#Africa Egypt: From little things, big things grow


Several years ago, an Egyptian mother had a novel idea for a small business in Qalyubia, a governate in the Nile Delta region.

From her humble basement, she would make coat-hangers. The mother’s search for start-up funding brought her into contact with Dr Aliaa Soliman, a partner at Cairo-based AIT Consulting and an expert on small-to-medium enterprise (SME) funding.

“With the assistance of one of the banks, she managed to buy the first plastic moulding machine,” recalled Soliman, “and now she is being contracted by several big producers.”

The entrepreneurial mother gradually expanded her manufacturing repertoire to a whole range of plastic objects, and earned enough money to fund her children’s education. “I remember her because she was somebody very simple, who just had an idea,” Soliman said.

Until recently, Egypt’s bankers had not typically focused on servicing these kinds of grassroots business models. Local SMEs were long starved of credit opportunities, even though the sector employs around 75% of Egypt’s workforce and generates 80% of the country’s GDP, according to CPI Financial.

Addressing this market gap will continue to be an essential part of the banking strategy of Abdel Fattah al-Sisi, who won another four years as President in March’s election.

During Sisi’s first term, in 2o16 the Central Bank of Egypt (CBE) launched its ‘SME initiative’, which compels the banking sector to address this market gap. The programme requires Egyptian banks to provide finance to SMEs (defined as businesses with an annual turnover between EGP1m and 20m [$57,000-$1.13m]) at a fixed interest rate of 5%. By 2020, SMEs must make up at least 20% of each bank’s loan portfolio. Overall, the initiative aims to fund 350,000 SMEs with bank credit totalling EGP200bn over four years.

Some industry experts applaud the project, noting that funding small-scale businesses has driven strong economic growth in countries like China and the US. On the other hand, consultants Oxford Business Group warn that the mandatory SME lending requirements may steer Egyptian banks away from more profitable investments.

Nudge in the
right direction …

Despite the compulsory nature of the ‘SME initiative’, significant banking figures have embraced the change. Hassan Abdalla, CEO of Arab African International Bank, believes that increased funding for SMEs appropriately responds to the youthful demographics of Egypt, where well over half the population is under 30 years old.

“This could be deciphered as a burden of unemployment, but it also points to the way that banks should shift their traditional operations towards micro-finance,” Abdalla told Global Banking and Finance Review.

Soliman, who has advised the government on several initiatives related to SMEs, concurs that many Egyptian banks are eagerly meeting CBE’s 20% quota for SME lending. Indeed, institutions like National Bank of Egypt and QNB Alahli have likely surpassed the target already.

“One of the reasons that this initiative was created was to assist banks in creating a perfect distribution within their portfolio,” Soliman said.

In her view, the project adds balance because Egypt’s millions of SMEs once comprised only a ‘small fraction’ of the banking sector’s clients. This exposed several institutions to a greater concentration of risk, especially if they had loan portfolios heavily weighted towards a few large corporate clients.

Additionally, Soliman believes that SMEs can offer more lucrative opportunities in some respects than heftier clients like large corporations and government. For instance, smaller businesses typically use day-to-day financial services more frequently, leading to higher revenues from commission fees and charges.

Soliman added that SMEs are “not angels” by comparison with larger entities. Both she and Abdalla raised general concerns about Egyptian SMEs’ book-keeping standards, financial structures and quality of training. Yet Soliman argues that other jurisdictions have overcome exactly the same endemic obstacles through professional education programmes, similar to those currently offered by the Egyptian Banking Institute.

“All markets worldwide have encountered the same problems,” she said. “It takes time to upgrade these SMEs.”

… or forcing industry’s hand?

CBE’s mandatory requirements have not met with unqualified approval. In its 2017 country report for Egypt, Oxford Business Group (OBG) referred to concern amongst rating agencies that “Egypt’s new SME lending quota is driven more by a wider economic ambition … than a prudential one.”

The government has championed the initiative as supporting economic growth and employment that includes more Egyptians. But according to OBG, the 20% requirement could erode banking assets if lenders struggle to find suitable SME clients. CBE has compensated for this risk somewhat by allowing banks to meet the quota with their non-interest-bearing regulatory reserves, which allows them to put deadweight assets into play.

Similarly, OBG notes that the 5% interest cap for SMEs could limit profitability when banks might obtain better immediate returns elsewhere, such as from the government’s lucrative Treasury bill programme. Yet Soliman argues that lenders are not fully constrained by the interest rate cap, even before the CBE initiative expires at the end of 2019. This is because plenty of SME clients are already opting for financial products that offer attractive commercial incentives, albeit at a higher interest rate.

Another practical concern is that CBE’s lending quota has placed certain banks at a comparative advantage if they had focused on SME finance before the initiative started. For example, Crédit Agricole Egypt created an SME credit team as early as 2006, while Banque du Caire revealed that
SME lending made up only 6% of its overall portfolio as at April 2017.

Under CBE’s auspices, the Egyptian Banking Institute provides practical training courses on SME lending to address this potential unfairness. Banks can send employees to learn about the specific skills required for handling these transactions. There are separate workshops available for small business owners, many of whom have little experience in dealing with banks.

Soliman endorses CBE’s efforts to level the playing field through education. Yet she does indicate that banks with extra manpower generally have more capacity to handle SME lending, given that small businesses generate a high volume of separate transactions.

