Conduits of Capital

• Good accessibility. Good communications both
international transit (including visa and immigration
processes) and telecommunications are important.
• Locational appeal. Good and affordable
infrastructure, accommodation, schooling and
assured personal safety.
However, while all the
above factors are necessary
conditions for replicating the
comparative advantages
associated with an offshore
centre, it is doubtful whether
they are sufficient. Successful
international financial centres
around the globe—whether
London, Hong Kong, Singapore
or Switzerland—were
not created in isolation, but
arose in conjunction with
development of a vibrant
domestic financial services
industry.
Figure 3: Ownership linkages among African banks
Looking beyond the issue of
scale, experience suggests
that the political economy of
financial sector reform is an
uncertain process, particularly
when such reforms entail
provision of public goods,
such as a conducive legal
and regulatory framework,
strong judicial and oversight processes, efficient financial
infrastructure, etc. Local private sector parties most
impacted by shortfalls in current systems are likely to
be the most vocal and effective drivers of such reform
processes. Thus, rather than engage directly in dialogue
with authorities on the reform process, the most impactful
approach to supporting improvement may well be to build
on the influence of those local private sector parties most
impacted by current circumstances (such as PE fund
managers whose activities are hampered by shortfalls in
the enabling environment). They are likely to be the most
effective drivers of such reform processes, see Box 2.
Note: The graph only shows ownership linkages between countries if the
share of assets held by home countries constitutes at least 10% of the
host country’s banking system. The size of the bubbles is in proportion to
the absolute size of each country’s banking sector. The reference year is
2011; where 2011 data was not available, figures from 2009-2012 were
used instead. Sources: Central Bank websites, annual reports of banking
groups, Claessens and van Horen Bank Ownership Database, World Bank
/ IMF country reports, GIZ (2012a, 2012b, 2012c, 2012d).
Judging the prospects for onshoring in Africa in relation to
the prospective depth of the local financial services sector
is important, as African financial systems are significantly
burdened by fragmentation. While not precluding small
countries from becoming financial centres, their ability
to assume this role depends on harvesting economies of
scale and could be significantly handicapped unless they
provide a ‘gateway’ to a
financial sector of significant
depth—e.g., as part of a
currency union or a financial
services free-trade zone. A
small country that cannot
provide such a ‘hinterland’
will find it much more difficult
to compete with offshore
centres, such as Mauritius.
In setting up a locally-based
financial services centre
providing access to an
investor base of significant
size will be an important
factor in determining the
‘viability’ of undertaking the
required institutional and
infrastructure investments.
Another important consideration
is whether countries
already aspire to becoming
sub-regional hubs for financial
services as reflected
by the investments made
by their financial systems in neighboring countries and
their capacity—both human resources and technical—
to expand their presence from their home base. A recent
study 12 maps the increasingly important role of South-
South investment in African banking, see Figure 3
above. While South Africa still has a dominant position in
cross-border banking in Africa, the study documents the
increasing importance of Kenya, Nigeria and Morocco as
sub-regional hubs.
Given the East African Community common market and
increasing liberalization of capital movements within the
Community, Nairobi has developed a vision of becoming
12
Thorsten Beck, Michael Fuchs, Makaio Witte and Dorothe Singer, Making Cross-Border Banking World for Africa, June 2014, published by GIZ, the World
Bank the African Association of Central Bankers and the Making Finance Work for Africa partnership.
Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity
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