the few. After decades of foreign assistance we now know enough to assess properly whether aid works or not through rigorous analysis of the existing data. Clearly there are individual situations where aid has not worked as desired, but this should not be used to attack the premise and principles behind

52 | The African Business Review

About the Author:

Finn Tarp is Professor of Development Economics at the University of Copenhagen Director of UN University-WIDER, Helsinki, Finland. He has some 35 years of experience in academic and applied development economics research and teaching. His field experience covers numerous countries across Africa and the developing world more generally, including longer term assignments in Swaziland (two years), Mozambique (eight years) and Vietnam (three years). Professor Tarp is a leading international expert on issues of development strategy and foreign aid, with an interest in poverty, income distribution and growth, micro- and macroeconomic policy and modeling, agricultural sector policy and planning, household and enterprise development, and economic adjustment and reform. In addition to his university positions, Tarp has held senior posts and advisory positions within government and with donor organizations, and he is member of a large number of international committees and advisory bodies. They include the European Union Development Network (EUDN) and the African Economic Research Consortium (AERC).

SUSTAINABILITY

The sunâ&#x20AC;&#x2122;s energy has the potential to power economic growth and development in East Africa By Janosch Ondraczek

Like much of the African continent, the East Africa region is well-endowed with sunshine. Yet, unlike in Europe, America and Asia, solar energy technologies still do not play a significant role in the regionâ&#x20AC;&#x2122;s power sectors. This article looks at the present state of solar energy markets in Kenya and Tanzania, which are mostly limited to off-grid applications in rural areas, and how these markets

emerged over the past decades. Looking ahead, the prospects for the emergence of industrial-scale solar plants in Kenya are analysed, and obstacles to their adoption identified and described. Chief among these obstacles are a lack of awareness among policymakers, as well as high financing costs that render projects uneconomical despite the good solar resource in Kenya and beyond.

The African Business Review | 53

nsufficient, unreliable and unaffordable electric power is regarded as one of the main obstacles to economic growth and social development in much of Africa. This ‘African energy challenge’, which is most acute in many sub-Saharan economies, implies that African nations need to expand their power sectors to foster economic growth, while maintaining grid stability and keeping an eye on the cost to consumers. In addition to economic and social aspects, the energy challenge also has an environmental component in that environmental damages from power generation need to be kept in check. While the world starts to address the threat of severe global warming, the use of renewable energy sources (such as hydropower, wind energy, modern biomass and solar energy) for electricity generation is being ramped up rapidly in many countries, something that is not (yet) happening in sub-Saharan Africa. Among the various renewable energy sources, solar energy technologies such as solar photovoltaics (PV) and concentrated solar power (CSP) have seen the most dynamic growth rates (and improvements in costs) in recent years in countries ranging from Japan, China and India through Germany, Spain and Italy, to the United States and Canada. However, the remarkable rise of solar PV, specifically, has not yet left its mark on most of sub-Saharan Africa. There, the use of solar energy technologies remains mostly limited to small, off-grid applications in rural areas, rather than the large commercial- or industrial-scale projects seen in the more advanced solar energy markets. Given Africa’s excellent solar resource endowment, with many hours of sunshine in a lot of places, this article will therefore shed some light, as it were, on whether solar energy can contribute to meeting the African energy challenge in East Africa. The east of Africa is among the regions with a solar energy resource that is generally considered to be large enough to be technically and economically feasible. Kenya’s market for solar energy technologies developed as one of the first on the continent and continues to be one of its biggest.1 Kenya’s solar market emerged in the 1970s and started to grow strongly in the 1980s, which was largely due to the emergence of a major solar home systems (SHS) segment alongside procurement by the government and donors. By 2009 the market had grown to an estimated 8-10 megawatt peak (MWp) and has continued to grow since then. Approximately threequarters of the overall capacity are installed in household systems. These SHS, which already numbered around 320,000 by 2010, were largely acquired by middle-class households in rural areas for the production of off-grid electricity mainly for their TVs, radios, lights and mobile phones, an aspect that will be further explored below. The remainder of the Kenyan solar energy market is largely in off-grid social institutions, with solar energy additionally being used in the communications and tourism sectors. Other forms of PV use, such as in mini-grids and on-grid electricity generation, are appearing only gradually. In addition, solar energy is increasingly being used in solar water heaters (SWH), whose number was estimated at 55,000 to 70,000 in the year 2009. Unlike the markets in many other countries, the Kenyan market was mostly driven by consumer demand for SHS and the development of an industry that caters to the needs of Kenya’s rural households. Tanzania’s solar market, on the other hand, developed much more slowly and was for a very long time dependent on government and donor support. The country’s SHS market emerged only in the late 1990s and early 2000s, largely through a spill-over from Kenya and active market development programmes of foreign donors and the Tanzanian government. By 2009, the overall installed capacity

had reached an estimated 3-4 MWp, with around 2 MWp installed in SHS and the remainder in institutional systems as well as a few other applications. The number of SHS was estimated at 40,000 systems in 2008, while an estimated 1,000 to 3,000 SWH were installed by 2010. Both market segments have reportedly grown since then, but large-scale installations have not yet appeared in the country. Despite the investments of the Tanzanian government and its international partners into the development of the country’s solar market, its industry remains much less advanced than that of its northern neighbour. Nonetheless, several major development programmes as well as purchases of institutional systems have been instrumental for the Tanzanian market to reach its current size and to span the entire country. Going forward, it seems likely that the Tanzanian solar market will be converging in many ways with the Kenyan market, as it grows especially strongly in the segments of institutional and residential systems.

For more on the solar energy markets of Kenya and Tanzania see Ondraczek, J. (2013): The sun rises in the east (of Africa): A comparison of the development and status of solar energy markets in Kenya and Tanzania, Energy Policy, Volume 56, May 2013, Pages 407-417.

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Throughout most of sub-Saharan Africa, the use of solar energy technologies remains limited to small, off-grid applications in rural areas, rather than the large commercial- or industrial-scale projects seen in the more advanced solar energy markets. As mentioned earlier, results from empirical research suggest that solar home system adoption among Kenyan households was largest among middle-class households in rural areas.2 These households move through what development experts call the ‘energy ladder’, which means that households switch, for example, relatively quickly to kerosene for their lighting needs as their incomes rise. In a fairly extended income range, households keep using kerosene, and only start using modern energy sources, i.e. electricity and solar energy, at relatively high levels of income. As such, the probability of choosing solar energy as the main source of lighting increases with income, albeit only from relatively high levels of income. Technology adoption is also influenced by the education level and other household characteristics. Moreover, one can also observe a very pronounced effect of clustering, i.e. the prevalence of SHS systems in the proximity of a potential user increases the likelihood of adoption in the household, supporting the notion that the availability of components as well as the knowledge of and openness towards a new technology – and possibly learning-by-doing effects – may play a major role in further increasing the uptake of SHS. While the focus of this article has so far been on the small solar energy systems that constitute the majority of the East African market for solar energy technologies, the world’s largest solar PV and CSP markets are increasingly dominated by large commercial- and industrial-scale projects, rather than the very small systems that are currently in use in many developing countries. With the exception of South Africa, which has implemented a renewables independent power producer (IPP) programme that includes solar PV and CSP, no other country in sub-Saharan Africa has yet endorsed solar energy technologies on an industrial scale. However, the rapid improvements in the technology costs of solar PV combined with the excellent solar resource in many places give rise to the question whether policymakers in the region are right in relegating this technology to its present off-grid niche. As recent research suggests, the rapid decline in the cost of solar This section on the determinants of SHS adoption among Kenyan households draws upon Lay, J., Ondraczek, J., Stoever, J. (forthcoming): Renewables in the energy transition: Evidence on solar home systems and lighting fuel choice in Kenya, forthcoming in Energy Economics.

PV systems in the past five years is not reflected in energy policy throughout Africa, where policymakers often continue to consider PV as a technology suited only to remote locations and small-scale applications. In the case of Kenya, calculations of the levelized cost of electricity (LCOE) for solar PV electricity suggest that the LCOE of solar PV electricity is approximately USD 0.21 (in 2011 USD) per kilowatt hour (kWh) at the Kenyan government’s standard discount rate for power investments of 8%.3 This result suggests that the LCOE of grid-connected PV systems in Kenya may already be below that of the most expensive conventional (peak) power plants, i.e. medium-speed diesel generators and gas turbines, which account for a large share of Kenya’s current power mix. This finding implies that researchers and policymakers may be mistaken in perceiving solar PV as a costly niche technology, rather than a feasible option for the expansion of power generation in developing countries. Not only could this technology potentially help to lower electricity bills to consumers and scale up power generation rapidly (it takes months to plan and build a solar PV plant rather than years, as in the case of conventional technologies), but could also help address the environmental side of the African energy challenge by implementing an emission-free power source.