Time will tell

Ultimately, the market will determine whether or not Egyptian banks maintain their SME portfolios after the CBE initiative ends. Soliman also points out that small businesses are increasingly attracting funding from alternative sources, including venture capitalists, private equity firms, and leasing and factoring companies. “You have a complete, functional financial ecosystem now,” she said.

Even so, Soliman returns to global market trends in justifying her prediction that SMEs will maintain a strong presence in Egypt’s banking sector for years to come. “You are not re-inventing the wheel [with the SME initiative],” she remarked. “You are just looking at what has been done around the world and fitting it into your [domestic] environment.” 

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#Africa SA startups invited to apply for $940k fund


Growing small and medium businesses in South Africa have been invited to apply for the ZAR12.8million (US$940,000) Growth Fund, launched to boost SME growth and job creation.

The Growth Fund, applications for which are open until June 29, is a fund designed specifically for growing South African SMEs who need a cash injection to scale up further and create jobs.  

Managed by CDI Capital, which was incorporated as a CDI subsidiary in 2016 to catalyse funding for SMEs, the fund has been enabled through contributions by the National Treasury’s Jobs Fund, the Technology Innovation Agency (TIA), and the Western Cape Department of Economic Development and Tourism (DEDAT).

South African-owned businesses who operate within South Africa, are at least one year old, and have turnover or assets above ZAR1 million (US$73,000), and eligible to apply.

Each applicant must demonstrate their year-on-year growth or the potential for sufficient growth, and must be tax compliant. Applicants also need to match 20 per cent of the contribution of the Fund through a cash contribution to achieve agreed objectives. Importantly, the business must be able to create new jobs.

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#Africa Casablanca Finance City spreads it wings


Casablanca Finance City (CFC) was officially launched in December 2010 as a financial and economic hub from which to drive investment into Africa.

Today there are 150 companies operating from the centre and it is estimated that 74% of Moroccan FDI and investment flows into Africa originate from CFC. There has been a flurry of activity around Africa-bound investments in London in recent times.

DLA Piper, a member of the CFC, organised an investor day to make the case for African opportunities to its clients while the Casablanca Stock Exchange hosted a Morocco investment day at the London Stock Exchange. Although the events were not related, they illustrate the continued appetite for emerging and frontier markets.

Attending the DLA Piper event, Manal Bernoussi, CFC’s Strategy and Marketing Director, said that although it was encouraging to see considerable investment interest in the UK, this has not been translated sufficiently into actual deals. Investments so far, Bernoussi says, are small by global standards.

Of the 150 companies operating in CFC, 40% are European groups but of those, only five companies are British. “If we are to drive capital to our economies,” she says, “one way of stimulating the flow of capital is to get international partners to be closer to the market, which is the appeal of CFC.”

Like the DIFC in Dubai, the CFC is providing modern infrastructure and facilities in a 100ha site, of which 50% is devoted to green spaces. The first tower is about to be completed and will start receiving its first tenants before the end of the year.

But it is much more than that and the CFC has a clear focus. To be granted CFC certification and to become a member, companies have to show a clear African orientation, she says. “Not any company can just come and set up in the CFC. You have to produce a business plan to prove that part of your business and investments are geared towards Africa.”

Companies targeted by CFC are typically involved in: financial services (except retail banking); professional services (law firms, accountants etc); African holdings; or are regional headquarters of multinationals. CFC members include a number of international institutions such as BNP Paribas, Boston Consulting Group, AIG and a number of fund managers, law firms and banking institutions.

CFC also hosts the Africa 50 Fund, a fund launched by the African Development Bank to accelerate investments in infrastructure by mobilising public and private sector capital. It is an ecosystem that she believes will help create movement to drive investment into Africa.

Clustering in expertise

When asked if companies within the CFC would be able to tap into the larger balance sheets of Moroccan banks for project and trade finance, Bernoussi says that’s not the objective. Instead she contends that the CFC will become a truly successful platform if it can help channel more capital from the North (Europe and the Americas), from Asia and from other markets into Africa. Right now, she says, Africa represents less than 5% of global FDI flows.

She is confident that clustering in organisations that have a clear African mandate and focus will help accelerate and increase investment flows to Africa and also create a critical mass of expertise and partners to work more closely together. “We are creating a cluster of skills and knowledge, an ecosystem of bankers and professional services, who are setting base camp in the CFC. If you are serious about investing in Africa you need to be in Africa,” she adds.

The CFC offers some clear advantages to investors. Members benefit from streamlined administrative processes, the accompanying physical infrastructure (currently in the final stages of completion) and also fiscal benefits, but the real added value will be in gathering African investors to share ideas and information.

To this end, the CFC is organising workshops and commissioning papers on sectors and countries, to be compiled by experts through their partners. These will be made available to the members.

Leader in green finance

The CFC wants to position itself as a leader in sustainable and green finance. Africa, says Bernoussi, is the most vulnerable continent when it comes to climate change but it also has the biggest potential in green finance. “We’ve managed to bring in funds focusing on green investments, companies such as Global Nexus or Finance in Motion. Expertise will come from members of the community, and raising awareness through events.”

The organisation also wants to become a regional hub for Islamic finance (Bahrain leads in the Middle East and Malaysia in
Asia). The way to do it, Bernoussi says, is by crowding in other partners in this sector and again creating expertise and know-how clusters.

Casablanca Finance City has been ranked the number one African financial centre since 2015 by the Global Financial Centres Index, a UK-based think-tank. This is a major achievement for the CFC because the rating not only considers the ease of doing business and other international and well-known indicators, but also because it seeks feedback and viewpoints from international players in financial services.

