Conduits of Capital

Rwanda is not included in any of the classifications of
financial centres, but has expressed a desire to become the
financial hub of the East African Community. It is likely that
measures will be implemented in support of this objective
over the next five years. Rwanda has not had an OECD
Global Forum review.
The Seychelles is classed as a financial centre and has
legal provision for the registration of international business
companies (IBCs) and offshore banks. The country has
the most secretive environment of the African jurisdictions
reviewed here, according to the FSI ranking. After going
through the two Phases of the OECD Global Forum exercise,
the country was rated ‘Non-Compliant’ with international
standards.
South Africa is the main financial centre in Africa, in the
sense of being the largest and most diverse. It has a wide
range of banking operations, including both domestic
and international banks; South African banks have an
increasingly wide range of operations throughout the
continent. Other financial institutions, including insurance
and asset management, also operate regionally from
South Africa. The JSE is by far the largest and most liquid
securities market in Africa, and is indeed one of the largest
emerging market exchanges in the world. The country has
good travel and communications linkages, a broad and
deep range of financial institutions and skills, sophisticated
business services, and good corporate governance.
However, it has a poor reputation for allowing companies to
bring in expatriates to meet skills gaps, as the immigration
system is very restrictive. The main financial centres are
Johannesburg (for banking and securities) and Cape Town
(for asset management).
The country is also the origin of several Africa-focussed
investment funds, which, however, tend to be domiciled in
Mauritius. Some funds are domiciled in South Africa, but
these are largely focussed on domestic (i.e., South African)
investments rather than outside of the country. Despite
its many advantages, South Africa has largely failed to
attract externally focussed investment funds, for a number
of reasons. First, there is no dedicated legal or regulatory
regime for international investment funds or financial
activities more broadly. Second, South Africa has extensive
exchange controls on capital movements, and these provide
a major disincentive for international banking and fund
activities, because they introduce a major level of delay
and uncertainty to external financial transactions. 10 Third,
despite the cosmopolitan nature of major South African
cities, the high crime rate provides a major disincentive to
international migration, which is compounded by a restrictive
immigration policy. Fourth, South Africa has relatively high
corporate tax rates.
However, although several investment funds originating in
South Africa are legally domiciled in Mauritius, much of the
substantive investment advisory and asset management
work is still carried out in South Africa.
South Africa has the best (i.e., lowest) score in terms of
financial secrecy under the FJN ranking. It is the only African
country to be fully ‘Compliant’ with international standards
as per the OECD Global Forum exercise. The GFCI rates
Johannesburg as an “Established Player” in the category of
Local Financial Centres.
Botswana established its International Financial Services
Centre (IFSC) in 2004. The IFSC makes provision for a
reduced tax rate (15%) for approved companies. Although
the IFSC was originally intended to be focussed on financial
services, in practice it has attracted a broader range of
business services, particularly holding companies for firms
that operate across different African countries, rather than
banking and fund management. Botswana has a good
reputation for macroeconomic and political stability, and has
the highest sovereign credit rating in Africa. There are no
foreign exchange controls.
However, the IFSC has been slow to take off, particularly
for financial services. Although the general level of
corporate governance is good, Botswana has been held
back by somewhat out-dated legislation, a slow response
to regulatory modernisation, a lack of transport links
(especially international air travel connections), a shortage
of specialised skills and a restrictive immigration policy
that makes it difficult for firms to bring in skilled personnel
from outside the country. The country also lacks the range
of DTAs that Mauritius and South Africa have, and has a
higher effective tax rate than Mauritius. And unlike Mauritius,
the Botswana IFSC requires approved investors to have a
physical (and not just legal) presence in the country.
10
While exchange control approval for transactions in goods have generally been delegated to the commercial banks (authorised dealers) by the South
African Reserve Bank (SARB), this does not apply to financial services transactions to the same extent. Furthermore, capital account transactions above
a certain size are generally not subjected to such delegated approval. The time taken for SARB review extends the transaction process, and in addition
because approval of capital outflows is discretionary, approval may be conditional. This all adds delay and uncertainty, especially for complex transactions.
Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity
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