Not only could solar energy technology potentially help to lower electricity bills to consumers and scale up power generation rapidly; it could also help address the environmental side of the African energy challenge by implementing an emission-free power source.

However, the economics of solar PV and other renewable energy technologies are not only influenced by the resource availability (sunshine, wind, biomass etc.), but also by the initial investment cost, operation and maintenance expenses as well as the financing cost for the overall investment. Sub-Saharan Africa is disadvantaged in both areas, as goods and capital markets are less developed there than in the more mature renewable energy markets. Research looking specifically into the role of high financing costs suggests that the high cost of capital typically found in emerging markets actually outweighs their often above-average availability of sunshine.4 Whereas the cost of capital for renewables investments can be as low 5% or less in developed economies, such as Japan and many European countries, it often reaches double-digit rates in most developing countries (see table 1).

In the case of Kenya, the weighted average cost of capital (WACC) is at least 13.7%, assuming an equal share of equity and debt in the financing of a solar PV plant. Such high capital costs for renewable energy investments adversely impact the economics of those technologies that exhibit high initial investment costs and low operating expenses. This is the case for solar and wind energy, which require no fuel and little maintenance. As a result, the LCOE of solar PV increases much beyond the USD 0.21 per kWh mentioned above when actual capital costs rather than the discount rate of energy planners are used. In the absence of lower technology costs or cheaper funding sources, the competiveness of solar PV is therefore not yet as good as Kenya’s abundant solar resource suggests. This article highlighted some of the key features of the East African solar energy market, making particular reference to Kenya and Tanzania. Both countries are well-endowed with sunshine, yet use little of the sun’s energy for the generation of power and heat. Whereas private markets have sprung up over the past decades for solar home systems, solar lanterns, solar phone chargers and so on, the large-scale adoption of solar energy technologies for the production of grid-power has so far not taken place. The lack of an enabling policy framework coupled with higher than average investment, operating and, particularly, financing costs currently renders solar energy uncompetitive vis-à-vis alternative sources of grid power. This means that solar energy at present is relegated to a small niche, typically in regions away from the grid, whereas it could also contribute to mainstream power generation, thus helping with tackling the energy challenge in much of Africa. With the right policies in place, Kenya and other African countries could thus tap into a large, and clean, indigenous resource, whose economics, and thus competitiveness, are improving by the day. If policymakers start enacting appropriate policies, ample business opportunities for ‘solar entrepreneurs’ might also arise in East Africa’s solar energy market, much as they already did elsewhere.

About the Author:

Janosch Ondraczek works as a researcher on the economics of solar energy technologies in East Africa. He is a guest researcher at the Research Unit Sustainability and Global Change (FNU) and pursues his Ph.D. in economics at the University of Hamburg, Germany.5 In addition, he is affiliated with the International Institute of Applied Systems Analysis (IIASA) in Laxenburg, Austria. Mr. Ondraczek holds an M.Sc. in Environmental and Resource Economics from University College London, a B.A. in European Business from the University of Portsmouth, and a Diploma in Business Administration from the University of Applied Sciences in Muenster, Germany. For the past nine years Mr. Ondraczek has been with the Table 1: Weighted average cost of capital (WACC) international audit and consulting firm PricewaterhouseCoopers Countries with lowest WACC (%): Countries with highest WACC (%): (PwC), where he works as a project manager. At PwC he advises both private and public sector clients in the areas of project finance, 1. Japan (3.7) 156. Sao Tome & Principe (21.6) transactions and strategies. His professional focus has long been 2. Ireland (3.8) 157. Brazil (28.4) on the German and European renewable energy markets, but has 3. Switzerland (3.9) 158. Madagascar (29.0) more recently expanded to other regions, particularly Africa and 4. UK (4.1) 159. Congo DR (32.4) Latin America. 5. Netherlands (4.3) 160. Zimbabwe (254.9) Source: Ondraczek et al., 2013.

See the following working paper for a detailed discussion of solar PV economics in Kenya: Ondraczek, J. (2013): Are we there yet? Improving solar PV economics and power planning in developing countries: The case of Kenya, Working Paper FNU-200, April 2013.

Refer to Ondraczek, J., Komendantova, N., Patt, T. (2013): WACC the dog: The effect of financing costs on the levelized cost of solar PV power, Working Paper FNU-201, May 2013, for a methodology description and detailed results.

See http://www.fnu.zmaw.de for a full list of publications and further information on the author’s research. Working paper versions of the cited papers are available from the website. They contain additional information on the issues addressed in this article, as well as a full list of references. The views expressed in this article are those of the author and do not necessarily represent those of the University of Hamburg, IIASA or PwC.

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Innovation in the field:

Tapping the potential of Africa’s agriculture By Aniekan Esenam

he Green Revolution that occurred in Asia and Latin America, led to sizable increases in yield and production returns to land, and hence raised farmers’ incomes; utilised crop rotation, employed better land use; adopted scientific farming methods that removed drudgery and increased efficiency; and brought sizeable segments of the rural population out of extreme poverty and food insecurity. Africa urgently needs its own Green revolution, a uniquely African Green Revolution that will help the continent achieve its dignity, its food security, and its prosperity. Such investments in agriculture can have a huge impact on many of Africa’s poorest people. In sub-Saharan Africa, some 70% live in rural areas, and depend on agriculture for their livelihoods. With Africa richly endowed with over 27% of the world’s potential (unused) arable land, unlocking this agricultural potential can be the catalyst to achieving economic growth. Moreover, growth in agricultural productivity increases incomes, and stimulates activity in the rest of the rural economy. It is clear then that investing in agriculture is one of the best ways to reduce poverty in Africa. With access to inputs, mechanisation, and improved connections to markets, small-holder farmers can generate more income, and contribute to raising their families out of poverty. But first, what, then, needs to be done to boost production and productivity? On the key matters there is broad agreement:

■

There needs to be government policies and a favourable environment for investment.

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Access to finance and credit for acquiring seed inputs, fertilizers, and mechanisation.

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Increase adoption and utilisation of technology and mechanization

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Ensure access to agricultural training and basic education

What can the governments do?

Historically, African governments have invested too little in agriculture in Africa, and neglected programmes and policies to promote the sector. Urgent actions are needed to provide physical infrastructure such as roads, power lines, irrigation and drainage; and knowledge development to raise the capabilities of local farming communities. A priority should also be the support of women farmers, by better targeting women in extension services, and taking greater steps to ensure that women are treated equally under the law, especially on land ownership.

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Without governments’ activity on these themes and other topics, Africa’s agricultural transformation will continue to be impeded. Consider poor governance, which not only creates an environment contrary to the efficient investment of human and material resources, but also undermines the formulation and implementation of policies and laws that can accelerate the process of economic growth and development.

“Investing in agriculture is one of the best ways to reduce poverty in Africa. With access to inputs, mechanisation, and improved connections to markets, small-holder farmers can generate more income.” Access to agricultural finance and credit

Access to credit is often critical for small farmers. Without access to loans at low interest rates, farmers are often unable to invest in mechanization, expand their farming or diversify into producing new crops. What the sector desperately needs is governments to develop or to support a schemes to help increase farmers’ access to credit. The could be encouraging through policy the development of farmers associations and cooperatives, - these farmers’ organizations develop a relationship with the lending institution while also increasing their capacity to manage and successfully repay loans, allowing farmers and their organizations to build a credit history to ensure long-term access to credit.

AGCO Mechanisation products to boost productivity AGCO’s agricultural equipment boosts productivity and transforms African agriculture’s prosperity.

AGCO’s Future Farms for Africa

As a world-leading agricultural equipment manufacturer, AGCO has unparalleled expertise and local knowledge of African Agriculture, amassed over many generations. Today AGCO’s Future Farm concept provides a unique opportunity to assist in the development of agricultural knowledge and infrastructure, through practical demonstration of mechanisation solutions around AGCO products; through integration of crop production solutions from our partners; through knowledge building in complementary areas – crop establishment, protection, and nutrition; through training on the best use, service, and maintenance of mechanization products. AGCO’s 150 hectares Model Farm & Learning Centre near Lusaka, Zambia is the first example of such a Future Farm concept. Here, farmers, especially of small to medium sized holdings, with limited access to modern farming techniques will in future be able to benefit from training courses ranging from basic agronomy through to general mechanisation, and will get training on the use and maintenance of tractors and harvesting equipment, including grain handling and storage techniques.