Bernoussi does not see the CFC in terms of competing with African financial centres but rather as responding to the need to strengthen and create stronger financial centres across the continent. “Africa will need multiple financial centres to serve the continent,” she says. In an interconnected world, these will have to work together in the same way that CFC has already partnered with others, such as the financial centre in Astana (for Islamic Banking), the City of London (on derivatives, insurance and real estate) or Paris (on financial innovation).

She says that Morocco’s re-entry into the AU and also more recently, the ECOWAS regional economic community, has helped the cause. This is critical because without greater regional integration, the scale demanded by investors is simply not there.

This is why the CFC is partnering with African investment promotion agencies. For example, Yewande Sadiku from the Nigerian Investment Promotion Commission was in Morocco in March to help establish stronger ties between CFC members and Nigerian partners and share information and data on opportunities and the projects seeking investments.

“We’re a truly African financial centre. Our members cover 46 countries in Africa,” Bernoussi says. She adds that without the continent coming together and creating these clusters of knowhow and expertise where different stakeholders pool together, investment flows will remain insufficient to transform the continent.

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#Africa MEST to launch Nairobi incubator later this year


The Meltwater Entrepreneurial School of Technology (MEST) plans to formally launch its next fully-fledged incubator in Nairobi, Kenya later this year, where entrepreneurs will be offered the same level of support, mentorship, network and access to resources as its other incubators.

Since its 2008 launch in Accra, Ghana, MEST has invested over US$20 million in funding, with portfolio companies going on to receive follow-on funding.

It expanded its footprint into Nigeria in 2015, Kenya in 2016, and South Africa and Ivory Coast in 2017 by welcoming Nigerian, Kenyan, Ivorian and South African Entrepreneurs-in-Training (EITs) into the programm. It has since launched incubators in Ghana, Nigeria and South Africa, and will now add a fourth in Nairobi.

This was announced this week at the third MEST Africa Summit, which saw leading entrepreneurs, investors and corporate executives from Africa and across the globe – including Silicon Valley, Europe and Asia – discussing trends, challenges and opportunities facing tech entrepreneurs on the continent under the theme “The Year of the African Scaleup?”.

Following a showcase of pitches from MEST portfolio company founders, the three-day event culminated in an announcement of the winner of the MEST Africa Challenge, a pan-African pitch competition which saw Nigeria’s Accounteer awarded US$50,000 in equity investment from the Meltwater Foundation, along with space and support in the MEST Incubator Lagos.

“We’re thrilled at the outcome of this year’s summit. We welcomed the continent’s leading entrepreneurs, investors and visionaries for some incredibly engaging discussions around how we can execute on propelling and scaling the continent’s leading tech scaleups, while serving as a celebration of a decade of growth at MEST,” said Aaron Fu, managing director at MEST.

“The success of this year’s summit, as a meeting ground for Africa’s top ecosystem partners and enthusiasts, has created a forum for honest discussion about change on the continent which we hope will lead to tangible actions and delivery. I’m also extremely excited about our upcoming incubator launch in Nairobi, as we look to strengthen our pan-African footprint.”

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#Africa MIT Solve Challenges offering $650k for startups solving global challenges


The Massachusetts Institute of Technology (MIT) has called for applications to its Solve Challenges, offering US$650,000 cash prizes to international startups addressing four global challenges.

MIT’s Solve Challenges seek to find solutions to globally pressing issues by supporting and funding innovations from across the world.  The current call for applications is seeking applicants addressing four challenges.

The first challenge is Work of the Future, looking for ways for those most affected by the technology-driven transformations of work to create productive and prosperous livelihoods for themselves.

Challenge number two centres on Teachers and Educators, and looks for startups addressing how can teachers can achieve accessible, personalised, and creative learning experiences for all.

The Coastal Communities challenge focuses on answering how coastal communities can mitigate and adapt to climate change while developing and prospering.

The final challenge looks at the Frontlines of Health, and asks how communities can invest in frontline health workers and services to improve their access to effective and affordable care.

All solutions selected in Solve’s four current Global Challenges will receive a US$10,000 grant funded by Solve.  The organisation also deploys its global community of private, public, and nonprofit leaders to form partnerships with selected teams to scale their impact.

In addition, Solve grantees will become eligible for a range of further prizes offering in excess of US$650,000.

Grantees will be selected by a panel of cross-sector judges at the Solve Challenge Finals during UN General Assembly week in New York City on September 23, 2018.

Applications are open here, until July 1.


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#Africa How Ghana’s InvestXD speeds the investment process


Ghanaian startup InvestXD is bidding to help people make easier investments by educating them on the process and making it more efficient.

Formed last year by Richard Yao Baku, Emmanuel Akin-Awokoya and Andrew Nduati Njage after they met during the Meltwater Entrepreneurial School of Technology (MEST) programme in Accra, Ghana, InvestXD is an online platform that makes it easy for young professionals to learn about investment products such as Mutual Funds, Fixed Deposits and Treasury Bills.

The startup has developed a learning platform offering bite-sized information that helps users to learn about investing at their own pace, share their learnings and apply their experience. It also has an easy to use Know Your Customer (KYC) form that assists users in investing in banks across Africa.

