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
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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
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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
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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.
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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
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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
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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.
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