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AFPA SNAPSHOTS… THE NON-BANKING SECTOR IN COMESA AND SELECTED AFRICAN COUNTRIES1 WHAT HAS BEEN THE CONTRIBUTION OF THE NON-BANKING SECTOR? The financial sector is an integral part of any economy. Even though banking sectors still dominate in developing economies as compared to developed ones, non-banking sectors also play a significant role in the arena of providing finance to SMEs, directly or indirectly. With the African continent becoming an increasingly attractive destination for investment, the number of investors looking for lucrative ventures is increasing. The rates of return for inward FDI to Africa are among the highest in the developing world (together with East/South East Asia) at 9.3% in 2011, compared to 8.4% for developing economies, 13% for transition economies and 4.8% for developed economies. Sources of funding are numerous and varied, ranging from private equity to leasing to Islamic finance. FDI capital flows into Africa have proved to be an important source of funding. Sources, both local and international, include pension fund managers, development financial institutions (DFIs), sovereign wealth funds and more recently, angel investors and crowdfunding. KPMG notes from reviewing publicly available information that over US$16.8 billion was raised for PE ventures in Africa in 2013. Sovereign wealth funds (SWFs), a relatively new phenomenon in Africa, focus mostly in the agriculture, mining, infrastructure and the real estate sectors. Examples include BlackRock, Blackstone and Saudi Arabia kingdom’s Zephyr which manages a dedicated million US dollar pan-African fund. Angel investors pool their resources together to invest in start-ups in exchange for convertible debt or an equity stake and are willing to take risks in new businesses that have not been tried and proven. Crowdfunding is the financing of a project or venture by raising funds from a large number of people usually over the internet. From US$ 89 million in 2010, the Crowdfunding industry was estimated at US$5.1 billion in 2013. Development finance institutions (DFIs) also play an important role in the African PE space. According to the AfDB, for every US$1 million that it invests, other institutions invest US$5 million. Other significant players, to name a few, are the World Bank’s Investment Finance Corporation (IFC), Britain’s CDC Group2, the Netherland’s Development Finance Company (FMO), France’s PROPARCO3 and China-Africa Development Fund (CAD Fund). Most DFIs also have a number of initiatives and programmes, implemented in collaboration with strategic partners, that facilitate access to finance by SMEs, usually on favourable terms. Islamic finance represents one of the fastest growing segments of the international financial system with an annual growth rate exceeding 20 percent over the past decade. Islamic 1 The COMESA member states are Burundi, Comoros, DRC, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. The selected other African countries are South Africa, Nigeria, Ghana, Togo, Tanzania and Morocco. 2 3 Originally the Colonial development Corporation but now only the initials are used. Which is majority owned by Agence Française de Développement Page 1 of 7 finance is expanding in many parts of the continent with Islamic financial service providers present across most of North, East and West Africa. Their efforts are complemented by Islamic DFIs, such as the Islamic Development Bank (IDB), the Abu Dhabi Fund for Development and the Arab Fund. The AFPA is a comprehensive directory that provides access to 500+ prospective financiers and resources. The AFPA will help entrepreneurs navigate their way around this labyrinth of prospective financiers and investors, helping them identify financiers and investors that provide the most appropriate services and products best suited to their needs. Since 2000, Sub-Saharan Africa’s (SSA) size has doubled in real terms and almost quadrupled in nominal US dollar terms. SSA is growing fast with annual real GDP growth exceeding 5% in the last 10 years, second only to developing Asia. Growth is expected to remain at this level for the next 5 to 10 years. The growth story is more spread across countries. In the early 1980s, 40% was attributable to South Africa, now it’s only 25%. Angola, Mozambique and Ethiopia reached average growth rates of over 8% in the last decade, comparable only to India and China which are the fastest in the world. The reasons for this are varied. Improved macroeconomic management and increased political stability have underpinned strong public spending, especially on infrastructure and services. Business friendly microeconomic reforms have made doing business easier. These developments have had a positive impact on investor and consumer confidence, encouraging new investors into the continent. Surveyed companies with an established business presence in SSA are happy with their situation.4 FDI dominates capital flows into Africa. South Africa and Namibia have been