“Our product promotes financial inclusion and helps young professionals achieve their goals such as saving for trips, saving capital for business, or paying for a postgraduate degree. The need to help young professionals achieve their financial goals is what drives us because we are just like them,” Baku told Disrupt Africa.

InvestXD is a direct result of the previous experiences of the co-founders when it came to investing.

“In our respective lives before our time at MEST Africa, information about the best available investment products was difficult to find because it was widely dispersed. We also found it tedious filling the same investment form every time we wanted to invest in a different investment scheme,” said Baku.

“This, coupled with the need to stay in a queue for hours to deposit money in an investment account, proved to be a major problem. The investment process is long and tedious with no efficient way of making payments.”

The InvestXD team took to the streets to validate their premise, calling, surveying and emailing potential users.

“After arriving at a user persona and building an MVP to solve the problem, we saw interest from both young professionals and financial institutions. So we decided to build a for-profit social impact company that is scalable to any country and promotes financial inclusion,” Baku said.

The result was InvestXD, which went live in October of last year. Since then its development has been informed by consumer data.

“This is helping shape and refine our value offerings to help the young professionals achieve their financial goals. Our diverse backgrounds from Enactus, MTN, Enterprise Group and MEST have been crucial to forming the business, taking into account the lifestyle, saving and spending habits of young professionals,” Baku said.

Essentially, the startup has set itself up as a financial intermediary between the financial institutions and investors.

“Simply said, InvestXD drives transactions to financial institutions from young professionals who want to save and invest from the comfort of their homes or office,” said Baku.

The startup raised a pre-seed round from the Meltwater Foundation, and is currently being incubated at the MEST Incubator in Accra. Its customer base has been growing by 28 per cent month-on-month, mainly due to word of mouth and social media marketing.

“We have also had a great response from financial institutions interested in having their products on our platforms,” said Baku.

“Our biggest uptake is the recurring investment by our customers through our platform and the number of diaspora Africans from Mauritius, Turkey, Oman, the United States (US) and the United Kingdom (UK) investing back home through our platform.”

InvestXD, which charges a commission on all transactions completed through its platform, is currently focused on the Ghanaian market, but has bigger plans.

“Leveraging the MEST network across Africa, we are looking to other African markets, with Kenya and Nigeria as our next markets of entry,” Baku said.

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#Africa Investors rally to Nigeria’s business reforms


For a long time Nigeria was considered the epitome of a frontier market.

The country’s shady internal politics and complex regulatory framework meant that only the hardiest investors braved Africa’s largest market. As in the Great American West, prospectors would set out with gold in their eyes; seeing risk as opportunity if handled correctly. Fortunes were made and lost.

As Nigeria now transitions into one of the world’s leading emerging markets with strengthened financial infrastructure and meaningful policy reforms, the opportunities remain while some of the risk has been lessened.

The government has been working hard to this effect and post-recession some of the indicators are looking good. Nigeria gained 24 places in the World Bank’s Doing Business report last year and investors are beginning to take notice. That said, reforms will need to be ongoing as Nigeria continually fails to attract enough capital to satisfy its pressing development goals.

Spring cleaning

Nigeria is an attractive market primarily because it affords access to a large consumer base characterised by a growing middle class. The key things that matter most to investors and businesses are the nuts and bolts of doing business – paying taxes, securing credit, registering a new enterprise – and the macro-economics at play, including the availability of foreign exchange, currency stability and interest rates.

Improvements in both these areas have spurred the recent appetite for investing in Nigeria. Yewande Sadiku, CEO of the Nigerian Investment Promotion Commission, points out that Nigeria attracted $12.4bn of foreign investment in 2017 as compared to only $5bn the year before.

The gains Nigeria has made in reforming its business fundamentals have come about largely due to concerted government policy and the establishment of numerous agencies tasked with monitoring and improving the corporate landscape. In February 2017 vice-president Yemi Osinbajo launched a 60-day National Action Plan through the newly formed Presidential Business Environment Council tasked with eliminating bureaucratic and regulatory constraints.

One element was streamlining business registration, and a Corporate Affairs Commission was established to process applications within 48 hours. Another was merging multiple agencies working at the ports to speed up cargo examination and facilitate the easy importation of goods into Nigeria. Tourist visas have been reduced to a maximum of 48 hours issuing time and the time taken to gain title to land has been reduced.

Various laws have also been introduced to facilitate easy access to credit, particularly for small to medium enterprises. Credit is often refused in Nigeria due to insufficient credit history or unacceptable collateral. The Collateral Registry Act now allows small businesses to register their movable assets such as motor vehicles and equipment as collateral for accessing loans thereby drastically increasing their ability to access finance. Similarly a Credit Reporting Act has been introduced to share credit information between credit bureaus, lenders, telecommunications companies and retailers.

For Sadiku the advances Nigeria made in the Doing Business report were due to an amalgamation of the above public-led reforms.

Macro improvements

Along with a business-friendly policy framework the market fundamentals of any country will be a key selling point to an investor. Rising oil prices coupled with some key initiatives has led to renewed economic activity and domestic production which has rebalanced the country’s economic indicators. Inflation has been steadily dropping over a period of two years leading to its lowest rate at 12.5% in April.

The benchmark interest rate is currently held at 14% – which may attract certain types of investors – but there may be room for the cautious central bank governor Godwin Emefiele to cut the rate and encourage cheaper borrowing and spending. Most important, however, has been the introduction of the Investors and Exporters (I&E) Foreign Exchange Window. The window was introduced in April 2017 to improve liquidity in the foreign exchange market, which had been severely damaged by both the drop in production and the price of oil.