AGCO invests across Africa

Introducing technology - Planter

AGCO commitment to Africa

AGCO, the market-leading manufacturer of agricultural equipment is heavily engaged in the challenges and opportunities in African agriculture. As a stakeholder to the World Economic Forum (WEF) ‘New Vision for Agriculture, AGCO is taking the initiative by promoting debate and action through its annual Africa Summit which discusses the challenges facing African agriculture, addresses the world food supply problem, and promotes dialogue to encourage businesses to invest in the future of Africa. AGCO’s 3rd Africa Summit titled ‘Agriculture in Africa – Innovation in the Field, to be held January 21, 2014, in Berlin, will look at and discuss the impacts of innovations in Agriculture, from government policy, to the development of women farmers potential; from mechanization, to innovative opportunities offered along the value chain: an emphasis being on processing.

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AGCO intends to package and reproduce across Africa the knowledge and infrastructure being developed at the Zambian Model Farm, establishing the ‘Future Farm’ approach to providing agricultural education and development across the continent. To support AGCO’s mechanization solutions, continuous investment has been made in developing its footprint in the region through building and opening a new Parts Distribution Centre in Johannesburg, South Africa, significantly improving response times for parts & service delivery. With these initiatives, AGCO is not only strengthening its position in the region, but also delivering on its mission: ‘To provide high-tech solutions to farmers feeding the world.’ www.agco-africa-summit.com

Aniekan Esenam Marketing Services Manager, Africa & Middle East AGCO International GmbH

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Agriculture & sustainable development:

British American Tobacco Nigeria (BATN) Foundation and Nigeriaâ&#x20AC;&#x2122;s agricultural reformation agenda

he agriculture transformation agenda is one of the most topical issues in Nigeria today. Therefore as I sat in the room with a group of development experts after a decade of community development work, looking through what weâ&#x20AC;&#x2122;ve done and working out our strategies for how we can bring more value to the table going forward, I felt this was probably one of the most important steps that the company will be taking in creating shared value within its operating environment at this time. The tobacco business is an agro based one; BAT works with thousands of farmers globally and been privy to the benefits of having a ready market for the farmers to sell their produce to plus the advantages of working with extension workers who can assist in opting up the farmers skills bringing in all inputs and every other thing needed to succeed, I felt even more confident that we could assist in the transformation agenda in our own small way. Though the Corporate Citizenship Community has had varying debates as to whether the private sector really has any business in development work, the realities on ground really doesnâ&#x20AC;&#x2122;t support such debates any more. Businesses cannot expect to grow sustainably in developing countries if they stay by the side doing nothing to help their communities. The communities also expect it, continuously inundated by requests asking for support in one way or the other means that there is a lot of work to do. The

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sustainability process for British American Tobacco (BAT) Nigeria is stakeholder focused, so ensuring that we check what we do with stakeholders is a critical aspect of our businesses processes. While we value our relationships with our employees we have also developed that platform through which we can interact and continue dialogue with our stakeholders. After two dialogue sessions with stakeholders on Corporate Social Investment and consultations with development experts and employees, we finally decided to stay in an area where we have core competence, which is agriculture. The vision of the Foundation remains largely the same, which is to support the drastic reduction of poverty in the country and we decided that we would be able to do this best by focusing on Agriculture. The Management team led by Keith Gretton, the CEO of BAT in West Africa, a Briton who has made Africa his home for a good part of his career and Freddy Messanvi, the Corporate and Regulatory Affairs Director, felt we had hit the nail right on the head. This is the way to go. With agricultural projects spread all over the country and more been commissioned, the focus now is to strengthen what we have done. Our aim is to play up the entrepreneurial tone of the project methodology and build the right kind of business capabilities for farmers, hence, strengthening them as small businesses that can grow sustainably and commercially and garner enough track record to be able to attract more funding to expand. The farming population in Nigeria is huge and largely

subsistence. Faced with challenges that have incapacitated them and deterred the sector from growing as it should, the Nigerian farmers now look forward to a brighter future with all the work that is being done. Solutions have been proffered for many of these challenges, which include but are not limited to land preparation, farm inputs, access to market and improved planting materials. Aligning the Foundationâ&#x20AC;&#x2122;s objectives to areas that can bring more value is indeed a welcome development for many internally. Believing in the success of the path that we have set out on and understanding what exactly is needed to get the job done is also key. We therefore, look forward to a wealth-creating venture that can do the job. Also important is measuring the social impact and encouraging others to do so in order to track what exactly has been achieved and how many beneficiaries have indeed experienced a change in lifestyle and improvement in living standard. It is sincerely hoped that this will be the start of a national income generating sector that is almost if not as lucrative as the oil sector for Nigeria.

Oluwasoromidayo George Head, Corporate Affairs, British American Tobacco Nigeria/Executive Director BATN Foundation

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Sustainable business practices: Taking uncertainty out of enterprise risk

By Carey Bohjanen and Swe Thant In this article, the authors discuss the advantages of a business approach that integrates sustainable business practices, which allow organizations to limit their exposure to potential risk whilst managing for improved performance.

peaking of governance in a recent interview, Mo Ibrahim, founder of Celtel, had strong words. He said, “How can you accept the signing of multi-billion dollar contracts in secret? What does it mean? It means that a bribe is being paid!”1 Whether one agrees with Mr. Ibrahim or not, the quote highlights the increasing need for sustainable business practices as a mainstream reality in business and investment. Sustainable business practices go beyond economic profitability to consider potential environmental, social, and governance (ESG) issues – including transparency and accountability – connected with a business enterprise or activity, and the material risks or business opportunities such issues pose. An approach that integrates sustainable business practices allows organizations to limit their exposure to potential risk whilst managing for improved performance. Such an approach can also facilitate investment decisions with a more complete picture of the risks, rewards and prospects of an enterprise for long-term profitability. Sustainable business practices are concerned with responsible business conduct and the benefits for business and the bottom-line. Corporate social responsibility, sometimes referred to as CSR, should not be confused with it. CSR is about doing good deeds. Sustainable business practices are about doing good ESG due diligence and considering risk issues that may impact core business. This focus on material risks helps explain the traction that it has gained among global corporations and financial institutions. How companies develop and implement their own sustainable business practices varies, based on their core business interests and operational realities. It may be green credit policies that prioritize and incentivize growth in particular industries or segments; or screening to exclude sectors that are particularly risky from an ESG point of view, such as unconventional oil. For many major corporations and financial institutions that have adopted and integrated sustainable business practices, the central feature is ESG risk management. This refers to undertaking due diligence to identify, assess and manage ESG risks associated with their core business activities. Despite the differences in practice, there are recognized international frameworks, benchmarks and established good practices, which lend coherence across sectors and geography. For example, the Equator Principles were developed by financial institutions to set due diligence standards for evaluating sustainability risks associated with financing or lending to large industrial projects, such as road or rail construction or laying an oil pipeline. Areas for due diligence cover all the paramount issues from pollution and climate change to community conflict, cultural heritage and Human Rights. There are a number of examples of sustainability or ESGrelated risks emerging in all sectors of the global economy. Mining 1.

Perspectives, This is Africa, 18 December, 2012

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and manufacturing are, for example, large consumers of water, a resource that is critically short in many parts of the world. With some regularity, the media has reported instances of multi-billion dollar projects that are placed on hold or shutdown because of standoffs between industry and the community over water use. A company that obtained mineral rights in a jurisdiction with poor governance can later find itself at risk of losing its assets because of allegations of impropriety or malfeasance in gaining the permit. The garment industry in Bangladesh glaringly demonstrated the cost to lives arising from safety violations in the factories, and the costs that will be carried by global retailers going forward.

From ethics to macroeconomics, the global trends driving sustainable business practices

Screening for sustainability risks is not entirely new. It has a precedent in ethical screenings used earlier by institutions to align investment practice with institutional values. Religious institutions, for example, were notable for avoiding “sinful investments,” and commonly screened out products such as tobacco, weapons and alcohol. Today’s macroeconomic drivers put a premium on concerns that are less exalted but no less urgent including: climate change and the damage caused by disastrous weather; threats to farming and agriculture; a growing population marked by rapid urbanisation; declining resources; and mass demands for individual empowerment and human rights. Anyone can readily call up the iconic images of recent headlines: mass street protests from Wall Street to Beijing to Cairo, raging hurricanes, catastrophic floods, shrinking glaciers and melting Artic ice. At the 2013 World Economic Forum, the IMF’s Managing Director, Christine Lagarde, underscored these developments. Speaking of the global trends that are shaping the future, she named key pivot points including popular demand for empowerment, climate change and declining resources. Fingering climate change in particular, she said it was the “wild card in the pack,” with the potential to cause major disruptions in the world economy. Little wonder then that national laws and regulations are getting tighter, bringing new restraints and potential new costs. The U.S. has issued laws prohibiting the import of minerals from conflict areas as well as mandatory requirements for companies to publish revenues paid to local governments. Multilateral institutions, such as the OECD are investigating how financial institutions are conducting human rights and other environmental and social due diligence, and considering the role of the OECD Guidelines for Multinational Enterprises.2 Two recent developments send a strong 2.