the main recipients, but FDI flows are increasingly going to Angola, Ghana, Kenya, Mozambique, Tanzania, Uganda and Zambia. In 2012, net FDI to SSA grew by 5.5% even though it fell by 6.6% for developing countries as a whole. Rates of return for inward FDI to Africa are among the highest in the developing world (together with East/South East Asia) at 9.3% in 2011, compared to 8.4% for developing economies, 13% for transition economies and 4.8% for developed economies. Both foreign and private investments have increased but are still the lowest amongst developing regions, suggesting that there is room for further investment driven productivity increases in SSA. Private equity Private equity (PE) capital is an extremely important source of capital for the African continent. Regionally focused African fund managers focus on a particular sector, usually natural resources, infrastructure or renewable energy, and operate quite successfully as they target deals often too small for the major players to look at. Still smaller are a whole category of minor PE managers that look at SMEs for deals worth US$5 million and less. The deals seldom make the news, but collectively these fund managers play an important role in developing the PE industry and in providing targeted capital for the SMEs. 4 Sub-Saharan Africa: A Bright Spot Inspite of Key Challenges Page 2 of 7 Private equity funds The African continent is becoming an increasingly attractive destination for investment, and so the number of PE fund managers looking for lucrative ventures has increased. According to figures from the Emerging Markets Private Equity Association (EMPEA), in 2013 eleven SSA focused PE funds raised US$922 million5. In contrast, Private Equity Africa puts the figure at over US$2 billion; whilst KPMG notes, from reviewing publicly available information that over US$16.8 billion was raised for PE ventures in Africa in the same year. Of this, approximately one third went to South Africa and the rest to other African countries. However, owing to confidentiality, reliable figures for the PE industry are difficult to get. While many important deals are announced publicly, many others are not. When a deal is announced through the media its price is usually not made known. Pension fund managers Pension fund managers are already important players in the African PE space and their importance is set to increase. Since 2012, South Africa’s Public Investment Corporation (PIC) has been mandated to invest up to US$6.5 billion (5%) of its assets under management (AUM) in African countries other than South Africa. South Africa’s Eskom Pension and Provident Fund (EPPF) has R7.7 billion under management of which R1.5 billion is invested in private equity. Although its mandate calls for equity investments in Africa outside of South Africa to be in listed equities, EPPF says, in practice, a private equity mandate would be better and EPPF is strengthening its internal PE team accordingly. In Morocco, the public pensions manager, the Caisse de Dépôt et de Gestion (CDG), has approximately US$21 billion (Dh 170 billion) on its consolidated balance sheet, of which US$ 370.6 million (Dh3 billion) is managed by the group’s private equity arm, CDG Capital Private Equity. Development financial institutions Development financial institutions (DFIs) also play an important role in the African PE space. DFIs lend to projects in which PE investors have put in capital. One such DFI is the African Development Bank (AfDB). AfDB actively participates in this space with US$800 million committed to PE funds. The AfDB’s reputation for caution and risk analysis gives other investors confidence in the management team and its buy-in into a PE fund often allows that fund to attain a certain threshold investment. According to the AfDB, for every US$1 million that it invests, other institutions invest US$5 million. Another significant player is the World Bank’s Investment Finance Corporation (IFC). The IFC has investment commitments of more than US$3 billion in North and SSA. Other DFIs that are active in the PE environment are Britain’s CDC Group6, the Netherland’s Development Finance Company (FMO), France’s PROPARCO7 and China-Africa Development Fund (CAD Fund) just to name a few. The CAD Fund had US$800 million invested in Africa in 2010, mostly in what China considers strategic mining operations. 