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04 July 2014

African banks on the rise

Middle East & Africa
Senior Reporter
African banks are taking the lead in financing the continent’s farmers, traders and soft commodities. With more local money in the system, they are also reaching further down the value chain, though still find financing farmers directly a challenge. At the same time, international banks are snapping up stakes in local players, hoping to piggy-back on their distribution network and on-the-ground expertise.

African banks are taking the lead in financing the continent’s farmers, traders and soft commodities. With more local money in the system, they are also reaching further down the value chain, though still find financing farmers directly a challenge. At the same time, international banks are snapping up stakes in local players, hoping to piggy-back on their distribution network and on-the-ground expertise.

African banks have a huge role to play in agricultural finance and their growth in this space is “inevitable,” says Richard Wangwe, head of agriculture at Stanbic Bank Uganda.

The growing role of African banks in trade finance was acknowledged by the WTO Expert Group on Trade Finance at their meeting in late April.

African banks have shown greater ability to syndicate big trade finance deals, mostly in the commodity space, without external support, the group concluded, according to Marc Auboin, a counsellor in the WTO’s Economic Research and Statistics Division. More local and regional banks have invested in trade, partly filling a gap left by the retreat of global banks since the financial crisis.

However, financiers have become more selective and remain focused on top-rated customers, leaving smaller traders with less finance than before, the group found.

“Africa can finance itself,” says Hiren Singharay, regional head of syndications, EMEA, for Standard Chartered. “Five years ago, not a single Nigerian bank had crossed the Congo to the east. Now all major Nigerian banks have done it. And five years ago, excepting Stanbic, no South African bank had crossed the Limpopo River to the north. Now they’re everywhere.”

After the financial crisis, a number of international trade finance banks pulled back from Africa, leaving a financing gap. “They kept financing their best customers – so the Cocobods and Sonangols still got their financing – but not the smaller and medium players,” says Edward George, head of soft commodities research  at the pan-African bank, Ecobank. “There’s ample liquidity in the world, but not for Africa.”

Mandate to expand

“Most South African banks have a strategy to expand into Africa,” says Zhann Meyer, Africa head, global commodity finance at Nedbank Capital. “It’s not about whether we’re going to do it – we have to do it,” he says. “It’s something that’s expected by our shareholders – to work in the African space, and assist the continent in growing.”

Nedbank’s mission for Africa is to follow its existing clients as they too make inroads in the continent, he says. “They’re going into Africa and we’re following them in areas and footprints where they’re comfortable.”

Banks on the continent need to increase their on-farm exposure, making sure they get into the supply chain at ground level, Meyer adds. The bank’s next step is to identify countries with conducive government policies in place and then the corporate players it could assist in growing the industry.

Local banks, including government-owned landbanks, “have always had a dominant market share in South Africa when it comes to agriculture finance,” says John Hudson, agriculture manager at Nedbank.

That said, Nedbank only got serious about agriculture five to six years ago as the financial crisis triggered a greater appreciation of the returns that it could generate compared with other asset classes, he says.

Agriculture, commodities and, more recently, fixed assets like land and infrastructure, suddenly started attracting investment. “Agriculture became flavour of the month,” Hudson says. The bank now has dedicated agricultural teams that engage with commercial farmers in South Africa.

At Barclays, although its Africa team sits in Johannesburg, “we have a mandate to operate across Africa” and go wherever our clients go, says  head  of  structured trade and commodity finance, Francois Visagie.

African cash

An estimated 85 million to 95 million households in Africa now have a disposable income of at least $5,000. “The money is there, and that money is flowing into pension funds, it’s flowing into banks, and into mutual funds,” says Singharay. “There’s a lot of cash in the system, and that can finance the agriculture sector.”

“African banks are taking the initiative and putting more skin in the game,” says George. For example, in a $500 million deal that Ecobank lead arranged last year for Orion Oil, “all that money came from African banks.”

It might take time to achieve something similar in agriculture – mostly because of the larger physical volumes involved in soft commodities and the longer value chains – but energy is a good first step, he says. “It’s really shown that African banks are taking more initiative and that they can pool their own capital.”

Partnerships and acquisitions

International banks  are  also  striking  up more partnerships with African banks – and in some cases acquiring them – as a lower-risk way of extending their reach into the continent.

Partnerships allow international banks to put their expertise and bigger balance sheet to work using a regional bank’s relationships, distribution network and local knowledge, says George.

“A lot of the multinational banks often don’t want to have operations on the ground [in Africa] because it’s expensive, but they want to do business there,” he says. “If you are a pan-regional bank, you can get the money that last mile, and you have the physical presence on the ground.”

Ecobank has an alliance with Nedbank in South Africa as well as partnerships with Barclays Africa, ABN Amro and Citi. “We help them do business in markets they have an appetite for but where they don’t have a presence,” says George.

Nedbank has until the end of November 2014 to convert a $285 million loan it made to Ecobank in 2011 into an equity holding, and then expand the stake to as much as 20%. It also owns MBCA Bank in Mozambique and in June completed its acquisition of a 36.4% stake in Mozambique’s Banco Unico for $24.4 million.

Rabo Development (Rabo) has also taken the acquisition path to expand its presence in Africa. Over the past nine years it has invested in five local banks. These include National Microfinance Bank (NMB), Zambia Commercial National Bank, Banco Terra in Mozambique, Banque Populaire  du  Rwanda  (BPR)  and, more  recently, DFCU Bank in Uganda.