SFA was commissioned to undertake the sector-wide mapping and analysis. The report, Environmental and Social Risk Due Diligence in the Financial Sector, was released by the OECD in July 2013.

signal about the need for a global shift to a low carbon economy. The U.S. and China are close to agreement to cooperate on cutting carbon emissions; and China has launched pilot cap-and-trade schemes as a start to a national emissions trading program. A recent Financial Times headline suggests what the consequences could be for carbon intensive industries and investment portfolios: “Staying Afloat As Assets Get Stranded.” 3 As awareness rises about the potential challenges and business disruptions associated with these global shifts and trends, companies must adapt to a rapidly evolving risk landscape.

Capitalising on Africa’s promise

Africa has vast amounts of untapped oil and mineral wealth; and there is a sense of urgency about their development that is shared around the world. With shrinking natural resources and growing populations, world demand for Africa’s commodities is increasing and the scramble for Africa is on. Natural resources have fuelled Africa’s growth thus far, but have largely failed to bring about an even distribution of progress and prosperity to the region. The benefits have eluded most Africans and yet the impacts on the environment and communities have been calamitous. 4 Still, their development and trade are central to national and regional development, offering some of the best opportunities for growth and improved standards of living. The sustainability issues associated with the extractive industries in Africa represent some of the key challenges in the region for business and investors. Conflict and instability are recurring problems with underlying issues about resource rights and political and economic inclusion. The problems are also linked to risks posed by governments and institutions that lack transparency and accountability, and that feed public distrust. In addition, Africa still experiences periods of famine and critical food shortages. Climate change can intensify food crises. Changes in weather patterns affect yields and harvest times; force changes in locating crop lands; demand innovations for climate resilient crops and seeds; and require irrigation practices that use less water. Because small farming makes up the backbone of agriculture in a number of African countries, the response of small farmers and business as well as the financial sector to climate risks is critical. Food crisis and shortage will not be a problem unique to Africa - failure to risk-proof and secure this important breadbasket will have serious consequences.

A case study of things going very wrong

The Republic of Guinea offers to investors a chastening example of governance risks and the imperative for official transparency and accountability. Guinea is rich with iron ore, bauxite and other minerals. Until 2010, when it held democratic elections, it was ruled by military strongmen. It earned a ranking by Transparency International as one of the most corrupt countries in the world; and a reputation for kleptocracy from Human Rights Watch. In 1997, under its autocratic leader, the government gave Rio Tinto exclusive rights to mine the wildly rich, untapped, iron ore deposits in the Simandou Mountains. In 2008, the government took away Rio Tinto’s permit and gave half of the exploration rights to the Beny Steinmetz Group Resources (BSGR). In 2010, BSGR gave Brazilian mining company, Vale, a 50% stake in the project for USD2.5 billion. The figure exceeded not only Guinea’s annual budget of USD1.2 billion but also BSGR’s total 3.

Staying afloat as investments get stranded. Mike Scott. Financial Times 23 June, 2013

Equity in Extractives -- Stewarding Africa’s natural resources for all”, African Progress Report, African Progress Panel, 28 May, 2013

investment in the project at that time of USD160 million.5 The country held democratic elections in 2010, the first in 50 years, which brought President Alpha Conde into power and his campaign commitment to clean up corruption and bring good governance; in particular to the mining sector. One of the first things to be examined was mining contracts negotiated under the previous incumbent. The BSGR transaction came under scrutiny for possible malfeasance – bribery, in this case. Corrupt practices are inherently difficult to prove; but the government is determined. The investigation has brought various principals and parties, directly or indirectly linked to BSGR and the project – including prominent individuals – into a tangle of legal proceedings and harsh media glare. BSGR faces the real possibility of losing its rights to the Simandou assets, which would have a number of disastrous financial and reputational implications.

Sustainable business practices go beyond economic profitability to consider potential environmental, social, and governance issues – including transparency and accountability – connected with a business enterprise or activity. A case study of how it can go right

Nigeria is as much a part of Africa’s promise as it is symbolic of some of the reasons why the promise of Africa has stalled. However, a pivotal step taken by the financial sector In 2012, signals the changes that are taking place and a desire to see and drive a different Nigeria and a different Africa going forward. A sector wide framework, the Nigerian Sustainable Banking Principles along with targeted industry guidelines now require sustainable business practices to be integrated into lending and investment decision-making and risk management processes. In the wake of the 2008 global financial crisis, Nigeria’s banking sector was in dire straits. Oil prices plunged, the equities market dropped and non-performing loans made up almost a third of total bank loans. The Central Bank of Nigeria (CBN) was charged with resuscitating and reforming the sector to full health. The CBN’s Governor, Sanusi Lamido Sanusi, is credited as the pivotal figure in transforming, reforming and in some Nigerians’ estimation, saving the industry that was brought to its knees. In describing sector reforms, Governor Sanusi has pointed to poor risk management and poor corporate governance as key problems that undermined the sector. Since then, the sector has undergone rigorous changes. Starting in September 2010, our team had the opportunity to work with a group of forward-thinking commercial banks to develop a set of voluntary sustainability principles for lending and investment. Designed to drive long-term economic growth that is profitable as well as socially relevant and environmentally responsible, the principles provide a practical framework for enhancing risk-resiliency and enterprise risk management, as well as an instrument for directing meaningful contribution to the real economy. In June 2012, all of the money deposit banks adopted the Nigerian Sustainable Banking Principles (the Principles), and three sector guidelines for Agriculture, Oil and Gas, and Power. It set a precedent for the financial sector in emerging markets, and underscored the integral role of the banks in the health and strength of the overall economy. The introduction to the Principles conveys the framers’ intention: 5.

Buried Secrets, Patrick R. Keefe, The New Yorker, July 8, 2013

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As business leaders in the Nigerian financial sector, the banking sector is uniquely positioned to further economic growth and development in Nigeria through its lending and investment activities. The context in which business decisions are made is, however, characterised by complex and growing challenges relating to population growth, urban migration, poverty, destruction of biodiversity and ecosystems, pressure on food sources, prices and security, lack of energy and infrastructure and potential climate change legislation from our trade partners, amongst others. Increasingly, it has been demonstrated that the development imperative in Nigeria should not only be economically viable, but socially relevant and environmentally responsible. Our working group comprised of representatives from each of the banks. The collaborative process engaged the group in ensuring that the Principles and the sector guidelines draw on international standards and good practice even as they recognized the particular context, needs and realities of Nigeria’s operating environment. It was an approach developed by Nigerians for Nigerians, and was designed to “move the sector as one”. In September 2012, under Governor Sanusi’s leadership, the Central Bank of Nigeria issued a circular requiring all banks in the country to adopt and implement the Principles and the sector guidelines. The Principles specifically commit the banks to: • • • • • • • •

Manage environmental and social impacts of their lending and investment decisions; Manage their own environmental and social footprint from dayto-day operations; Safeguard human rights; Promote women’s economic participation and empowerment; Promote financial inclusion for people and communities with little or no access to banking services and products; Meet the imperatives for good governance, transparency and accountability; Collaborate and work together as a sector and with international partners; and Report their progress on all of the above.

A sector wide framework, the Nigerian Sustainable Banking Principles along with targeted industry guidelines now require sustainable business practices to be integrated into lending and investment decision-making and risk management processes. The sector guidelines address incentives and safeguards; identify key sector risks and impacts that should be avoided or managed for improvements; and provide guidance for implementing ESG risk management procedures. This includes guidance for assessing and categorising risk exposure, engaging with clients on sustainability performance, and establishing systems for monitoring and reporting. The Principles, the sector guidelines, and the accompanying Guidance Note for implementation, are first steps in building an evolving, coherent scheme for integrating sustainable business practices into Nigeria’s financial institutions. They are decisive in providing a framework for sustainability risk management that is consistent with the imperative for a robust, fit-for-purpose banking sector. They will be indispensable for facilitating commercial activities

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and enterprises that meet the needs for good governance and environmental and social sustainability.

Conclusion

Sustainable business practices are part of a larger worldwide development to define rules of engagement for business and investment in today’s dynamic economies and complex risk environments. It is a work-in-progress for even the most dedicated institutions, and comes with a multitude of challenges. How far can a company or investor push for safeguards and better environmental, social and governance performance from a company or client? If Nigerian banks say no, which other African, Asian, European or Middle Eastern banks will say yes? Among the key questions are leverage – for example, the level of influence that an institution can exert to compel compliance or improve performance - which is often contingent on the type of financial transaction, product or service, or the relationship with the client or investee company; the organisation’s scope or sphere of influence based on its specific business interest or engagement; and the culture and capacity of the organisation to effectively implement and follow-through on the policies and procedures. To see meaningful uptake and integration of sustainable business practices, it will take buy-in and long-term commitment at top senior levels; dedicated staff and resources to carry out robust sustainable risk management and ESG due diligence practices; engagement at the client level; and the support of enabling laws and regulations. Although progress in developing effective procedures and practices will take time, the pay-off will be decisive. For investors evaluating a company’s prospects, questions about the company’s policies and track record on environmental, social and governance issues can close the gap on hidden uncertainties. They can give a more complete answer to the question: Is this a prudent investment? In Africa, sustainable business practices can get us all one step closer to realising Africa’s promise.

