With around a billion people in over 50 countries, Africa is predicted to be the next big thing when it comes to the financial industry. Already, forward thinking funds are investing heavily in several countries, and - in some territories at least - a vibrant asset servicing industry is already geared up to provide support.
With around a billion people in over 50 countries, Africa is predicted to be the next big thing when it comes to the financial industry. Already, forward thinking funds are investing heavily in several countries, and - in some territories at least - a vibrant asset servicing industry is already geared up to provide support.
There are still some serious barriers to overcome, however. While many countries on the continent seem to have it all - huge natural resources, a young and mobile workforce and an increasingly well-educated and motivated middle class, it still struggles with historic problems. Many governments remain unstable, and internecine conflicts often spill into neighbouring countries. Over a third of the population live on less than a dollar a day, while many countries also suffer under a heavy burden of international debt. Corruption is rife, and the AIDS pandemic is cutting much of the young population down in its prime.
So the hurdles that need to be overcome remain astonishingly high. But there are real positives. In countries such as Botswana, natural resources are being harnessed to benefit the country as a whole, while the likes of Kenya, Tanzania and Namibia are making strong strides in attracting wealthy tourists. The African diaspora is sending money home, increasing the wealth amongst those they left behind. Many countries are becoming more politically stable - the genocide in Rwanda is, while certainly not forgotten, being worked through and the creation of South Sudan, the world’s newest nation, was done without the bloodshed often associated with breakaway countries.
And then there is China. While there are certainly many downsides to the world’s new economic superpower’s investment in Africa, no-one can deny there have been some real benefits. In desperate need of guaranteed natural resources, China has pumped billions into many areas of Africa, particularly in sub-Saharan countries that either have their own mineral wealth or can provide a pipeline through the continent. New roads are being built, new factories, new mines, new airports and shipping routes. All of this is providing jobs for the people and incomes for the countries. For the moment at least, it is also providing security and stability. And while growth varies dramatically, many countries have significantly outperformed the more mature markets in the West.
The most mature market has for decades been South Africa. Since its emergence from the horrors of apartheid, it has transformed itself into a modern economy that has the confidence of both local and international investors.
The World Cup last year put a real focus on South Africa, showing it as a modern vibrant nation that - while not without its problems - is a beacon to the rest of the continent. 20 years after Nelson Mandela’s release and the beginning of the end of apartheid, the country is increasing its wealth and open for business to the wider world.
South Africa remains a comparatively small market compared to the Western giants, but it has been punching above its weight for some years. While it certainly suffered during the downturn, it has bounced back well, and asset levels are now on a par with those seen three years ago.
Growth has consistently been in double digits over the past year, and the stock exchange is confident that its success can only continue.
From being a fairly insular economy, the South African government and regulators have decided to open up somewhat in the past couple of years. Of course, part of the reason for the country’s relative immunity to the international economic downturn was its existing regulation, which meant that domestic investors tended to invest domestically, while international players were not in the market enough to spread the contagion.
But there is an understanding that if the country is to compete on the international stage - and to improve the lives of its citizens, particularly those at the bottom of the ladder - South Africa must become more internationalist.
In October 2008, foreign exchange controls were relaxed, meaning foreign capital allowance for residents, which was last adjusted in 2006, would be increased from ZAR2 million to ZAR4 million, while the single discretionary allowance would be increased from ZAR500,000 to ZARR750,000.
The Government also raised the limit on the amount institutional investors can take offshore by five percentage points. The limit will be between 25 per cent and 35 per cent for investors, depending on both the type of investor and the type of investment.
“Previously, the foreign exchange controls placed obvious constraints on the industry and the available assets to service in the local market,” says one custody leader. “These constraints have now been eradicated and investors can now look further at greater investments into sub-Saharan regions, as just one example,” who adds that foreign investment into the region will now become more appetising, and domestic investors looking to expand their footprint in Africa will now be more attainable. From a securities services provider perspective, the future looks very promising.
The South African government has also announced a review of the prudential framework for foreign investment by private and public pension funds. This will include the Government Employees Pension Fund. A prospective review date is yet to be announced.
It’s not just the Government that is looking to bring in the changes. The Johannesburg Stock Exchange has invested heavily in technology and infrastructure and is now looking to bring the settlement timeframe more in line with modern standards. Currently at T+5 settlement, many in the industry have voiced concern that as volumes grow, the potential for reducing liquidity and efficiency and increasing risk also grows. As a result, the exchange is looking to move to T+3 as soon as possible.
New funds have entered the market, while many of the existing participants have expanded their offerings. This is combined with the country’s position at the forefront of a continent that is increasingly open for business. The risks of investing in many newer markets, however, means that many firms prefer to base themselves in the relatively safe environment in the south while looking for opportunities elsewhere.
In 2009, HSBC launched its SA synthetic DMA platform and expanded its Market Access product to a number of neighbouring countries, including Nigeria, targeting an increasing number of investors with an interest in this part of the world.