By taking large minority stakes, typically around 40%, Rabo also gains the right to install its own management – usually the CEO, head of risk management and head of retail – at banks it invests in. Through its advisory unit, RIAS, it also provides them with technical assistance and risk solutions. “The important thing is that we are not a silent or passive investor,” says Hans Bogaard, head of agribusiness.

RIAS also advises other banks on how to implement their agrifinance strategy. Clients include Ethiopia’s Cooperative Bank of Oromea, the Development Bank of Ethiopia and Kenya’s Chase Bank.

Rabobank also opened a Nairobi branch in June, serving commodities clients.

Distribution and risk assessment

“Where local banks have an advantage is their actual presence on the ground, close to the primary farming community,” says Visagie. “The cash that has to be disbursed can be done via the normal banking network.”

“We have branches across the continent so we’re pretty much seen as a local bank in most markets,” he says. While its West Africa footprint is limited to Ghana and a representative office in Nigeria, “in East and South Africa we’re pretty much everywhere we should be.”

Stanbic is present in 17 countries across sub-Saharan Africa and is in the process of extending its branch network to Rwanda and Congo, says Wangwe.

On top of its South African branch net- work and its partnership with Ecobank across West and Central Africa, Nedbank has an office in Kenya.

“That is really the raison d’etre of a regional bank in Africa,” says George. “It is their presence on the ground and it is being able to use the networks they have to service the trade and the business of international companies and multinational banks.”

Local presence also helps with accurrate risk assessment.

“If you’re a local bank, you have a different perception of country risk, because you’ve been there many years,” says George. “It may be that a country has a bad reputation – but you know exactly how to do business there.”

“You also have a much better perception of counterparty risk, because it may be you’ve been doing business with a counterparty for 20 years,” he adds. “You can immediately vouch for them. That is extremely useful for multinational banks.”

“African banks have an advantage in that they have relationships on the ground. This gives you a degree of comfort,” agrees Meyer. Emailing a client or looking at his website will never provide as much insight for a bank as going to his office or visiting his operations, he notes.

Having people in-country also gives banks crucial intelligence that lets them assess and manage specific risks as they unfold, he says. For example, “with Nigeria declaring war on terrorism, how will that impact on agricultural areas where small-scale farmers operate?”

Funnelling cash to farmers

Local banks are also leading the way in extending credit to smallholders, says Singharay. Equity Bank Kenya, for example, can disburse a loan to a farmer within 10 minutes of him walking in the door, and has been making profit on capital of up to 25% over the last five years. “There’s a lot of money to be made in this business. But it requires local knowledge and being on the ground,” he says.

One way local banks can help money flow through the value chain while disproving the perception that agriculture is risky is through financing the outgrower schemes that are linked to established off- takers, says Wangwe, adding that this has been quite successful in the sugarcane, horticulture and coffee sectors.

African banks need to work more though with non-governmental organisations (NGOs) and microfinance institutions (MFIs) to help them develop products that can be extended into more rural regions, he says. They can also help subsistence farmers commercialise their operations.

Nedbank focuses on financing export traders across Africa, supporting their efforts to “integrate backwards” and provide technical support to the smallholders they buy from and to add value on the continent by investing in cotton gins, crushing mills and other processing facilities, says Meyer.

“Smallholder farmers pose a challenge,” even for banks with a local footprint, he says. The lack of a land ownership model in much of Africa means “you can’t take a vanilla approach and say you will take a mortgage over the land as collateral,” he says. Side selling too is a “massive” risk for us.

“So we wouldn’t directly loan to small- scale farmers,” he adds. “We would use a contract manager to sub-contract the farmers and manage the portfolio on our behalf.”

Rabo Development’s BPR finances the inputs for  rice  cooperatives in  Rwanda based on offtake contracts with Australia’s ICM, which has invested in a rice milling joint venture in the country.

Another model that banks are generally comfortable financing is the commercial farming hub, says Meyer. Here, a commercial farmer who leases land contracts other farmers and supplies them with seeds, insecticides and, if mechanised, diesel. If the commercial farmer has processing capacity too, another benefit for him is increased throughput.

Kenya is a leader in terms of improving the bankability of cooperatives, especially in its moves to encourage collective payment obligation, says Meyer. This gives banks a legal entity that they can define as obligor. “If you as a small-scale farmer decide to side-sell your crop, it puts at risk the access to finance of the cooperative. So they check each other, which is the best policing you could ask for,” says Meyer.

Barclays Africa has partnered with the private sector to facilitate the flow of value chain finance to subsistence farmers in Kenya and Ghana. With one project, small- scale farmers in Ghana supplied grain to Ghana Breweries, which also supported the farmers with inputs. Barclays then discounted the sales on the strength of the brewery’s balance sheet.

By financing intermediaries who pro- vide farmers with the tools to start a sustainable farming practice, “you can actually run the chain right through to the primary farmer,” says Visagie.

With farming making up 64% of Africa’s workforce, “the biggest thing we can do as local banks or international banks is to help provide training for subsistence farmers,” he says. “If you can upskill these people to start thinking more commercially, Africa could well be the food basket for the world.”

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