About the Authors:

Carey Bohjanen is the CEO/Managing Director of Sustainable Finance Advisory (SFA). SFA provides sustainability and risk management advisory and consulting solutions to financial sector clients worldwide. Ms Bohjanen has build successful partnerships and delivered projects in over 25 OECD and emerging market countries, ranging in scope from facilitating multi-stakeholder engagement processes to driving sector initiatives on sustainable finance strategies, and leading CEO roundtables and workshops. She and the SFA team served as the Independent Advisor to Nigerian banks during the year long process to develop the Nigerian Sustainable Banking Principles and sector guidelines. Swe Thant is an associate consultant at Sustainable Finance Advisory (SFA). In her capacity as environmental and social risk analyst to international banks, Ms Thant has worked on both policy and practice, developing institutional frameworks and conducting practical assessments. Previous to her work with SFA, she has worked in corporate scenario development for large multinationals; and in fundraising and development for global organizations engaged in gender equity and women’s political and economic empowerment. For further information, please contact: info@sustainablefinanceadvisory.com

By Senyo Adjibolosoo

The bid for developing quality leaders in African countries

LEADERSHIP Prince Louis Rwagasore (1932-1961) on 100 Francs 2010 Banknote from Burundi

Dr. Senyo Ajibolosoo, the originator of the human factor perspective on international development theory and practice, makes the case for the need to pursue a human factor-based transformational development education (TDE) program to cultivate honest and compassionate citizens and as a means to transcend Africa’s leadership problems.

hese days, it is not uncommon to hear many people complain about the lack of leadership in Africa. At international conferences and seminars, it is not uncommon to hear presenters complaining that Africa’s greatest problem is leadership inadequacy. Yet, every time I hear this pronouncement I feel waves of discomforting doubts about its validity. Such pronouncements

make me realize that those who claim to know what Africa’s greatest challenge is have little knowledge of it after all. In this article, I address this issue and provide a human factor-based response. The remainder of this article is organized as follows: the first part discusses leadership classifications, followed by discussion on leadership development the human factor way and end with the conclusion.

Leadership classifications

To gain a deeper understanding of the leadership challenges Africans face today, one must become familiar with the human factor perspective on leadership classifications and effectiveness. Regardless of what existing leadership theories propose, universally, there are only three kinds of leadership types. These are the Type I, Type II, and Type III leaders (See Figure 1).

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positive human factor qualities and yet lack vision, mission, plan, and appropriate courses of action will not make effective Type I leaders. Similarly, people who have great visions, excellent mission statements, grandiose plans, sensible courses of action, and state of the art technology and yet lack the positive human factor qualities will fail to be Type I leaders. The human factor is:

Type I leadership is made up of honest, selfless, and serviceable servants (i.e., principle-centred). These leaders are primarily inspired by and aspire to the dictates of the universal principles. Universal principles are timeless, comprehensive, fundamental, and foundational truths of nature that underpin the functioning of the whole universe. These principles are unbreakable seals that inform, reveal, and authenticate the physical laws, the rightness or wrongness, honesty or dishonesty, justice or injustice, and fairness or unfairness of whatever happens in the universe. Each principle governs specific aspects and functions of the universe. These principles are etched on the canvass of every sphere of the interstellar system and exist in the physical, spiritual, moral, and every other domain of this universe, making it to function as commanded. Their dictates provide us with irrevocable laws regarding every aspect of our living including the social institutions, scientific, and technological dimensions of human life.

The quality of the human factor is as indispensable to leadership effectiveness in the whole human enterprise as the central nervous system is to the proper functioning of the human body. Type I leaders are unique trailblazers in serving others. They begin with principles and end with the right concepts. Such leaders promptly confront burning issues without procrastination. They exercise excellence in boldness, courage, good judgment, and justice. They pursue kindness, virtuousness, humility, and fairness. They focus on serving others rather than being served. Type I leadership successes are contingent on factors I refer to as primary and secondary factors. While the primary factors are the qualities of the leader’s personality characteristics, the secondary factors encompass the strength of commitment to vision, mission, plan, and any resources: technology, machines, institutions, and procedures. The effectiveness of the Type I leader is determined by the ability to balance the primary and secondary factors. The more efficiently their primary and secondary factors mix, the more successful Type I leaders are. While effectiveness can be measured by evaluating whether the leader is heading in the right direction and doing the morally excellent things, efficiency is determined by taking stock of how much is being accomplished with the available scarce resources. Both categories of factors must be viewed as being complementary rather than competitive. For example, individuals who have acquired the

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The spectrum of personality characteristics and other dimensions of human performance that enable social, economic and political institutions to function and remain functional over time. Such dimensions sustain the workings and application of the rule of law, political harmony, a disciplined labour force, just legal systems, respect for human dignity and the sanctity of life, social welfare, and so on. As is often the case, no social, economic or political institutions can function effectively without being upheld by a network of committed persons who stand firmly by them. Such persons must strongly believe in and continually affirm the ideals of society (Adjibolosoo, 1993, p. 142). Type II leadership is dishonest, selfish, self-serving, deceptive, and a task master (i.e., non-principle-centred). Contrariwise, the immature leader, the Type II leader, works harder to avoid personal disillusionment, self-animadversion, criticism by others, loss of prestige, or popularity. The Type II leader pursues contemptible human ideologies, personal power, revenge, and authority. He or she uses them to accomplish intended personal objectives regardless of whether the ideologies being pursued and the means being employed are commensurate with the dictates of the universal principles. The Type II leader draws inspiration and power from his or her emotional clock and image. The phrase, emotional clock and image, is used here to represent how certain people’s attitudes and actions depend on the cyclical emotions they feel and the types of images they wish to project. Their lifestyle is not necessarily principle-centred. Instead, their cycles of emotions and the types of images they wish to project control their way of life. The Type II leader demands unabashedly the service, praise, and allegiance of others. In the courts of the Type II leader there is no room for dissenters. The utterances of such a leader are draconian laws that ignore the rule of law, civil liberties, good judgment, justice, and tenets of principles. They terrorize their opponents with dire consequences such as imprisonment, torture, and loss of life. Blending together leadership Type I and Type II, there emerges the Type III leadership. Type III leadership is a crossbreed between Type I and Type II. Type III leaders are hybrids of Type I and Type II (See Figure 1). As hybrids of Type I and Type II leaders, the attitudes, behaviours, and action steps of the Type III leader is a blend of those of the Type I and Type II leadership. The primary premise of the Type III leadership is the truth of having people function between the two distinct worlds of principle-centredness and nonprinciple-centredness. The Type III leader’s principle-centredness or non-principle-centeredness is a result of what this leader deems to promote his or her financial interests best. For example, when this leader believes that the commitment to principles will enhance personal wealth, there is the obligation to make sure that principles are followed to the letter. Alternatively, if the flaunting of principles enhances the personal affluence creation process, it is selected as the path to pursue. The Type III leader does everything possible in public life to satisfy people’s call for principle-centeredness. This practice is, however, reversed when Type III leaders are out of public gaze. Examples of the Type III leadership are common in the social institutions and are present everywhere in politics and business.

Many African countries are rich in and led mostly by Type II leaders. There are few cases of Type I leadership in African countries today. One will also come across some Type III leaders. The question then is: “What must Africans do to produce Type I leaders”? The remainder of this article is devoted to answering this question.

Leadership development the human factor way

Undeniably, African countries have leaders. Many of these leaders are excessively corrupt just as any others from the rest of the world. The primary reason for the nature of corruption in African countries as well as elsewhere in the global village is the lack of the positive qualities of the human factor. The quality of the human factor is as indispensable to leadership effectiveness in the whole human enterprise as the central nervous system is to the proper functioning of the human body. In general the human factor can be likened to the necessary software that aids computers to operate aircrafts, trains, cars, satellites and communication systems. Just as it is impossible for any computeroperated tool, appliance, or gadget to function without the relevant programmed software, effective leadership will never occur in Africa without the availability of the positive qualities of the human factor. Principle-centred leaders, managers, and labour force lead to enhance productivity growth, high quality life, and longevity. These people are rich in the positive qualities of the human factor at all levels of the production processes, socioeconomic development, and business profitability. The six critical components of the human factor theory are presented in Figure 2 below.

