This time for Africa
07 December 2016
Despite an economic slowdown, foreign interest in Africa is on the up, delegates heard at NeMa Africa and the Global Custody Forum in London
Image: Shutterstock
Descending on a London hotel in quick succession, NeMa Africa and Global Custody Forum each saw debate around remaining challenges in the financial services industry, both in Africa and globally.
However, they each also named Africa as a potential market of opportunity, rich in innovation and ripe for growth.
At Global Custody Forum, panellists deduced that neither investors nor counterparties are doing enough to challenge depository banks on their ability to weather so-called ‘black swan’ events.
A French banking speaker, who recently changed his focus to the Nordic region, expressed his surprise that regional Nordic players are not delving to sufficient depths in their due diligence of depositary banks they were considering working with.
An ex-rating agency speaker added that a number of depository banks do not have standalone ratings from major ratings agencies, suggesting this is another indicator that clients are not conducting thorough vetting processes.
Of two depository bank representatives in the hall, one declined to comment and another answered in the affirmative, saying banks are indeed doing enough to prepare for any significant market event. However, the speaker did not respond to questions relating to a lack of due diligence.
Another banking audience member summarised the risk that such an omission might represent, saying: “You can build all the market buffers for your own asset protection you want, but if you can’t trust the people you do business with to do the same, it’s all useless.”
Earlier in the week at NeMa Africa, the keynote speaker focused on the increasing role of custodians as trusted partners who are driving change in the capital markets in Africa.
Rajesh Ramsundhar, head of investor services for South Africa at Standard Bank, suggested that, in order to better influence change in the market, more collaboration is required between players.
The custodian business will no longer be driven by client needs, he argued. Rather, “they need to anticipate the needs of clients”, use that as a basis to drive change, and move “more into a trusted partner role”.
Ramsundhar suggested that the role of custodians in African capital markets has been gradually developing. Looking back over 20 years, he said that between 1997 and 2006, custodians were on the receiving end of change, getting to grips with “the basics of custody services” such as settling and paying dividends on time. Custodians weren’t actively involved in driving change, they simply reacted to it.
From 2006 to 2010, Ramsundhar said, custodians acted as enablers of change, with the focus shifting from pure settlement and safekeeping to how they could provide different products on the portfolio. They became more active in participating in the markets and in discussions about how to bring about change, rather than merely reacting.
Ramsundhar said: “We needed to be more than custody to service our customers and, honestly, to satisfy the funds within our business.”
Between 2010 and 2016, however, custodians in Africa have further evolved to actively initiate change, thereby improving in “relevance and contribution”.
This, Ramsundhar argued, is partly driven by regulatory needs, client requirements, and an increased emphasis on managing risk in the markets and diversifying business into new product capabilities.
For example, he cited securities lending in Nigeria as a process that “custodian banks have initiated into the market”, first floating the concept to regulators and institutional investors, and ultimately leading to the implementation of new regulation and the development of the new market.
He also cited pension reform projects, saying: “It’s been quite a long journey trying to convince the market to move towards independent asset management and custody.”
Custodian banks have been active in lobbying these changes, and have made significant progress.
In the future, Ramsundhar argued, custodians will only become more active in developing capital markets in Africa, as growth increases and clients and investors require more diversification.
The domestic markets are growing and conventional products will not be sufficient. “You need diversity,” he said.
In a NeMa Africa panel session, delegates discussed the role of the network management function in sub-Saharan Africa. One speaker, Bogart Miheaya of BNP Paribas Securities Services, suggested that managers are no longer expected simply to be market experts, they are also involved in credit risk and market compliance aspects.
David Margelisch of Bank Julius Baer noted that Africa is no different from any other frontier or developing market. The region is a frequently changing market where people want to see change, but slowly.
Market participants have to consider the upstream effects of change on foreign investors, he said. Change cannot be instant, as it will have an effect on balance sheet risk and sovereign risk.