5 Down 46% from the figure in 2012. Originally the Colonial development Corporation but now only the initials are used. 7 Which is majority owned by Agence Française de Développement 6 Page 3 of 7 Sovereign wealth funds Sovereign wealth funds (SWFs), a relatively new phenomenon in Africa, focus mostly in the agriculture, mining, infrastructure and real estate sectors. Angola’s SWF, with US$5 billion in assets, has earmarked a third of its AUM for equity investments in emerging and frontier markets. The Carlyle Group, with US$185 billion in AUM, opened offices in Johannesburg and Lagos and commenced with investments in the Middle East and North Africa (MENA) markets in 2006. In 2011, it launched a US$500 dedicated SSA Fund with the AfDB as an anchor investor. Other SWFs have started their African portfolios with stakes in more developed markets. Examples include Kohberg Kravis Roberts with its controlling stake in Egypt’s Hedef Alliance, BlackRock with a position in South Africa’s Umcebo Mining, Blackstone with its investment in an offshore exploration deal with Kosmos in Cameroon and Saudi Arabia’s kingdom Zephyr which manages a dedicated million US dollar pan-African fund. Britain’s Standard Chartered has invested more than a billion dollars in private equity worldwide much of that in Africa. The biggest dedicated Africa PE manager is Washington based Emerging Capital Partners (ECP), which raised over US$2 billion for investment in Africa. The IK’s Helios Investment Partners is of a similar size. This Africa specialist has US$1.7 billion under management. Angel investors and crowdfunding Then there are angel investors and crowdfunding, relatively new phenomena in the world of finance. Angel investors are groups of individuals or companies that pool their resources together to invest in start-up businesses in exchange for convertible debt or an equity stake in the new business. Africa has seen an increase in the number of start-ups and the challenge faced by these start-ups, as with start-ups in other parts of the world, is funding. African angel investors take the necessary risks in investing in new businesses that have not been tried and proven based on their own decisions and convictions. However, owing to the private nature of the transactions and confidentiality, reliable figures for the investments by angel investors are difficult to get. Crowdfunding is the raising of funds from a large number of people usually via the internet. Crowdfunding websites have helped companies and individuals worldwide raise US$89 million from members of the public in 2010, US$1.47 billion in 2011 and US$2.66 billion in 2012—US$1.6 billion of the 2012 amount was raised in North America. In 2012 more than one million individual campaigns were established globally and the industry was projected to grow to US$5.1 billion in 2013. A May 2014 report, released by the United Kingdom-based The Crowdfunding Centre and titled "The State of the Crowdfunding Nation", presented data showing that during the month of March 2014, more than US$60,000 dollars were raised on an hourly basis via global crowdfunding initiatives. Also during this time period, 442 crowdfunding campaigns were launched globally on a daily basis. Page 4 of 7 Development finance institutions The International Finance Corporation Through its Access to Finance business line, the IFC helps to increase the availability and affordability of financial services, particularly to SMEs, through a number of initiatives, some of which are highlighted below. The IFC’s priorities are to build bank and non-bank financial institutions, develop financial infrastructure and improve the legal and regulatory framework. The IFC achieves its objectives by working together with its strategic partners, from both the public and private sectors, such as the AfDB, CDC, DFID, J.P. Morgan, Standard Chartered Bank, Standard Bank and Rabobank, just to mention a few. Africa Micro, Small and Medium Enterprise (AMSME) Program The AMSME Program provides support to commercial banks seeking to establish or expand their MSME banking services while maintaining or improving the quality of their portfolio. The program has provided advisory services to and invested almost $140 million in 18 banks in 13 countries in West, Central, and East Africa. A special focus of the program's support is to help banks increase their lending to women-owned businesses and women entrepreneurs. Leasing Program Launched in 2008, the IFC Africa Leasing Facility is a five-year, multi-country advisory services program aimed at introducing leasing as an innovative financial instrument across Sub-Saharan Africa. The facility’s goal is to increase access to finance for micro, small and medium enterprises (MSMEs) in a number of important sectors, including agriculture, transportation, construction, and manufacturing. Global Index Facility (GIIF) The Global Index Insurance Facility (GIIF) is an innovative program managed by the IFC and jointly implemented with the World Bank. It is a multi-donor trust fund that supports the development and growth of local markets for weather and disaster index-based insurance in developing countries, primarily SSA, Latin America and the Caribbean and Asia Pacific. GIIF’s implementing partners have covered more than 600,000 farmers, pastoralists and microentrepreneurs to date with $119 million in sums insured. One million recipients have been reached with information and access to index insurance. GIIF's objective is to expand the use of index insurance as a risk management tool in agriculture, food security and disaster risk reduction. Trade Finance Program IFC’s Global Trade Finance Program promotes