Among the six components of the human factor, the most important one is spiritual capital which refers to the individual’s ability to connect to, know, understand, and use the wisdom attained from these principles for the benefit of all. Next to spiritual capital is moral capital; which is one’s ability to distinguish between right and wrong. One must successfully use it to ennoble one’s contributions to the nation building process. Aesthetic capital is the capability to distinguish between beauty and ugliness. Human capital refers to acquired knowledge and skills. Human abilities are the competences one develops and uses to inform the applications of acquired knowledge and skills. Human potential refers to untapped latent qualities (Adjibolosoo, 2005, 1999, and 1995). When these six dimensions bloom in citizens the nation has a powerful base for effective leadership. These are the kinds of people required for effective leadership in Africa.

The kinds of people required for effective leadership

It is universally accepted that to succeed in attaining and sustaining set objectives anywhere, a certain calibre of people is required. These people are rich in the positive qualities of the human factor. To accomplish the task of nation building, human-centred development, business profitability, and longevity every community requires members who: 1. Have the ambition and the imagination to search for clues; have the intent always to perform and are of one mind; have the willingness to search for, and insist on discovering solutions to existing national problems. 2. Are determined to search for and acquire understanding about current problems, existing levels of available skills and the additional abilities required for the enhancement of productivity, and have knowledge about what must be done and how and the wisdom to use acquired knowledge to solve problems. These people will facilitate the rate at which solutions are carved for overcoming hindrances to the economic development process. 3. Have the zeal and the willingness to give liberally their best in contributing to the national economic development program. The industry brought to the reconstruction process by each person must grow out of individual free will and commitment to self-interest insofar as it is consonant with national economic development goals. 4. Provide the required leadership that is apt to facilitate the process of providing the opportunities for every citizen to contribute freely to the success of the national program for economic progress. 5. Have the assurance that courage, resourcefulness and hard work will not only increase the wealth of their society but will also lead to the continuing enjoyment of the fruits of their munificence. 6. Possess a sense of purpose, insight, vision and direction; are skilful in wisdom and scientific knowledge; are steadfast in commitment to risk taking; and are dedicated to personal integrity. These are the people who possess relevant human qualities and know what is good and required for human progress (i.e., effective and efficient maintenance of law and order, respect for the rule of law and property rights, the promotion of hard work and social welfare and an unrelenting respect for the sanctity of human life and the dignity of labour). (See 1995, pp. 84-85).

Type I leadership is made up of honest, selfless, and serviceable servants (i.e., principle-centred). Regardless of what existing leadership theories propose, universally, there are only three kinds of leadership types. What African countries require today to make a turnaround is an education program designed to produce this calibre of citizens who lead and create propelling environment required to succeed in their chosen professions. It is only when the African citizenry grows richer in the positive human factor qualities that the most critical condition for Africa’s advancement will emerge. The required vehicle is fully equipped with the engine and fuel to make the journey from degradation to advanced levels of prosperity. When hired for positions of trust and adequately resourced, these people provide effective leadership for profitable >>

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global business ventures and organizational prosperity. As a powerful team, they create the required and sufficient conditions for sustained advancement and the emergence will enhance the profitability of global business in Africa. The benefits to the whole world will be much more far-reaching than most people can conceptualize. It is imperative that Africans as well as their eternal helpers know that the positive human factor qualities of citizens sustain higher business profitability and long-term socioeconomic advancement. The principle-centred leader acts according to the degree of and commitment to integrity. This leader skilfully guides the labour force with respect, care, and transparencyâ&#x20AC;&#x201D;making sure that everyone feels his or her relevance to long-term company survival and profitability.

The role of severe human factor decay in leadership effectiveness

Leaders who become embroiled in morally reprehensive acts create financial crisis, bankruptcies, and suffering on everyone. Many African leaders suffer from severe human factor decay. This syndrome is the primary root cause of leadership failure in Africa. Acts of social injustice are reflections of severe human factor decay. It poses a serious hindrance to the establishment of collaboration, harmony, and peace. It is a staunch enemy to productivity growth. Its austerity paralyzes leadership effectiveness. It damages the lives of citizens and denies them the ability to attain their human potential (Adjibolosoo, 2012).

Transformational development education

Leadership desire to serve others will morph into true realities if there is genuine respect and love for the universal principles. To build such a nation, citizens must channel sufficient financial, effort, energy, and time (FEET) resources into TDE programs. By TDE I imply the kinds of instructional practices that provide a fertile learning environment within which the types of intellectual, spiritual, moral, legal, political, religious, and other activities pursued equip the learner with the knowledge, understanding, and wisdom required for daily principle-centered living and problem solving. As illustrated in Figure 3, TDE is aimed at working with those involved in it to first unlearn behavioral practices that create the vicious cycle of leadership integrity crises. Secondly, the custodians of the TDE program work with these individuals to grow in attitudinal insinuations, behavioral practices, and action steps that enhance the virtuous cycle of integrity in leadership. TDE works best with children.

This is why at the Human Factor Leadership Academy (HFLA), the educators believe that the best time within which any group of people will succeed in the development of the much-needed Type I leaders is during the first six years of life. During these years the race is about working with the children to learn about and grow in the knowledge, understanding, and wisdom embedded in the universal principles. They are representative of the various human factor-based activities engaged in at the HFLA to provide opportunities to the students. The red circle in Figure 3 represents the universal principles that serve as the hub of the curriculum of the TDE program. The arrows represent the spokes of the wheels of the TDE program. The box to the left and the other to the right of the red circle and its revolving arrows represent respectively the human factor qualities. To be successful in the TDE program through to high school is to position the students to grow into honest and compassionate leaders in the long term.

The primary premise of the Type III leadership is the truth of having people function between the two distinct worlds of principle-centredness and non-principle-centredness. Firstly, the object of any TDE programs is directed essentially at equipping those who participate in the development of the positive qualities of the human factor. No member of this environment is denied the opportunity and access to learn that effective nation building begins with people who demonstrate the positive human factor qualities. Secondly, these nation builders are aware that the degree to which the nation building process succeeds is determined by the strength of integrity, selflessness, responsibility, and accountability with which citizens approach their role. Thirdly, the learner in the Academyâ&#x20AC;&#x2122;s TDE environment is intentionally guided to recognize that the only limitations we face are those we impose upon ourselves. Through TDE learners become exposed to how to form the mind and educate the heart for deployment. The heart and mind are reconnected and better prepared to fill the core of inner being with improved quality of spiritual capital and moral capital. Having successfully accomplished these objectives, African leaders and their subordinates will be repositioned to bring sustained improvements into their quality of life. TDE forms the basis for the establishment of the HFLA in Akatsi, a small town in the Volta Region of Ghana. At the HFLA, the learner is assisted through TDE programs to use what is taught and learned to hone the positive human factor qualities required for patriotic citizenship and profitable global business.

Figure 3: TDE: Transitioning from Vicious to Virtuous Cycles Integrity Cycles 1. 2. 3. 4. 5.

Integrity Unselfish Generosity Self-denying Educated Conscience 6. Sensitivity 7. Honesty 8. Habitually Speaking the Truth 9. Trustworthiness 10. Moral Practices

Virtuous Cycle

Vicious Cycle 1. Duplicity 2. Selfishness 3. Greediness 4. Covetousness 5. Uneducated Conscience 6. Insensitivity 7. Dishonesty 8. Habitual Lying 9. Untrustworthiness 10. Immoral Practice

Conclusion

To achieve the objectives of nation building African leaders and their international helpers must develop principle-centered citizens who are properly equipped to build an inclusive, openly tolerant, and progressive civil society. Any community of people in Africa who desire to build a harmonious civil society and a flourishing global business must pursue TDE programs aimed at improving the human factor quality. Though there are many views regarding the meaning and constituents of ongoing economic growth

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and sustained human-centred development, those who are committed to progress and global business must focus on the general wellbeing of community members. Programs aimed at securing socioeconomic development and a profitable global business must produce genuine tolerance, respect, caring, peace, joy, liberty, understanding, and fulfilment to improve the quality of life for all. The programs pursued must give birth to measurable socioeconomic benefits and attainable long term goals. This is the only untraveled path to date and yet the only hope for African.

References:

Adjibolosoo, S. 2012. The Human Factor in Free Market Efficiency. New Delhi, India: New Century Publications. Adjibolosoo, S. 2005. The Human Factor in Leadership Effectiveness. Mustang, OK: Tate Publishing. Adjibolosoo, S. 1999. Rethinking Development Theory and Policy: A Human Factor Critique. Westport, CT.: Praeger. Adjibolosoo, S. 1995. The Human Factor in Developing Africa. Westport, CT: Praeger.