However, Margelisch added that market infrastructure providers are interested in implementing changes, and that there are increasing opportunities for creating even significant change in “an acceptable and harmonised manner”.
Stuart Roy, vice president of network management at Northern Trust, pointed to slight variations in elements such as settlement cycle practices. He suggested that the issue of understanding the elements of risk, and being able to relay them to investors and clients, is a key challenge.
He said: “We’re very reliant on our sub-custody network … to support that education process and also to relay back into the market all the concerns and needs of the foreign investor and intermediary community as well.”
When asked whether they predict consolidation of sub-custody providers, The panellists were generally in agreement that they would like to see more competition in the markets, and more alternative service providers available.
While Roy suggested that increasing competition could “raise a larger voice on behalf of foreign investors” in those communities, Margelisch added that he would like to see more local banks stepping up to increase their sub-custody offerings in these markets. Before any consolidation can come about, more banks are required to offer that service in the first place, he said.
A panel discussion at Global Custody Forum also focused on the African market, with speakers suggesting that the rise of local institutional investors in Africa has allowed for capital markets on the continent to continue to develop, despite overall market slowdown.
One delegate from a global bank with significant African exposure explained: “The emergence of domestic institutional investors has been a big driver of growth.”
The panellist continued: “The economic impact has not stopped capital market developments.”
Of the 54 African nations, the speaker cited Nigeria, Kenya and Ghana as the fastest-developing economies, although South Africa still stands head and shoulders above all others.
Not including South Africa, the emergence of homegrown insurance companies and pension funds now accounts for $500 billion worth of assets in sub-Saharan Africa.
The African banking delegate acknowledged that, on the global stage, this is still a comparatively small sum but explained that it represents a significant step forward for the region.
Another major driver of growth in African capital markets is the commitment of regulators to reforming and updating governing frameworks to allow for new financial structures, and opening their respective markets up to foreign investors. Unsurprisingly, Nigeria and Kenya were again cited as being front-runners in market reform.
Of an audience of global banking and technology representatives, roughly a third said they are already active in at least one African market, showing that despite a comparative lack of airtime, interest is growing in the continent in general, and early movers may well be rewarded.
However, they each also named Africa as a potential market of opportunity, rich in innovation and ripe for growth.
At Global Custody Forum, panellists deduced that neither investors nor counterparties are doing enough to challenge depository banks on their ability to weather so-called ‘black swan’ events.
A French banking speaker, who recently changed his focus to the Nordic region, expressed his surprise that regional Nordic players are not delving to sufficient depths in their due diligence of depositary banks they were considering working with.
An ex-rating agency speaker added that a number of depository banks do not have standalone ratings from major ratings agencies, suggesting this is another indicator that clients are not conducting thorough vetting processes.
Of two depository bank representatives in the hall, one declined to comment and another answered in the affirmative, saying banks are indeed doing enough to prepare for any significant market event. However, the speaker did not respond to questions relating to a lack of due diligence.
Another banking audience member summarised the risk that such an omission might represent, saying: “You can build all the market buffers for your own asset protection you want, but if you can’t trust the people you do business with to do the same, it’s all useless.”
Earlier in the week at NeMa Africa, the keynote speaker focused on the increasing role of custodians as trusted partners who are driving change in the capital markets in Africa.
Rajesh Ramsundhar, head of investor services for South Africa at Standard Bank, suggested that, in order to better influence change in the market, more collaboration is required between players.
The custodian business will no longer be driven by client needs, he argued. Rather, “they need to anticipate the needs of clients”, use that as a basis to drive change, and move “more into a trusted partner role”.
Ramsundhar suggested that the role of custodians in African capital markets has been gradually developing. Looking back over 20 years, he said that between 1997 and 2006, custodians were on the receiving end of change, getting to grips with “the basics of custody services” such as settling and paying dividends on time. Custodians weren’t actively involved in driving change, they simply reacted to it.
