Conduits of Capital

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
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