As a consequence of the commodity downturn the naira weakened against the dollar and following a devaluation in mid-2016 the currency remained volatile and the black-market surged.

The window allows investors the opportunity to sell dollars at rates of their choosing providing they can find willing buyers, thereby increasing liquidity and ensuring that investors have a working instrument to be able to get dollars out of the country if need be. As a result an enormous amount of capital has entered the Nigerian market since the introduction of the window.

FX turnaround

As Sadiku explains, in Q1 last year Nigeria attracted $908m. The window was introduced in Q2, which led to an instant influx of $1.9bn, finishing in Q4 with $5.4bn. Moving from a period of intense dollar shortage, Nigeria’s foreign reserves hit $47.37bn in April.

“The I&E window signalled we were ready for business,” says Babatunde Obaniyi, managing director of investment banking at United Capital. “In Q1 there was very little FDI coming into the market. By Q4 it was a rally.”

At a similar time the Nigerian equities market also experienced a rally, posting a growth of 42.3% in 2017. This uptick was a direct result of both the I&E window and rising oil prices, explains Tosin Osunkoya, CEO of trading firm Comercio Partners. “We have seen massive participation from foreign investors,” he says.

The question, however, is how long will the rally last? With the 2019 elections looming, many are trying to capitalise on the good times in an effort to prepare for the unpredictable. 

“Maybe by the time we get to Q3 there will be a slowdown in capital flows, so we are trying to pace up on everything we are doing to see if we can close our transactions by that point,” says Obaniyi. “You want to be sure you are watertight if anything happens.” 

Nigeria’s infamous sector

At the same time, discussions around Nigeria’s business environment will inevitably lead back to the continent’s poster boy for unworkable sectors: the oil and gas industry.

The sector has been chronically underfunded in the past and many would argue for good reason. A mix of extra-legislative contracts, unofficial middlemen, beleaguered parastatals and very few legal guarantees has historically dissuaded international investment into the sector. However, as a barometer for Nigeria’s overarching business environment, if the sector shows improvements it can be assumed that the rest of Nigeria’s corporate landscape is also faring well.

Some improvements are being made on that front. The Petroleum Industry Governance Bill (PIGB), one part of the long-awaited Petroleum Industry Bill (PIB), has been passed by the National Assembly and is awaiting the signature of President Muhammadu Buhari.

The PIB, which also includes the Fiscal Regime Bill, the Upstream and Midstream Administration Bill and the Petroleum Revenue Bill, aims to increase transparency and stimulate growth within the country’s oil industry. Between them, the four separate bills provide regulatory clarity on all aspects of investing in Nigeria.

“The bill removes uncertainty around regulations and taxes for all potential investors,” says Dada Thomas, CEO, Frontier Oil Limited and president of the Nigeria Gas Association.

As Nigeria’s reforms trickle through and the economy begins to rebound international appetite for investing in Nigeria will only increase.

Tom Collins

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#Africa Nigeria’s rebound: Beyond oil?


Diversification is the word of the moment in Africa. For petro-economies like Nigeria and Angola, which rely almost exclusively on the proceeds from a single resource, the need is great.

During the past two years Nigeria’s government has been leading the drive away from oil followed closely by the private sector. The most obvious initiative – championed by president Muhammadu Buhari – has been a move into agriculture. Around 70% of Nigeria’s workforce is employed in agriculture. The country is also home to large amounts of arable land producing lucrative crops such as cocoa, maize and cashew nuts. By sheer size and number, therefore, any improvement in the sector will go a long way to rebalancing Nigeria’s economic infrastructure.

Tech, although less of a government priority, has also presented itself as key sector of growth. Lagos is one of the continent’s foremost tech hubs and the sector is replete with rapidly expanding start-ups. Jumia, a Lagos based e-commerce company, became the continent’s first company to be valued at a billion dollars in 2016.

Finally banks, as key lubricators of any economy, have been actively diversifying their portfolios away from oil towards lending in other spaces.

Broader lending

Before Nigeria crashed, many of the country’s largest commercial banks had large oil and gas portfolios. Upstream oil and gas made up an average of around 28% of Nigerian banks’ loan books and with such large exposure many felt the brunt of non-performing loans when crude prices dropped.

“During that period of low price, low production and low economic output many players in the oil and gas sector defaulted on their loans,” says Uzoma Dozie, CEO of Diamond Bank. The banks, like the government, needed to diversify their asset base. “Going forward we are going to be lending in line with our strategy which is in the small business areas. We believe growth is in this area because the risk of concentration is not there. You can diversify across all industry segments including education, agriculture and manufacturing as compared to oil and gas where if anything happens you are dead.”

By choosing to lend to Nigeria’s entrepreneurs Diamond Bank’s risk is measured out over the various sectors in which the entrepreneurs are operating as opposed to just one volatile commodity. This strategy – as well as helping the bank resist future shocks – will also unlock finance in many other of Nigeria’s underfunded sectors.

“Over-concentration in the oil and gas sector has had a negative impact,” says Charles Kie, managing director, Ecobank Nigeria. “Obviously there’s a need for banks to rethink which sectors they allocate credit to. In other words it’s important to support more of the industries that drive growth.” As a result Ecobank is pursuing a similar strategy to Diamond Bank. “What we are trying to do is position ourselves to become small business bankers; the bank of entrepreneurs,” reveals Kie.

