Conduits of Capital

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6. POTENTIAL AFRICAN ONSHORE FINANCIAL CENTRES As outlined earlier in the paper there is no single factor which can determine the potential of any city to fulfil the role of a financial centre. Furthermore, we have determined that there are several different types of financial centres and hence policymakers must be precise in their objectives such that the most appropriate policies can be designed. In the following table we have tried to offer a ‘general’ comparison of different African centres and their potential to become an important onshore financial centre. We discuss below why other geographies were not considered. Table 1 outlines the strength of some African cities based on several characteristics that are important to financial practitioners (in each category the number of stars indicate a show of strength). We have chosen a number of cities as the basis of comparison. In each case, we believe there is the potential to develop or grow the city’s role as a financial centre and where we believe the city has the potential to serve a regional role. Table 1: Comparison of African onshore financial centres Lagos Nairobi Lusaka Accra Casablanca Capital Markets (a) *** ** * * *** GDP (b) *** ** * * *** Financial Market Institutions (c) ** *** * ** ** Infrastructure (d) ** *** * ** *** Quality of Life (e) * ** *** ** *** Legal framework (f) * ** ** *** *** 6 Stability (g) * ** *** *** ** Professional services (h) *** *** ** ** ** (a) Capital Market: based on scoring of the African Domestic Bond Fund Feasibility Report (ADBF Report) from Concerto Financial Solutions on behalf of the African Development Bank in 2011. To assess Capital Markets we used the study’s score attributed to the Domestic Investor Base which is based on different measures of total assets held by pension, mutual and insurance funds. (* 0-15; ** 16-25; *** 26 and above). (b) GDP: based on country GDP data from IMF 2014 estimates in USD (* 0-50bn; ** 51bn-100bn; *** 101bn and above). (c) Financial Market Institutions: based on ADBF Report’s variable used to score institutions and organisations relevant to the Financial Markets. The variable is composed of the number of institutions that exist to facilitate financial markets: (*0-50; ** 51-70; *** 70 and above). (d) Infrastructure: based on number of international (also intra-African) destinations reached directly from a city’s airport (* 0-20 flights; ** 21-40 flights; *** 41 and above). (e) Quality of Life: based on Mercer Quality of Living Survey 2012 Ranking: (* rank 200 or below, ** rank 199-150, *** rank 149-1). (f) Legal framework: based on World Bank Governance Indicators 2013. Scores are based on average of percentile achieved in regulatory quality and rule of law. (* 0-20; **21-40; *** 41 and above). (g) Stability: based on World Bank Governance Indicators 2013. Scores are based on percentile achieved in the political stability assessment. (* 0-10; ** 11-30; *** 31 and above). (h) Professional services: based on LHGP assessment on using local expertise in accounting, consulting and other finance related services. As we have seen, certain factors are important even if none of them can claim to be sufficient to enable any one city to accede to the role of becoming an important financial centre. Most of these factors have been discussed and their relative importance has been outlined above. In Table 1, we have tried to rank certain African cities with respect to their relative strengths in key areas. From this very high level analysis, the three centres that offer the greatest potential would seem to be Lagos, Nairobi and Casablanca. This analysis can and should be undertaken in greater detail before specific policy recommendations are made and at the very least there should be formal engagement with key policymakers and possible stakeholders. In the African context, there may be some issues with regional differences. For example, West African countries may find it easier to be serviced from an offshore centre such as Mauritius 6 Casablanca is the only destination where the legal system is not based on English law. As most financial centres have legislations based on English law or at least based on common law, investors may consider Casablanca more challenging from a legal point of view than less well rated common law destinations. 110 |
ather than an onshore centre that is in East Africa. Both are too far to benefit from proximity benefits, but Mauritius is already established. For that reason there is some rationale to promote centres such as Casablanca rather than to look to cities in East Africa. When considering the potential of African cities to become major financial centres, it is useful to look at other examples where certain countries have tried to fulfil this role with mixed success. Building a financial centre becomes particularly difficult if you are competing against an already established centre. In the case of mainland Africa, this means competing against somewhat remote centres such as Dubai and less remote Mauritius. Their relative lack of proximity leaves scope for new centres to develop. A good example might be the Middle East. Clearly Dubai has become an important financial centre, not only servicing the Middle East but in many cases also hosting companies that service India and Africa. It has successfully held its position against active competition from other cities in the region including Doha, Bahrain, Abu Dhabi and Jeddah. In particular, Doha and Bahrain have both created financial centres and there has been an active policy by the governments in those countries to encourage foreign companies and investors to build a local presence. Despite pressure from local governments to tie government contracts to the presence of a local office, in practice, local offices became something of a token gesture and the local presence was often a small office with the main Middle East presence remaining in Dubai. Similar policies could be more effective in Africa, in particular West Africa, where there is no immediate centre to compete against, as was when Dubai began its effort. Dubai can also serve as example that limited rule of law must not be a barrier to the development of a financial centre. International Arbitration can remedy bias of local courts. The BRICS also serve as example that the size of the economy must not be the determinant of the location of a regional financial centre—in particular, if there are established financial centres to compete against. Cities such as Moscow, Mumbai and Shanghai are now host to a substantial amount of financial activity. But in general they service very large domestic economies and have so far failed to become a hub for the region. In the case of Mumbai and Shanghai, they will face competition for the role from the likes of Tokyo, Hong Kong and Singapore. These other centres have a greater history of being important centres for finance and trade and they also have legal systems and a business environment that is more closely aligned to international standards. Mumbai and Shanghai are also evolving out of economies that were or still are fairly closed. Until recently both had capital controls and in both cases the rule of law is viewed with suspicion by international investors. In the absence of competition of the likes of Hong Kong for Shanghai in Africa, size could determine the location of its financial centres. Other than Nigeria, no African country has a sufficiently large domestic market to become a regional financial centre in its own right. One could argue that Johannesburg should be a natural onshore financial centre given its infrastructure and sophistication. But the historical political problems and more specifically the difficulties created by capital controls have meant that it has failed to fulfil its potential. Any other country would need to act as a wider regional centre covering multiple African geographies. Kenya in East Africa stands out in terms of market development, infrastructure, quality of life and overall human capital. French speaking West Africa is large enough to support its own financial centre. An important lesson for Africa is that in the absence of a financial centre, without the political will to establish one, it is unlikely to emerge by itself as illustrated by Moscow. In the case of Moscow, there remain many issues including political stability, the rule of law and the quality of infrastructure. Theoretically, Moscow could be a centre that serviced several important regions such as Central Europe and countries from the former Soviet Union. But the Russian administration seems to have little interest in this. 7. THE ROLE OF DONORS As donors seek new and innovative ways in which to catalyse development, they are keen to understand the benefits that may accrue from building financial centres. As a starting point, this means that donors are willing to accept the benefits of financial markets in development. Indeed many donors and development banks are keen to promote capital markets development in African countries. The IFC and African Development Bank are both very active in working with African countries in promoting the development of local stock exchanges, in endorsing domestic bond markets and in helping African countries access the latest financial products from the international markets. Both of these issuers have executed bond transactions in domestic African markets in order to promote liquidity and to catalyse the development of the institutional Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity | 111
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Conduits of Capital Onshore Financi
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TABLE OF CONTENTS I. FOREWORD .....