trade flows between emerging markets to increase developing countries’ share of global trade, and support the flow of goods and services between these countries. The value of bank intermediated trade finance in Africa was estimated to range from US$330 billion to US$350 billion in 2011/2012, which was approximately equal to one-third of African trade. Although there are constraints, such as regulatory compliance and trouble accessing credit worthy borrowers, banks are expected to increase their finance activities in the immediate future. Trade finance is an appealing Page 5 of 7 activity for African commercial banks and is attracting a growing number of players. Trade finance contributes about 17% of African banks earnings on average. The advisory program provides banks and other financial institutions with training and support to upgrade their skills in structuring basic and complex trade finance transactions, improve their techniques for mitigating trade finance risk, upgrade the operational and technical skills of their trade finance back offices, and transfer current international best practices in trade finance to local markets. Global Trade Supplier Finance8 Established in 2010, the Global Trade Supplier Finance (GTSF) programme helped to address a huge shortfall in supply chain finance. The GTFS is a US$500 million multicurrency investment programme that provides short-term finance to emerging market suppliers and small and medium sized exporters. The IFC works with banks and buyers across industries that source goods in emerging markets to help reach thousands of small and medium sized suppliers. The GTFS provides post shipment finance to suppliers based upon acceptance of receivables by buyers approved by the IFC. Suppliers can improve working capital by converting sales receivables to cash immediately and access to lower cost financing based on the buyer’s higher credit rating. Suppliers can also finance open account transaction at competitive rates without collateral requirements making the suppliers more attractive to global buyers. Global Warehouse Finance Programme (GWFP) The GWFP is part of the IFCs efforts to increase access to finance for farmers and to promote agriculture development as a means of alleviating poverty. Warehouse financing is a secured lending technique that allows farmers access to finance secured by commodities deposited in warehouses. Warehouse financing allows banks to shift the risk from borrowers’ fixed assets to the commodities that farmers produce. With warehouse financing, farmers can also manage their cash flows and protect themselves against price seasonality. Islamic banking With an annual growth rate exceeding 20 percent over the past decade, Islamic finance represents one of the fastest growing segments of the international financial system. Islamic finance encompasses a broad range of financial products that are structured in compliance with Islamic law (Shariah) and obey two basic principles. The two principles are risk and profit sharing and the prohibition of the collection and payment of interest. Africa is home to just over a quarter of the global Muslim population. Africa provides a potential sizeable market for Islamic financial services and products which presents significant opportunities to deepen and broaden financial intermediation. While still comparatively underdeveloped, Islamic finance is expanding in many parts of the continent. Islamic financial service providers are now present across most of North Africa and in many countries of East and West Africa. Their efforts are complemented by Islamic DFIs, such as 8 Supply Chain Finance for SMEs, IFC, Oct 2014 Page 6 of 7 the Islamic Development Bank (IDB), the Arab Bank for Economic Development (BADEA) and the Arab Fund, the Abu Dhabi Fund for Development and the Arab Fund. Conclusion SSA is growing fast. Owing to favourable developments, such as improved macroeconomic management and increased political stability underpinning strong public spending, investor and consumer confidence has grown encouraging new investors into the continent. FDI has proved to be a significant source of capital flows into Africa. In line with the positive developments, so have there been positive developments in the world of finance for the African continent. Even though it fell by 6.6% for developing countries as a whole, net FDI to SSA grew by 5.5% in 2012. There are numerous funding sources, as well as organisations that facilitate access to funding for African entrepreneurs and businesses. The funding sources and financial institutions mentioned above are but a few of a plethora of what is available, from private equity to leasing to Islamic finance. The AFPA is a comprehensive directory that lists over 500 funding sources for entrepreneurs to access, resources that will enable these entrepreneurs to make a success of their businesses. The AFPA will help entrepreneurs navigate this world, and identify the institutions and funding that best meet their business needs. Page 7 of 7