Sowing the seeds

Agriculture is the ace in much of Africa’s and indeed Nigeria’s diversification cards.   

Kola Masha, Managing Director of Babban Gona, a social enterprise aiming to increase the profitability of small holder farmers in Northern Nigeria, argues that there has been a shift in focus towards agriculture over the past two years. “Fundamentally the agriculture sector is one of the highest areas of growth in the economy,” he says. “It has demonstrated its ability to be resilient to macroeconomic shocks.”

The reasons behind this change are largely down to a high-profile government awareness campaign broadcasting the benefits of agriculture – both commercial and social – and work to create the right enabling environment. Onyeka Akumah, CEO of Farmcrowdy, an agri-tech platform sourcing finance for smallholder farmers, points to infrastructure investments, tax rebates and increased government lending in the space through the Central Bank of Nigeria as examples of successful government-led initiatives.

At the same time Akumah argues that the real benefits of these changes may take some time to come to fruition. “Agriculture is not a quick win business; it’s long term and it will take a while to reap the benefits from improvements in the sector.”

For this reason many are concerned that reforms in agriculture may take a back-seat now oil prices are back in town. “If you are getting revenue from a product which doesn’t require much effort then there’s a huge risk that product will affect focus on other activities,” says Akintunde Sawyer, executive secretary, Agric Fresh Produce Growers and Exporters Association.

However, Sawyer argues that regardless of whether it stays the course, the spotlight the government has shone on agriculture as a commercially viable sector has had a lasting impact on the private sector. “This has led to increased private sector consciousness around agriculture,” he says.   

Babban Gona and Farmcrowdy – both relatively new companies – are examples of this increased private sector consciousness and commitment. “I was actually one of the people converted by the government’s message about agriculture,” concludes Onyeka. “Farmcrowdy is a product of that.”

While it is unlikely the government will rescind its previous push towards agriculture, the ball is already rolling in terms of the private sector.

Up and coming

Lastly, Nigerian tech companies are increasingly stamping their mark in the African tech space – and many have global ambitions. Jumia, Iroko TV, Andela and Konga are just a few examples of rapidly expanding and highly profitable Nigerian-affiliated tech companies. The space is typified by millennials, who have very little in common with Nigeria’s old-hat politicians. This presents a certain wariness between the sector and public administration.

Onyeka, heading Farmcrowdy, a tech-enabled agriculture start up, laments the lack of a minister who understands the sector and is able to work with it in the interest of both parties. “Going forward, I would recommend a commissioner for tech entrepreneurship,” he says. “Someone who is well respected and who can speak the mind of the community to help grow the sector.”

Greater collaboration would both encourage the sector’s growth and ensure it is regulated and properly taxed so that high-grossing tech companies can better contribute to Nigeria’s growth story. As the scene begins to attract more attention it will only be a matter of time before this convergence takes shape.

While efforts have been made to diversify the Nigerian economy the transformation is not yet complete and the government must continue to work with and encourage the private sector in order to move its ambitions away from oil.

Tom Collins

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#Africa Nigeria’s rebound: Rising oil prices or structured growth?


Even recessions have a silver lining.

In Nigeria, an almost two-year recession brought on by disrupted oil output and a crash in commodity prices, led Africa’s largest economy into a period of intense self-analysis. The oil growth that Nigeria enjoyed between 2011 and 2015 was exposed as a poisoned chalice and diversification became a rallying cry.

Those leading the charge bemoaned the lack of development and depth in all other revenue-generating activities aside from oil. They said that Nigeria needed another way of making money and championed broad-based growth as a bulwark against future market shocks. Nigeria has now begun to grow at between 2.1% and 3.5% – depending on who you speak to – and some claim that these figures show the effects of structural reforms and steps taken to strengthen economic infrastructure.   

Those holding the opposing view would argue that growth is primarily piggybacking on rising crude prices and President Muhammadu Buhari has failed in his promise to reform a single-resource economy. While the government has introduced a number of key policies, 70% of government receipts still come from the oil and gas sector and Nigeria must be wary of resting on its laurels now that easy money has returned.

Financing the budget without oil?

Paradoxically, although oil revenue accounts for only 10% of GDP, it brings in over 90% of foreign exchange earnings. When militants in the restive Niger Delta region redoubled their attacks on oil infrastructure in 2016, dollars quite literally stopped flowing into the state coffers. 

With the central bank all but out of foreign currency, government projects gathered dust and the black market boomed as corporates scrambled for cash. Growth was derailed as revenue dried up and it was clear the country needed a more complex portfolio to back its spending.

At N9.12 trillion ($29.8bn), this year’s budget is Nigeria’s biggest ever. Its assumptions include a benchmark crude oil price at a modest $45 per barrel, output at 2.3m barrels per day and GDP growth at 3.5%.

The spending breakdown falls in line with the country’s Economic Recovery & Growth Plan (ERGP): a detailed document given to each ministry as a blueprint for growth. “The sectors that the ERGP promotes are agriculture, transport, power and gas and manufacturing and processing,” says Yewande Sadiku, CEO of the Nigerian Investment Promotion Commission.

These sectors – particularly agriculture and manufacturing – were championed by Buhari during his election campaign as key foreign exchange earners and engines of socioeconomic growth. Agricultural and manufactured goods processed in Nigeria and sold on the international market are certainly ways to bring dollars into the country.

