Banking Partner Key to Managing Risks of Expansion into Africa
by Chris Paizis, Head of sales, Africa (ex- SA) and Head of Corporate Sales SA, Corporate and Investment Banking division, Absa, a member of Barclays
Africa has emerged as a key new market for companies seeking global expansion, with the potential to become a very prosperous location for international business. As an increasingly popular destination for global corporates, today’s treasurers need to number amongst their skills the ability to manage the risks associated with setting up an operation in Africa. Yet contending with the challenges and risks associated with setting up operations in Africa requires careful planning and strategic partnerships.
Africa continues to experience unprecedented levels of economic growth, making it an attractive region for overseas investors. Its economic resurgence in recent years has been a direct result of a number of factors, including macroeconomic stabilisation and policy reform, growing financial and political stability, strong foreign direct investment flows, surging commodity prices and market development.
With its burgeoning and largely youthful population, rising income levels, wealth of natural resources and ongoing political, economic and market reforms the future has never looked brighter for the continent. Added to this ever-improving investment climate, Africa’s remarkable resilience in the recent global downturn has seen the continent recover much quicker than other regions. As such, Africa is now well poised for sustained growth.
These conditions combine to make Africa fertile ground for companies looking for expansion opportunities. With seven out of 10 of the world’s fastest growing economies expected to be in Africa, the continent is seeing a flurry of corporate activity from multinationals seeking a slice of African growth.
Risk management challenges in Africa
Setting up shop in Africa, however, can be more complicated than most corporates would like. With its long history and experience in the region, Barclays knows that it takes both guts and patience, but above all, local support, to establish a successful business in the region. So, while Africa offers great opportunities, a treasurer looking to set up operations on the continent needs to be completely conversant in the risks and challenges associated with the region.
Despite Africa’s promise, many firms struggle or fail to access African growth because they either see Africa as a single entity, unaware that most African markets, apart from being very different in their own right, are also all in different stages of development. In fact, Africa has been ranked by several recent World Bank Doing Business Reports as one of the world’s least business-friendly places. That alone should signal risks and anticipate challenges. Put more simply, investors cannot adopt the same approach to Africa as they would, for example, to Asian countries or markets in the developed world.
Some of these challenges include excessive and often inefficient bureaucracies, poor infrastructure, unfinished distribution networks, a shortage of skilled labour, undeveloped capital markets, lack of finance and credit, foreign exchange volatility, lack of sound property rights and poor legal and enforcement systems.
Since the latter are especially important in the protection and promotion of legitimate businesses on the continent, it is gratifying that recent studies indicate some improvement in legal accountability in parts of the continent.
From a treasury management perspective, three challenges stand out in particular:
- first, the infrastructure of delivery, namely, collecting payments, paying people and securing title to, and possession of, goods;
- secondly, the need for visibility and the control and effective management of cash in the different markets across Africa; and
- thirdly, the logistical and security challenges posed by a predominantly cash-based system.
Hedging provides an illustration of how these challenges affect operations in Africa. Hedging often becomes a daunting task for companies in Africa operating in multiple geographies – especially when regulation influences these strategies. For example, the recent flurry of regulations in Zambia enforcing conversions to Kwacha and requiring a generally ‘tighter’ process around trade, present challenges to hedging programmes. Another well documented issue is the lack of depth in many African currency markets and the often chronic shortage of foreign currency in certain countries. There are, nonetheless, answers and solutions to these risks and challenges.
Strong banking relationship
It is crucial for any corporate moving into Africa to develop strong and trusted relationships with its banking partners. As such, being able to view the bank as a trusted partner has become a key theme for today’s treasurers – in some cases becoming even more important than start-up funding or other lending commitments.
Being a trusted partner means having long-standing relationships with clients that endure through both the positive and negative economic cycles. It is about developing a reciprocal relationship whereby a bank is able to anticipate its client’s needs and, conversely, the client is also able to anticipate the bank’s reaction.
Corporates require a partner that will help them not only facilitate their expansion by providing independent support, but also to solve day-to-day challenges. So, in addition to assisting corporates with perennial challenges such as global account visibility, effective management of global liquidity and automation through integration, banks in Africa are, for example, also increasingly required to assist with financing and risk management solutions that will assist their clients access regional growth markets.
As such, Barclays has placed a greater emphasis on driving efficiency through streamlined connectivity across operations ensuring that its franchises’ meet the detailed needs of corporate clients.
Linking different markets is not only about branding, but also the ability to link systems and processes. As such, in Africa, there is a lot more behind-the-scenes work that needs to be done to provide superior service quality across all markets. An example of this is the ability to bank on mobile technology across a continent dependent on this technology. Over and above ensuring clients receive a consistently high level of service, whether operating in Europe or in Africa, it is important to help clients make the most of the local environment. For example, day-to-day business operations in Africa can be different from elsewhere. As such, multinationals require support in adapting to local best practice requiring strategic banking partners to follow and support their clients every step of the way as they expand into the region.