What is the relative importance of foreign and domestic investors in the development of Africa’s investment markets?
Historically, Africa has seen larger flows from foreign investors. But following the financial crisis and the global economic downturn, domestic investors are increasingly important for the development of local markets. Participation of domestic and foreign investors is key for the development of an efficient and effective financial sector that facilitates industry growth and infrastructure developments.
An active capital market provides opportunities for new financial products and services. Kenya, for example, is well known for leading the world in scalable mobile phone enabled money transfer and payment systems with the success of M-PESA. Now the country is looking hard at how to extend banking and investment opportunities to that fast-growing and currently largely unbanked cohort of under- 25 year olds.
So in September 2015, the government launched the world’s first Treasury bond offered exclusively via mobile phone, with a minimum investment requirement of just $29.
At a regional level, both East and West African regions are working to create partnerships between countries to help drive retail consumers into investment markets. This will be an essential route to increasing the liquidity, depth of market and range of investment instruments that both domestic and foreign investors require.
East Africa is encouraging cross-listings and we’ve seen them lately between Uganda and Tanzania as well as Kenya and Tanzania. Kenya and Nigeria have formed a single Central Supplier Database (CSD), to facilitate cross-border listings and ease cross-border trading.
What are the key challenges holding up the development of African capital markets?
The challenge is that the region still contains relatively few listed markets and company ownership traits in Africa imply a relatively smaller level of free float in comparison to larger emerging and developed markets. Each country has a government debt market that is fairly well established but efforts now are focusing on developing equity markets.
There have been several significant changes in terms of infrastructure over the last year. South Africa’s move to a T+3 settlement cycle, which is due to go live on 11 July, is one important example that should reduce settlement risks and margin requirements and also stimulate securities lending activities.
Lower margin requirements will enable more trading opportunities and deepen market liquidity. Kenya is considering several new products including securities lending to boost liquidity and manage market volatility; in Nigeria the legal framework for securities lending is already in place but no one has started engaging in the practice yet.
The overarching challenge in all these markets is the liquidity of the currency and how far physical market volumes warrant securities lending.
In terms of success, I think – as we saw in South Africa in the 1990s – the key will be the involvement of a major participant. Once one large firm has gone in and shown what is possible others would quickly follow and the market could then be expected to develop.
How far are local domestic pension markets developing?
Pension funds in Africa are estimated to be around $350bn, of which South Africa has the dominant share.
Kenya is a striking example of how regulatory reforms change and innovate in order to achieve progress and increase participation from local investors.
The Kenyan government has introduced the requirement for citizens to partake in the universal pension fund. One of the pension schemes tasked with implementing this realised that the registration process would be particularly onerous for most Kenyans.
Because all Kenyans have smartphones (many have more than one) the scheme together with the government launched a programme to digitise Kenyans’ identity documents, including ID cards and passports.
Many Kenyans now pay for a number of government services electronically and there is a drive to deliver members’ statements to their smartphones, taking paper out of the mix altogether. This evolution of fund and asset servicing facilitates rapid progresses.
It will also allow end users to benefit from – but not be constrained by – the experience of other developed markets that have gone before. It’s the best of both worlds.
We see strong growth coming from Nigeria, Uganda and Tanzania, all driven by regulatory reforms and increased participation from local investors.
New provisions introduced in these markets have extended the eligibility for participation in pension fund schemes to employees in the private sector, small employers and the self employed, and it also increased the contribution rates of the employer and employee. Nigeria, for instance, has around $19.4bn in total pension assets (source: National Pension Commission, March 2016).
Across the region, the framework for pension fund regulations to develop domestic pension fund industries is in the early stages of development. These are moves that will precipitate a huge influx of savings and will entail an extended role for custodians.
How do providers such as Standard Chartered help in the process of developing these markets?
Standard Chartered remains committed to sharing industry feedback from our clients with local industry bodies, regulators and governments, as well as sharing experiences from other markets we know well in Asia and the Middle East.
By sharing information and proactively encouraging dialogue between the public and private sectors on investor-friendly economies and policies, we hope to support tangible collaboration and sustainable regulations fit for long-term development and growth.
Are there particular countries that investors are emphasising?
Mauritius is a jurisdiction that is relatively far along its development path, offering participants significant benefits such as the free flow of capital.
I think it will be interesting to see the development of Ethiopia and Rwanda in the coming years – these are two countries that are worth keeping an eye on.
In Rwanda, the second IPO for Bank of Kigali was oversubscribed almost three-fold, reflecting investor confidence in the country’s economy. As the country’s second public offer after BRALIRWA earlier in the year, Bank of Kigali targeted to raise RwFr37.5bn ($63m) but instead attracted applications worth Rwf103bn ($173m), 274% oversubscribed.
Given strong demand from both international and local east African clients, we added Rwanda to our Africa market coverage for custody services. The country has the ambition to be the Singapore of Africa. We have interest from clients in Rwanda recently via our Mauritius office, including organising visits to the country for them.
The Johannesburg Stock Exchange and Strate, the CSD, has also implemented initiatives to make the South African market more attractive to international investors, such as migration to T+3 mid-year, and the reshaping of Strate’s bonds platform.
To what extent is there a trend for asset managers to outsource the management of their back and middleoffice functions in Africa?
Many of the larger fund managers have been active in outsourcing their back and middle-offices for some time now. The trend has been focused on South Africa in particular, but some international firms have extended this practice into cross border businesses.
Outsourcing and the standardisation that enables it, such as SWIFT, obviously brings efficiencies to end users. For the fund management groups that use our comprehensive range of services, it improves the ease with which they can access information and improves the capital efficiency of spending on these processes. For providers, too, a growth in this market will provide improved efficiencies.
How are African countries progressing against the traditional reservations than investors still hold about these markets – such as corruption and ease of business?
One of the big challenges the industry faces – and this is driven in part by the significant increase in regulatory requirements, be that AIFMD, UCITS V, FATCA or others – is standardisation.
As we work with participants on their ideas for how Africa’s capital market infrastructures should evolve, and therefore how the funds and investment markets in Africa will develop, we must be mindful of this.
There are also the legacy challenges of doing business in this region. There are still only three countries in Africa that feature in the World Bank’s Ease of Doing Business Report: South Africa, Mauritius and Rwanda.
Standardisation is one factor that can open up business in Africa and monetary union is one element of standardisation that on empirical evidence provides support for the view that trade will be enhanced in Africa as a result.
Regulatory requirements are a major factor that investors and those who service them have to be on top of to continually provide relevant solutions. However, Africa still remains an overall growth story, and Standard Chartered, having been in the region for over 150 years, is well positioned to assist investors in navigating these markets.