About the Authour:

Dr. Senyo Adjibolosoo is Professor of Economics at the Fermanian School of Business, Point Loma Nazarene University, San Diego, CA, USA. He obtained his Ph.D. in Economics from Simon Fraser University, Burnaby, British Columbia, Canada. An Econometrician by training, Dr. Adjibolosoo devotes most of his research time to international as well as socioeconomic development. He is the originator of the Human Factor perspective on international development theory and practice. He is the Founder and Chief Executive Officer (CEO) of the International Institute for Human Factor Development (IIHFD). He is also the Founder and President of the Human Factor Leadership Academy (HFLA), located at Akatsi in the Volta Region of Ghana. He is the Editor in Chief of the Review of Human Factor Studies and the Journal of Gleanings from Academic Outliers. Dr. Adjibolosoo’s numerous publications include journal articles, book chapters, books and book reviews. His research focuses on the human factor in socioeconomic development, in which he continues to conduct and publish cutting edge research.

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Obama needs Kerry’s help to Accomplish Africa Goals By Alexander Benard Addis Ababa, Ethiopia

n his trip to Africa last month, President Obama highlighted the importance of engaging the continent through trade and investment, rather than merely foreign aid. The specific goals that he articulated on his trip – including an initiative to “Power Africa” by promoting private sector investments in the energy sectors of several African countries – are laudable. If he is to succeed, however, he will need the help of his Secretary of State, John Kerry, who thus far seems as though he intends to devote his next four years almost entirely to the Israeli-Palestinian Peace Process. In fact, it was Secretary Kerry’s predecessor who put this commercial engagement strategy in motion. Early in her tenure as Secretary of State, Hillary Clinton identified economic statecraft – the concept of wielding power and influence through commercial engagement – as an important 21st century priority for U.S. foreign policy. Her campaign to elevate economic considerations kicked into overdrive in late 2011, when she argued in a speech that the United States was losing ground to China in some of the world’s fastestgrowing markets because it was not focusing enough attention on commerce. And on one of her very last trips as Secretary of State, Secretary Clinton stopped over in Senegal where she noted that her Department would be working with American businesses and investors to help them understand the vast opportunities that are available to them in Africa. Secretary Clinton was right to make economic statecraft a focus of her tenure at the State Department. Throughout Latin America, Africa, the Middle East, and Asia, many heretoforeoverlooked countries are seeing their GDP grow at astronomical rates. Indeed, according to some predictions, the world’s emerging and frontier markets may overtake the developed world, in terms of total combined GDP, by as early as next year. If these predictions hold, they will auger drastic shifts in the global distribution of wealth, and with it geopolitical significance. Nowhere are these trends more evident today than across Africa. China, of course, has been aware of these trends for some time. As a result, it has spent a substantial part of the past few decades enhancing its commercial linkages throughout these fast-growing parts of the world. Its trade and investment in Africa alone, for example, has jumped from six-fold over the last 10 years to over $150 billion today – now far outpacing U.S. trade and investment on the continent. Brazil, India, Turkey, and even several European countries are also increasing their trade and investment in Africa at a far faster pace than the United States. In part this is due to certain natural advantages that U.S. competitors enjoy in Africa. Countries like China, Brazil, India, and Turkey are able to offer goods and services to Africa at much cheaper prices than American firms. European countries like the United Kingdom and France, meanwhile, enjoy historic relations in large parts of Africa that make it easier for their companies to operate

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effectively in many markets across the continent. But in part it also has to do with government policies. The Chinese government has done everything in its power to open markets in Africa to Chinese companies – forgiving debt, subsidizing its companies, and pressuring African governments through diplomatic channels to give its companies lucrative infrastructure and natural resource deals. Indeed, this summer alone the Ethiopian government announced a $1.6 billion deal with Huawei and ZTE to upgrade the country’s telecommunications network, China and Nigeria put in place a $1.1 billion in which the Chinese government will provide low-interest financing for infrastructure projects (that will, of course, be constructed by Chinese companies), and Sierra Leone signed agreements with China for agriculture and infrastructure that, combined, are worth well over $3 billion. Especially in the case of Sierra Leone, it is widely understood that the Chinese are investing in these projects in part so they can later access the country’s vast reserves of iron ore. John Kerry initially indicated, in several speeches, that he would honor Secretary Clinton’s legacy by ensuring that economic statecraft remained a top priority for the State Department. In fact, his first major speech as Secretary of State highlighted success stories like Boeing and GE’s success in Indonesia, and praised OPIC’s efforts to provide financing for Africa’s energy and transportation sectors. Having noted these examples, he declared in that February speech that “developing economies are the epicenters of growth, and they are open for business, and the United States needs to be at that table.” But his nods have been fleeting and largely rhetorical. Since the speech, Secretary Kerry has focused the vast majority of his time, energy, and foreign travel on the Israeli-Palestinian Peace Process. This has left President Obama picking up the slack. In Africa this summer, he announced that he would be marshalling the resources of numerous agencies, including OPIC, USAID, and EXIM, for Power Africa. But unless his Secretary of State personally takes ownership of economic statecraft, and related initiatives like Power Africa, all of this will drown under the many competing agendas vying for President Obama’s time. The Secretary of State is the point person for U.S. foreign policy. And if commercial diplomacy is not a priority for him, it will not be for the administration. Which would be a shame. By pushing forward with Hillary Clinton’s economic statecraft agenda, Secretary Kerry could help to refocus U.S. foreign policy on the challenges of the future. And who knows: with a bit of creativity, he may even be able to have his cake and eat it, too, by figuring out how to apply the novel idea of economic statecraft to the age-old Israeli-Palestinian conundrum.

About the Author:

Alexander Benard is COO of Schulze Global Investments, a private equity firm focused on emerging and frontier markets. In Africa, Schulze Global manages a $100 million fund focused on Ethiopia. Mr. Benard has published articles on trade and investment in emerging and frontier markets, for a variety of newspapers and magazines including Foreign Affairs, Foreign Policy, World Affairs, the Wall Street Journal, and Forbes, and he has appeared as a commentator on CNN. He was previously Managing Director of Gryphon Partners, an advisory and investment firm focused on the Middle East and Central Asia.

CULTURE

Lola Shoneyin talks to The African Business Review

ola Shoneyin, the award-winning author of The Secret Lives of Baba Segi’s Wives has taken on a new challenge. She is hosting the Ake Arts and Book Festival in Abeokuta, Nigeria between 19 and 24 November 2013. In the midst of her very busy schedule, visiting the Edinburgh Book Festival, preparing for the Ake Arts Festival, Lola agreed to talk to The African Business Review about her hopes and aspirations for the festival and indeed for leisure reading in Nigeria. Your latest venture Ake Arts and Book Festival which is taking place from 19 – 24 November 2013 in Abeokuta, in the south west of Nigeria, brings wonderful news to lovers of African writing, what a wonderful gift to book lovers. Yes, having attended several book festival and fairs around the world, I thought it was embarrassing that Nigeria, with our numbers, our potential and our creativity did not have enough literary festivals on the scale of festivals like the Edinburgh Book Festival, Festivaletteratura in Mantova, Italy or even festivals on the continent like Open Book Festival in Cape Town or the Storymoja Hay in Nairobi. I just thought this would be a fine idea and I started working towards it about two years ago. The organisers of these festivals I have mentioned have been instrumental in getting us to the point we are now with their advice suggestions and support. I’m really grateful for this. The challenge has been garnering local support. Tell us a little bit about Abeokuta; why did you decide to hold the Festival there rather than in Lagos or Abuja? Outside Nigeria, a lot of festivals take place in the countryside. Lagos is already bustling with literary activity and local organisations and international institutions like British Council and the Goethe Institut do a lot of work there. But there is more to Nigeria than these big, sometimes unruly cities and I am keen for our guests to get a feel of the reality of most of Nigeria. Abeokuta just as a place has incredible historical and cultural significance. It has an underexploited quaintness to it. It’s safe and the people are genuinely welcoming. How did you get support for the project, was it a struggle? Getting financial support has been a nightmare. We got a very generous grant from the World Bank and so far, a number of oil companies like Shell Petroleum and Chevron and banks have thrown their weight behind it. Channels TV has been incredible in giving us coverage. Arcadia (UK) and the Miles Morland Foundation (UK) have been the most generous in terms of independent funding. In Nigeria, you have to rely on the CEO/ Director’s sympathy for the Arts and aesthetics so this has made it quite challenging. It’s all about the individual. The governor of Ekiti State, Dr Kayode Fayemi, in spite of the fact that the festival not taking place in his state, has been one of our biggest supporters but that’s because of his personality, his understanding of the significance of the Arts in the growth and history of a people. Governor Amosun has also encouraged us and gave us a generous discount on one of our venues. I am going back to Nigeria to do some more rigorous fund-raising. We need all the help