Interestingly, the largest allocation of funds is to the Ministry of Power, Works and Housing at $1.5bn. The oil and gas sector has historically been chronically underfunded and unable to attract the capital it needs; hence the government support. The thinking in public office is to capitalise on rising oil prices and redeploy the capital into diversification projects. As Okechukwu Enelamah, the minister of industry, trade and investment, points out: “You need oil to get out of oil. If we combine reforms in the structural economy with rising oil prices; growth will come back.”

In this vein, much of the budget is funded by oil and oil projections as, for now, no other sector can provide the same level of revenue. However, if commodities were to drop once more, either through a slowdown in the Chinese economy as a result of a looming trade war or a ramp up in US shale, then Nigeria would face the same problems. It’s a risky strategy but Nigeria may have no other choice. Restructuring the entire economy to fund the budget another way would take far longer than two years.

“Government’s focus is to maximise the use of revenues from the oil sector and spend in the non-oil sector, to get the non-oil sector driving the economy,” Udoma Udoma, minister of budget and national planning, told reporters in a briefing on how the government intends to fund the budget.

One way to rebalance the funding of the budget would be to strengthen and expand fiscal policy. Tax has long been under-exploited as a source of government revenue in Nigeria. With a rapidly growing population currently estimated at around 184m, a broad tax base could be a real driving force behind Nigeria’s economy. Gains have been made but the instrument is slow to bring in the level of capital the country requires. Vincent Nwani, director of the Lagos Chamber of Commerce and Industry, argues the gains made are too few. “The issue is not tax rates, it’s about tax inclusiveness,” he says. According to Nwani only 10% of Nigerian citizens are tax-compliant and points to easily identifiable sectors like high-earning Nollywood stars as missed opportunities.

The government is gradually looking to make amends. Under the direction of its state governor, Akinwunmi Ambode, Lagos has mobilised an online and centralised tax-paying platform called the Lagos Internal Revenue Service. The mega-city has come a long way in funding its own development. In 2017, the state raised N503.7bn ($1.4bn) in revenue to fund large infrastructure projects.

“There was far less infrastructure in Lagos 10 years ago,” confirms Kunle Elebute, national senior partner, KPMG Nigeria. “What you see now has been paid for by taxpayers’ money.” 

Yet at 6% Nigeria’s tax-to-GDP ratio is one of the lowest in the world. The government is aiming to bring this figure up to 15%. Domestic and international companies, high net worth individuals, the formally and the informally employed are all in the government’s crosshairs.

In order to bring a greater percentage of the population in line a tax amnesty called the Voluntary Assets and Income Declaration Scheme (VAIDS) was introduced in 2017 by the Federal Inland Revenue Service. The scheme allows taxpayers to declare their assets and income from all sources within and outside Nigeria for the preceding six years without being prosecuted. The deadline for the voluntary disclosures was 31 March and the government has since been pursuing those who did not comply. Abuja hopes to reclaim $1bn from these efforts.

Taxes on goods and services have also been lacking in the past. Nigeria’s VAT rate stands at just 5%, well below the global average of 15.79%. President Buhari has recently approved a hike in excise duties on tobacco and alcoholic beverages despite facing tough resistance from the industry. The new regime will raise the tax by as much as 20% – an increase challenged by the Manufacturers Association of Nigeria.

This highlights an important tension in the Nigerian economy: the difference between getting the most out of goods, services and corporates via tax and not inhibiting growth. While taxes should be increased, at times Nigeria’s tax system is overcomplicated and nebulous. Double taxation is often an unintended consequence and can frustrate growth objectives. Government, however, has recognised the problem and is looking for solutions. “We are working hard to create an enabling business environment which avoids unnecessary taxation,” affirms Enelamah. 

While the budget remains largely oil-dependant, Nigeria is moving in the right direction to secure a wider revenue base.

Better borrowing

Concerns have also been raised about Nigeria’s steadily accumulating debt. Nigeria’s total external and internal debt stands at around $70.92bn with the IMF concluding that the level was creating vulnerabilities. The argument, similar to the discourse surrounding the budget, is that Nigeria should find ways other than borrowing to embark on the ambitious recovery and growth plan.

Kemi Adeosun, minister of finance, argues that the debt-to-GDP ratio, which is at 21%, is “conservative, by global standards”. Compared to some other African countries she may have a point.

Importantly, however, the minister then argues the debt has been tied to specific infrastructure projects and will not be used simply to service costs and pay salaries. This is a key distinction to make as previous administrations – overendowed with oil money – have seen debt as a largely short-sighted exercise. Indeed, used in the right fashion debt is a crucial financier of much of the world’s large development projects. “We are not adverse to debt,” confirms Nwani. “It’s not bad for a government to finance its infrastructure by debt. But if you must borrow make sure you put it on something that will yield revenue; that will be able to pay back the debt.”

Some developments have been made in this area. Nigeria is beginning to borrow with better defined objectives and through a more diverse array of instruments. This signals a move away from less considered days and towards an era of smarter borrowing. Nigeria’s fifth and latest $2.5bn eurobond is a prime example. The sale was used to refinance domestic naira debt which had higher interest rates and shorter terms – the new eurobond offered maturity terms of between five to 30 years. This signals smart financial management with an appetite to get more from money by tying the extended maturity rates to long-burning infrastructure projects.