From 2006 to 2010, Ramsundhar said, custodians acted as enablers of change, with the focus shifting from pure settlement and safekeeping to how they could provide different products on the portfolio. They became more active in participating in the markets and in discussions about how to bring about change, rather than merely reacting.
Ramsundhar said: “We needed to be more than custody to service our customers and, honestly, to satisfy the funds within our business.”
Between 2010 and 2016, however, custodians in Africa have further evolved to actively initiate change, thereby improving in “relevance and contribution”.
This, Ramsundhar argued, is partly driven by regulatory needs, client requirements, and an increased emphasis on managing risk in the markets and diversifying business into new product capabilities.
For example, he cited securities lending in Nigeria as a process that “custodian banks have initiated into the market”, first floating the concept to regulators and institutional investors, and ultimately leading to the implementation of new regulation and the development of the new market.
He also cited pension reform projects, saying: “It’s been quite a long journey trying to convince the market to move towards independent asset management and custody.”
Custodian banks have been active in lobbying these changes, and have made significant progress.
In the future, Ramsundhar argued, custodians will only become more active in developing capital markets in Africa, as growth increases and clients and investors require more diversification.
The domestic markets are growing and conventional products will not be sufficient. “You need diversity,” he said.
In a NeMa Africa panel session, delegates discussed the role of the network management function in sub-Saharan Africa. One speaker, Bogart Miheaya of BNP Paribas Securities Services, suggested that managers are no longer expected simply to be market experts, they are also involved in credit risk and market compliance aspects.
David Margelisch of Bank Julius Baer noted that Africa is no different from any other frontier or developing market. The region is a frequently changing market where people want to see change, but slowly.
Market participants have to consider the upstream effects of change on foreign investors, he said. Change cannot be instant, as it will have an effect on balance sheet risk and sovereign risk.
However, Margelisch added that market infrastructure providers are interested in implementing changes, and that there are increasing opportunities for creating even significant change in “an acceptable and harmonised manner”.
Stuart Roy, vice president of network management at Northern Trust, pointed to slight variations in elements such as settlement cycle practices. He suggested that the issue of understanding the elements of risk, and being able to relay them to investors and clients, is a key challenge.
He said: “We’re very reliant on our sub-custody network … to support that education process and also to relay back into the market all the concerns and needs of the foreign investor and intermediary community as well.”
When asked whether they predict consolidation of sub-custody providers, The panellists were generally in agreement that they would like to see more competition in the markets, and more alternative service providers available.
While Roy suggested that increasing competition could “raise a larger voice on behalf of foreign investors” in those communities, Margelisch added that he would like to see more local banks stepping up to increase their sub-custody offerings in these markets. Before any consolidation can come about, more banks are required to offer that service in the first place, he said.
A panel discussion at Global Custody Forum also focused on the African market, with speakers suggesting that the rise of local institutional investors in Africa has allowed for capital markets on the continent to continue to develop, despite overall market slowdown.
One delegate from a global bank with significant African exposure explained: “The emergence of domestic institutional investors has been a big driver of growth.”
The panellist continued: “The economic impact has not stopped capital market developments.”
Of the 54 African nations, the speaker cited Nigeria, Kenya and Ghana as the fastest-developing economies, although South Africa still stands head and shoulders above all others.
Not including South Africa, the emergence of homegrown insurance companies and pension funds now accounts for $500 billion worth of assets in sub-Saharan Africa.
The African banking delegate acknowledged that, on the global stage, this is still a comparatively small sum but explained that it represents a significant step forward for the region.
Another major driver of growth in African capital markets is the commitment of regulators to reforming and updating governing frameworks to allow for new financial structures, and opening their respective markets up to foreign investors. Unsurprisingly, Nigeria and Kenya were again cited as being front-runners in market reform.
Of an audience of global banking and technology representatives, roughly a third said they are already active in at least one African market, showing that despite a comparative lack of airtime, interest is growing in the continent in general, and early movers may well be rewarded.
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