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we can get to put on a world-class festival so we can elevate the level of discourse. Nigeria has made too big a contribution to the literary world as a whole for this not to happen. Of course we have big names from across the continent attending, with Nobel Prize winner, Wole Soyinka, headlining. Abeokuta is his adopted hometown. We know that Nigeria has a strong history of literary writers, but what about the general enthusiasm for reading? How would you describe the reading public, the reading culture in Nigeria, is it elitist? Well, it is elitist in that access to books and reading has become a luxury. For the last few months, I have been trying to get UK and US publishers to take exhibition stands at the festival so that there is wide array of books available. Perhaps because of the short-ish notice, funding or because it’s a new venture, they have been reluctant to join us in November. Some UK-based publishing houses like Bloomsbury, Walker Books, Freight Books have however given us huge discounts on their books and we in turn have spent thousands of pounds buying books with the aim of selling them at discounted rates to Nigerian readers. With over 80 African and international writers invited to the festival, it is important that their books are available during the festival. We have also purchased books that would be of general, educational, historical and cultural significance to a Nigerian audience. One of the things I am working on now is to get the neighbouring state governors to sponsor one hundred university students each to the festival. The sponsorship package gives each student N20, 000 in book tokens, which can only be spent at the festival. Registration is done on our website www.akefestival.org and I think this is a great way for them to support scholarship in a small but significant way. These books will be read, enjoyed and shared by the students. What are your aims for the festival, what do you hope to achieve? I hope that the festival will join the efforts of other festivals in making reading and books sexy. I despair when I see how much people worship money in Nigeria, and not without good reason, considering the scale of poverty. The belly comes first! There was a time however when intelligence and knowledge were key, respected attributes. People dumb themselves down by focusing only on empty religious texts penned by opportunistic pastors who are themselves obsessed with the material. These texts not only shun the importance of our history and our culture but they provide little by way of intellectual stimulation. Technologically, we say the world is becoming a global village but in other ways, the physical scale and size of it will never be diminished. The successful economies are those who actively study and seek to understand others. I grew up in Nigeria where I was introduced to the work of Wole Soyinka, Chinua Achebe, Ola Rotimi, D O Fagunwa, Amos Tutuola, John Pepper Clark and a host of other Nigerian writers, and one or two other African writers like Camara Laye. There is a dearth of information about new literary titles, African authors in and outside Nigeria. To what extent do you think the Nigerian reading audience is familiar with African writing from outside Nigeria? I totally share your experience. I read Ferdinand Oyono, Yambo Ouologuem, Ngugi Wa Thiongo, Calixthe Beyala and so on. This is one of the reasons why we have made the effort to invite authors, critics and thinkers like Alain Mabanckou (Congo), Mamle Kabu, Taiye Selasi and Sena Ahadji (Ghana), Laila Lalami (Morrocco), Raymond Suttner, Natalia Molebatsi (South Africa), Tendai Huchu (Zimbabwe) Binyavanga Wainana (Kenya) Doreen Baingana and Monica Arac DeNyeko (Uganda) Syl Cheney Coker (Sierra Leone)

etc.

One of the most tragic consequences of colonialism in Africa is the way even neighbouring countries have become literarily estranged, divided by their official languages. We have such exciting talent coming out of the Republic of Benin, for instance, but because Benin is a Francophone country, we are alienated from the work of Beninese authors, in spite of the fact that Yoruba is spoken in parts of Nigeria and parts of Benin. It’s depressing. One of our goals is to celebrate unsung African talent. No one else will do it. We cannot continue to wait for the West to identify who we should be reading. We must value African literary talent and have rigorous debates about their work. As part of the Ake Festival, we are planning, six months after the festival, to invite three authors to a mini festival, called The Trial Festival. The three authors will be put on the stand by scholars and readers who may not necessarily be enamored by their work. Let’s have less of the mollycoddling that you find in these sickly reviews and ego-massaging events. Let African and international authors take their stand and ‘defend’ their work. This is one of the ways to raise the bar and also a way of getting people excited about books that will be made available beforehand.

In a country where there are no public libraries, where there are still challenges with infrastructure and distribution, what steps would you say need to be taken and by whom to encourage and increase leisure reading in Nigeria. Books must be subsidised by the government as a first step, to make the written word more accessible. We have to catch them young. The Arts as a whole must be supported. In developed countries, government patronage and philanthropy sustain the arts. Recognition and respect must be accorded to people in this aspect of the creative industry, not just to young actors and actresses who support government campaigns. Nigeria, for example, constantly dismisses the role of a whole generation of writers who stand tall in the world stage. Most of them live outside Nigeria, in countries where their work is valued. We have no child laureates. Writing and scholarship are ridiculed and demeaned. This is the future of the country going down a black hole. This, I think, would be a good starting point. We can see that The Ake Arts and Book Festival is supported by the World Bank; do you think that these types of partnerships would help to support and stimulate leisure reading in Nigeria and do you have any plans beyond the festival to foster such objectives? All invited authors are going into local primary and secondary schools to read to and speak to the students with the sole objective of getting the kids excited about reading. When they leave, they will leave a small package of 12 books to contribute or start a school library. These books are being donated to us by individual authors like Paula Sofowora and a handful of Nigerian publishers like Learn Africa. I hope this experience will be embraced by the students and for the authors. Putting a range of reading material into the hands of

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the young boys and girls will make a difference to their future. Do you think that there is any room for partnerships with private investors to stimulate the Nigerian literary publishing industry? What in your view are the incentives for such a partnership? I am totally mercenary here. I would support a company who wants to have their company logo emblazoned on the back cover of a book to enjoy exposure, so long as the books are making it into the hands of children. They have to think long term, how this will result in them having a broader pool to choose from in the next ten years. Many of them look to employing UK/ US educated staff. This is great but the pool is tiny. Plus, they have to see the benefits of securing the future of our country. We must create well-rounded individuals. I encourage them to join in the effort of the Ake Festival to promote literacy. If you are reading this, get behind us! Tell us about some of the writers that are going to be at the festival. How and why did you select them and what do you think they will bring to the festival? We were looking at three things, basically. First, we considered African authors who are making waves on the international circuit. Secondly, we were particular about unsung African authors who are overlooked at festivals outside Africa but are pushing the boundaries by exploring important and edgy themes, employing exciting and unusual genres. Lastly, we looked at authors who have something to add to ongoing conversations and debates on topical issues concerning African history, culture etc. Tell us a little bit about some of the highlights of the festival?

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It’s an Arts and Book Festival so although there is a special emphasis on books, we are also celebrating African Art, dance, theatre and film. We have invited Adepero Oduye, US based actor who starred in the acclaimed film, Pariah. If you’ve seen The Wire, you’ll be able to rub shoulders with Gbenga Akinnagbe who starred as Chris Paltrow the cold, psycho murderer. We are collaborating with Nigeria Now to showcase some of the best talent on the Nigerian Art Scene. We are putting on a concert with 20 artists so visitors will be able to dance their way through the history of Nigerian music. Caine prize winner, Rotimi Babatunde has adapted my novel, The Secret Lives of Baba Segi’s Wives for stage, directed by renowned actor/ director Femi Elufowoju Jr. One of Wole Soyinka’s new plays will be on as well. We also have workshops in Bata dance and the talking drum. Master classes are available in 12 areas from illustrating for children, interviewing celebrities to acting tips for pros and creating documentaries for women. Focus Films have given us permission to screen Pariah and Home, featuring Gbenga Akinnagbe will premiere on African soil. With fourteen panel discussions, ten book chats, a fun, creative programme for kids, I hope you’ll agree that there’s something for everyone. Does the Festival’s programme include anything for new, and aspiring writers? Well, apart from the master classes, we are also having a publisher/ author speed-dating session. I’ve invited Ayesha Pande, my agent and a few local publishers to take part in this event that allows aspiring authors to pitch their work to an agent or publisher. I’ve even invited my Italian publisher who loves African fiction to come and take part.

I noted that most of the writers who have been invited to the festival write about African themes in one way or the other was this deliberate or a mere coincidence? Do you feel that there is a need to promote African writing in Nigeria and in Africa as a whole? This is a festival on African soil that aims to promote writing on about or about African for the consumption of Africans.

The festival promises to be a feast of African writing and arts, not to be missed. Ake Arts and Book Festival is taking place in Abeokuta, in the South West of Nigeria from 19 – 24 November. Visit the website, www.akefestival.org for full programme and tickets.

How would you like this festival to be remembered?

Lola Shoneyin was interviewed by ‘Tunde Olupitan.

I would it to be an important festival, one that attracts thinkers, cultural enthusiasts, book-lovers and arts aficionados. I would like it to be the event that gathers converts year on year, raising the profile of the arts until African authorities begin to appreciate the value of the arts. I’d like it to be the richest and the biggest cultural event on the continent. More importantly, I’d like it to be the event where people come to have ‘a ball and a book’!

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