Establishing a Regional Treasury Centre in Africa

The business opportunities in Africa have never been greater. With a rapidly increasing middle class of over 300m and vast natural resources, the growth rate in many African countries is now similar to the ‘tiger ‘economies of Asia.

South Africa has long been the main economic powerhouse of the African continent, but a number of other countries are showing signs that their enormous potential might finally be realised.

Nigeria, for example, is shortly set to overtake South Africa in terms of total gross domestic product (GDP). Half of the 20 fastest growing markets over the next 20 years will be in Africa, according to International Monetary Fund (IMF), which selects Côte d’Ivoire, Democratic Republic of the Congo, Gambia, Ghana, Guinea, Mozambique, Rwanda, São Tomé and Principe, South Sudan and Zambia as potentially the continent’s top performers.

Key investors across Africa include private equity funds as well as leading corporates from South Africa, other parts of Africa, India, China, Europe and the US. Large multinationals such as Vodafone, IBM and Starbucks have announced major expansion plans over the past 18 months, joining Indian and Chinese firms that have been investing heavily over recent years. Most corporates are focusing on Nigeria, Mozambique, South Africa and Ghana.

Traditionally, Africa was managed out of mostly European and occasionally Asian treasuries. However, there is a clear trend towards regional treasury functions being established in locations such as Mauritius and South Africa instead. This is done mostly to navigate local regulatory environments, be closer to the operating business, and manage the region more efficiently.

There is also increased interest in outsourcing back office functions or establishing shared service centres (SSCs) in South Africa and Mauritius. Many large multinationals have already established significant operations there, including Shell and Amazon. Corporates are also establishing procurement hubs in Mauritius to supply goods and materials to their African entities. For corporates that sell physical goods in Africa, this can be an effective way of releasing some trapped cash from their African entities, though it is important to consider foreign exchange (FX) controls and taxation implications.

Considerations for Establishing a Regional Treasury Centre

The first consideration when establishing a regional treasury centre is location. There are a number of factors to consider in this decision, such as tax and regulatory environment; cost base; infrastructure; resource availability; financial markets and banking; and the social and business environment.

Mauritius is typically used due to the Indian Ocean island’s business-friendly tax and regulatory environment, together with a well-developed banking sector that allows for effective liquidity management. South Africa is used especially by corporates that use the country as their main African market, i.e. proximity to the business.

However, while the South Africa-based treasury centre may manage the region, any regional liquidity management structure would more likely reside in Mauritius. This is because there are significant exchange controls in South Africa that make efficient cross border liquidity management difficult. Mauritius, on the other hand, is an open market in terms of exchange controls and supports an extensive network of tax treaties with countries in Africa, Asia, the Middle East and Europe covering both investors and destination countries alike.

In a highly-regulated region such as Africa, a solid understanding of local regulations is a must. It is not uncommon for rules to either be unclear or to change at short notice. Due to various restrictions, one of the most common issues for the treasurer is trapped cash that creates multiple issues such as devaluation risk, counterparty risk and inefficient use of surplus funds leading to low yields.

Most countries have strict regulations around foreign exchange (FX) and intercompany lending. In addition, transfer pricing is also coming under increasing scrutiny from local tax authorities with penalties for breaches becoming more prevalent. This trend is particularly important when looking at cross-border transactions that involve either an intercompany loan as part of a pooling structure or trading transaction between a procurement hub and a local subsidiary.

Although most countries have significant restrictions, some countries including Kenya, Uganda, Botswana and Mauritius allow a corporate’s local entity to participate in a regional pooling structure. Mauritius is an attractive location as its network of double tax treaties can reduce the withholding tax payable on intercompany loans when allowed under local regulations. When creating pan-African liquidity structures, it is important to have a local banking partner that can both deliver a complete set of liquidity management capabilities such as automated sweeping, pooling and investments options as well as a strong understanding of the local tax and regulatory environment.

From a day-to-day cash management perspective, there are many different clearing systems and banking practices that impact on the efficiency of in-country business operations. On a positive note there are a number of initiatives to extend clearing systems across national borders such as the West African Economic and Monitory Union (WAEMU) and the Central Africa Economic & Monetary Community (CEMAC), which cover multiple countries in each region – not unlike the single euro payments area (SEPA) in Europe. Some corporates are already taking advantage of these clearing systems to concentrate their outgoing payments in a single location for each of these regions; for example, the Ivory Coast for the WAEMU region and Cameroon for the CEMAC region.

There are also initiatives to develop single markets, such as the East Africa Community (Kenya, Uganda, Tanzania, Rwanda and Burundi) and the Southern African Development Community (SADC) creating future opportunities for further rationalisation of cash management practices in Africa. EAC has just implemented a cross-border real-time gross settlement (RTGS) system that allows payments between Kenya, Uganda and Tanzania in each country’s local currency as a starting point. SADC is doing something similar in the common monetary countries of South Africa, Namibia, Lesotho and Swaziland but in a single currency, the South African rand (ZAR).

Bank technology is spreading quickly in the region but capabilities are often not yet up to international standards. Even getting visibility of all bank accounts across the region can be a challenge, since many local banks are not equipped well enough to automatically deliver balance and transaction reporting in traditional SWIFT formats. As the information delivery is not always reliable from local banks, treasurers and others should be prepared for some delays and missing balance and transaction reporting. The alternative is to choose a primary regional banking provider that has operations in the key countries. With a regional player corporates may also benefit from one electronic banking platform allowing for the same processes in a consistent and highly secure manner across the region.

The handling of FX needs and hedging of currency exposures may pose a significant challenge in many markets. The range of products can be limited and in many markets there is a general lack of liquidity, leading to price distortions and additional FX risks. Treasuries covering Africa need to understand not only the local FX regulations, but also the methods for obtaining foreign currency. In some markets this is controlled by the central bank through a bidding system. Additionally, currency availability can be seasonal based on the export and import cycle in a given market. Close cooperation with banking partners who understand the dynamics of each market is therefore very important.

The fact that large proportions of the African population still remain unbanked, coupled with poor access to formal banking infrastructure in remote areas, also pose tremendous operational difficulties for corporations which have consumer-oriented businesses. Traditionally, this has resulted in the need for extensive cash handling, which creates obvious risks and inefficiencies. However, with the advent of mobile money systems in countries such as Kenya (where 70% of the population have an M-Pesa mobile money account, payments and receivables can be converted to a cashless process for the corporate.

Conclusion

Treasury management in emerging markets is always a challenge and that is definitely true for Africa. Although there have been improvements in communications, banking technology and product capabilities, it is important for corporates to work with banking partners that have a strong country network, comprehensive product capabilities, and can provide insights into the local market and regulatory environment to support efficient in-country cash management as well as regional liquidity management.

Yet along with the many challenges, there also a number of areas where a treasury can make a real difference by adopting a more active management of cash, FX and liquidity management in this complex region. Treasurers should pick some quick wins, such as account rationalisation, followed by regional cash visibility and then graduate to common payment hubs and cross-border liquidity solutions. Do not be discouraged; with focus and a project-based approach, it is possible to overcome many of the challenges faced in Africa.

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