Babatunde Obaniyi, managing director of investment banking at United Capital, argues both corporates and governments are engaging in smarter borrowing. “What we used to see in the market was vanilla bonds,” he says. “You would simply use your balance sheet to raise money, but I think the market is getting sophisticated to the level where you can start engaging in project finance and infrastructure finance.”

Obaniyi references the sale of a $100bn sukuk in 2017 which was oversubscribed and tied to a number of specific projects including the construction of the Kano Western bypass, of the Loko Oweto Bridge in North Central and the rehabilitation of the Enugu-Port Harcourt road in the South East. A total of 15 projects were earmarked to benefit from sukuk proceeds. This is also true of the private sector.

Obaniyi explains that in the past the majority of issuers on the capital markets were banks. “If you look at the structure of the Nigerian economy the financial sector is less than 20% of GDP but prior to 2014 banks raised more than 90% of the capital on the local markets,” he says.

For Obaniyi this represents a mismatch and means that corporates were neglecting a key capital-generating instrument. “For any developed economy in the world you need a strong debt capital market where you can get long term financing,” he says. “In the past few years the markets have seen an increase in breadth and depth and new players from the power, hospitality and real estate sectors have come to the markets to raise funds.” 

Nigeria’s public and private sectors are therefore beginning to borrow better post-recession, ensuring sustainable development and less reliance on oil to fund large projects.

Import-dollar glut

A large portion of Nigeria’s income is spent on importing commodities that are found in abundance throughout the country. Nigeria’s two comparative advantages are oil and agriculture and yet the country wastes millions of dollars each year importing both. Nigeria annually spends $1.2bn on petroleum imports and $22bn on food imports. The raw materials – crude and agricultural foodstuffs – are plentiful in Nigeria. The solution, therefore, is strengthened domestic processing capacity yet Nigeria has traditionally struggled to put this theory into practice. “Nigeria has talked for a long time about the importance of local production, local refining and value added products,” admits Enelamah.

The good news is there are some slow developments. The refinery debate in Nigeria exposes the ever-shifting balance between Nigeria’s public and private sectors. In the past Nigeria’s oil and gas sector was replete with beleaguered parastatals guzzling money and with very little to show for it. “I don’t believe in government run refineries,” says Dada Thomas, CEO, Frontier Oil Limited and president of the Nigeria Gas Association. “We have seen the impact of government run refineries in Nigeria. We have three or four refineries that have been gulping billions of dollars and achieved nothing for it.”

Thomas gives Eleme petrochemicals complex in Port Harcourt, Rivers State as a case study. The complex was state-run for a long time and was functioning at a fraction of capacity. In 2006 it was sold to Thailand-based Indorama Group for $224m and has since become a poster boy for privatisation by ramping up output and becoming profitable. “The private sector has turned black hole companies into profit-making machines which are expanding,” says Thomas.

Along these lines Nigerians are eagerly awaiting Aliko Dangote’s Lagos refinery at Lekki Free Trade Zone, just outside of Lagos. At $11bn the refinery is expected to come fully online in 2019 at a 650,000 barrels per day capacity: enough to meet Nigeria’s domestic needs and even export to other West African countries.

On the agriculture side a perennial problem to processing plants in Nigeria is power and basic infrastructure. Companies like Olam, Notore and BUA Group are setting up processing plants but cite poor infrastructure as a major obstacle. Often a company will have to power its own plants, unable to use the grid system, and will be forced to invest in roads and transport links to get the goods to market.

“The government really needs to think about providing power and infrastructure for agri-business,” says Akintunde Sawyer, executive secretary of the Agricultural Fresh Produce Growers and Exporters Association of Nigeria. “Government should look at providing incentives for those who want to build infrastructure that enhances the preservation of food, whether that’s warehouses or silos or preservation units.”

The catch is that with so much money spent on imports the government is already strapped for cash and may struggle to provide the infrastructure necessary. The public and private sectors must therefore work together to reduce Nigeria’s import bill and free up money for projects giving long-term growth.

Weakening the grip of oil

To sum up, Nigeria has made some key advances in strengthening the country’s economic infrastructure. These advances, however, will take some time to weaken the stubborn grip of oil on the structure of the economy. If Nigeria can continue the gains made during the recession and see its current policies weather the storm of the upcoming 2019 elections then Africa’s largest economy will be better adapted to withstand any future commodities crash.

Tom Collins

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#Africa Merck launches Satellite Programme in Cape Town


The Merck Accelerator has launched a second edition of its Satellite Programme in Cape Town after successfully concluding the inaugural version in Nairobi.

The Merck Accelerator Nairobi Satellite Programme, hosted in partnership with Mettā Nairobi, saw 10 startups take part in a four-day coaching and mentoring bootcamp in May.

Respiratory illness diagnostic tool Tambua Intelligent Diagnostics was named overall winner at an event earlier this month, receiving a US$3,000 cash prize and a trip to Merck’s Germany-based Innovation Centre.

The second series of the Satellite Programme events will take place in Cape Town, in partnership with MEST Africa. Merck is focusing on startups located in Southern Africa that present innovative solutions aligned with its focus areas of healthcare, life science, performance materials, and other business fields such as bio-sensing and interfaces, healthcare access solutions and precision farming.

Applications are open until July 20, with the winning teams of the programme’s events standing to benefit from cash prizes of US$3,000 and six-to-12 months of sponsored membership at the MEST Cape Town Incubator. They will also be invited on an all-expenses-paid trip to the Innovation Centre in Darmstadt, to pitch their ideas and gain the opportunity to collaborate with Merck.

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