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predictable, legal systems that res
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works and that everyone loves.” D
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Because of the fragmented nature of
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Industry Views: EMPEA 2015 African
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EXECUTIVE SUMMARY In April 2015, FS
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INTRODUCTION Across the emerging ma
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As a general rule, GPs tend to foll
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“Offshore” refers to a jurisdic
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expressed by GPs). Over 61% of GP r
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“The industry has found a very sa
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INDUSTRY ATTITUDES TOWARD ONSHORE A
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A RANKING OF ONSHORE FUND DOMICILES
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Conduits of Capital - Onshore Finan
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WHAT COULD MAKE ONSHORE SUB-SAHARAN
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“Other” actions include: “rem
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“ STAKEHOLDER VIEWS ON THE RELATI
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APPENDIX 1 - DETAILS ON SURVEY PART
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Expert Perspectives: Onshore Financ
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Experts were asked to make recommen
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Table 2 - Prerequisites for a succe
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3. FINDINGS 3.1 Evolution and Compa
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particular jurisdiction (communicat
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that it is obvious: a well-function
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• The development of an onshore f
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amined the impact that venture capi
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4.1. Where do Private Equity Fund M
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in absolute terms, or relative to t
Page 59 and 60: average. With respect to regulatory
Page 61 and 62: For future research, it is importan
Page 63 and 64: ENDNOTES 1 World Bank Enterprise Su
Page 65 and 66: 33 African Development Bank. Maurit
Page 67 and 68: 71 Unfortunately, the DTAAs lists b
Page 69 and 70: The financial activities carried in
Page 71 and 72: The OECD has reviewed over 100 juri
Page 73 and 74: Importance of Domestic Flows The re
Page 75 and 76: Rwanda is not included in any of th
Page 77 and 78: Other possible contenders may emerg
Page 79 and 80: APPENDIX 1: LISTING OF COUNTRIES IN
Page 81 and 82: Country / Territory Palau Listed by
Page 83 and 84: Country Mauritius Morocco 16 Nigeri
Page 85 and 86: Onshore Options for Africa-focussed
Page 87 and 88: Developing skills in these areas re
Page 89 and 90: 2.2 Policy Issues Related to Onshor
Page 91 and 92: • Good accessibility. Good commun
Page 93 and 94: 4. ROLE OF DONORS AND TECHNICAL ASS
Page 95 and 96: Thus, while some PE general partner
Page 97 and 98: management extends to monitoring co
Page 99 and 100: ANNEX 1: CATALOGUE OF FINANCIAL CEN
Page 101 and 102: Dublin Mauritius Dubai Botswana Cap
Page 103 and 104: To some extent, policymakers also n
Page 105 and 106: In administrative financial centres
Page 107 and 108: services industry. However, recent
Page 109: gains, even if it involves offshore
Page 113 and 114: generally look to London or in some
Page 115 and 116: Onshore Options for Africa-focussed
Page 117 and 118: whether it is ‘Local,’ ‘Trans
Page 119 and 120: are suited to particular financial
Page 121 and 122: In GFCI 16, only three African cent
Page 123 and 124: The ‘stable’ centres in the bot
Page 125 and 126: GFCI 16 Investment Management Centr
Page 127 and 128: Professional service providers tend
Page 129 and 130: Busan and Doha have been advancing
Page 131 and 132: Zambia and Zimbabwe, the report not
Page 133 and 134: Get Connected - Ease Scaling Up In
Page 135 and 136: Financial centres are added to the
Page 137 and 138: The SVM then uses the data to predi
Page 139 and 140: Instrumental Factor Country or City
Page 141 and 142: Instrumental Factor CA* BU DO DU IS
Page 143 and 144: Open Government The World Justice P
Page 145 and 146: Securitisation TheCityUK http://www
Page 147 and 148: Human Capital Instrumental Factor S
Page 149 and 150: Global City Competitiveness EIU htt
Page 151 and 152: 6.4 Appendix D - Group Respondent P
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Page 155 and 156: 6.5 Appendix E - Country Summary Ov
Page 157 and 158: Uganda 26.086 33,800,000 772 Kampal
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