“We have high hopes for many of these markets,” says a spokesman for one South African bank. “We have given ourselves the opportunity to kickstart the market here - as they become more sophisticated and more funds look to invest in this area of the world, we are going to be able to service the investment that comes in. We don’t expect there to be enormous growth straight away, but there will be business and we are in a prime position to take advantage of that.”
It’s not straightforward, though, as head of business development at Finsettle Ted Hampson explains: “Common challenges are faced by the different exchanges across Africa, which include liquidity in the markets, standard or similar governance and reporting principles, effective and standard settlement cycles at T+?, effective use and/ or adaptation of technology, movement to electronic trading systems, the need to increase bandwidth, education of companies towards listing as a capital raising alternative, consumer education related to investing in a stock exchange, effective available research, education and training of market participants, customer management systems and techniques, navigating the needs of different exchanges, countries and regions as further trust is fostered for all to take advantage of the future opportunities. These common challenges present business opportunities for those with vision....”
The big global names are out in force in South Africa, with Societe Generale, State Street, J.P. Morgan and others leading the way. Domestically, Standard Bank has a reputation for quality of service at a low cost, while other African banks - in particular those from Nigeria - have a small but growing footprint.
And all of this is designed to offer clients access to markets across the whole continent - or at the least those countries in central and southern Africa. Last year, Standard Chartered Bank set down a marker in Africa after buying Barclays Bank’s one remaining foothold in the business.
Barclays exited the custody world in 1998, leaving only its pan-African operation. While it insists the business is still profitable, management by a global operator would give it a boost, according to Barclays.
Operations are present in eight countries where direct custody capabilities have been added: Botswana, Ghana, Kenya, Mauritius, Tanzania, Uganda, Zambia and Zimbabwe.
Indirect capabilities are available in Egypt, Cote d’Ivoire, Malawi, Morocco, Namibia, Nigeria, Tunisia and South Africa. These are provided through a network of third party sub-custodians powered by an operations hub in Mauritius.
It’s this sort of operation that international funds are increasingly sourcing. And as South Africa matures, many experts believe it will pull its neighbours up behind it. “We’re confident in South Africa and have a lot of investment there,” says a representative of one fund management company. “Nearby, we would be happy to work in Botswana and, to a lesser extent Kenya and Tanzania. We’re hoping that more as more countries come on stream, we will have more opportunities to operate outside Johannesberg.
Banking giant Citigroup recently announced that it has expanded its direct custody and clearing services to institutional investors in South Africa, becoming the 60th market where the bank offers this service. Country manager Donna Oosthuyse says: “This business will be a profit centre in and of itself. This should bring in foreign-exchange business, electronic funds transfer and brokerage. In time there will be securities lending and cash management”.
Nigeria
While South Africa may be more established, Nigeria is quickly catching up. Although it has a reputation in some areas as a home of corrupt activity, the funds market has developed a name as an efficient, open and approachable market.
With over 150 million people, and a well-established and profitable oil production base, the fundamentals are strong. In 2010, the equity market grew by almost 20 per cent and this has continued into 2011. However, the asset servicing market remains dominated by domestic banks, especially when it comes to looking after the pension funds.
Historically, custody in Nigeria has been divided into non-pension and pension custody, and pension fund custodians (PFCs) are licensed and regulated by the National Pension Commission. There are four pension custodians controlling 95 per cent of the market: First Pension Custodians, Zenith Pension Custodians, UBA Pension Custodians and Diamond Pension Custodians (all are subsidiaries of four Nigerian banks: First Bank, Zenith Bank, UBA and Diamond Bank). A handful of non-pension custodians or asset custodians are allowed to source business from outside the pension arena. Whereas the local investment market is underdeveloped, much of the business comes from foreign investors and all custodians are regulated by the Nigeria Securities & Exchange Commission (SEC).
Section 47 of the Pension Act provides that the custodians shall receive the total contributions remitted by the employer on behalf of the pension fund administrator within 24 hours of the receipt of contributions from any employer; and notify the pension fund administrator within 24 hours of the receipt of contributions from any employer.
The PFCs are also to hold pension funds and assets in safe custody on trust for the employee and beneficiaries of the retirement savings account.
On behalf of the pension fund administrator, the pension fund custodians are to settle transactions and undertake activities relating to the administration of pension fund investments including the collection of dividends and related activities.
Besides, the Act requires PFCs to report to PenCom on matters relating to the assets being held by it on behalf of any pension fund administrator at such intervals as may be determined, from time to time, by the commission.
The Act further states that the PFCs shall undertake statistical analysis on the investments and returns on investments with respect to pension funds in its custody and provide data and information to the PFA and the commission.
However, other providers are making waves. Standard Bank and Standard Chartered are both bringing in new business, while other firms are circling the market.
