The plethora of rules, regulations and payment systems at play within and between Africa’s diverse and numerous markets has always presented a challenge to the continent’s corporate treasurers.
As Africa’s largest bank by assets, Standard Bank – at home in 20 local markets – has found that businesses that draw on its experience, insight and established relationships with the continent’s central bankers and regulators ahead of setting up operations in Africa. This enables companies to better manage many of the liquidity and foreign currency challenges that define treasury management on the continent.
For businesses considering establishing operations there, it is useful to conceive of Africa as having three different treasury landscapes. Countries like Mauritius, Kenya, Uganda, Zambia and Botswana have either little, or very few foreign exchange (FX) regulations or rules concerning access to hard currency and international transfers.
A second set of countries, including Malawi and Tanzania for example, apply a limited amount of regulation to manage liquidity and FX issues more closely. A third set of countries, including; Angola, Mozambique and Nigeria, on the other hand, have highly defined rules and regulations to access foreign currency liquidity. While these rules are intended to help manage liquidity and access to foreign currency in the local market, they often add to paperwork and time delays within the treasury function and increase the risk of trapped cash.
When setting up an operation in Africa, or moving from an established African operating environment into new territories on the continent, corporate treasurers need to understand the detail of the complexities and differences within and between the various environments that they are entering.
Regional treasury centre benefits
It’s not just about establishing a presence in Africa though. The way you set up – or indeed how you research and plan your treasury operations before you enter a specific market can have profound consequences for treasury’s ability to successfully manage that market’s specific challenges, given the business that you are doing.
In short, setting up the right treasury structure in market can determine how much – or how little – trapped cash you end up with.
For example, in many markets investors are required to demonstrate to regulators the levels of capital that they are bringing to a country ahead of establishing operations. This will assist businesses in both enabling access to investment and operational incentives; as well as later, when businesses wish to expatriate investment proceeds. Without the correct process being followed at the start, this could effectively trap cash in the market.
Not knowing this level of detail up front can cause huge logistical and supply chain difficulties once operations start.
The best way to avoid these kinds of surprises post setting up is for treasury to talk with its relationship bank(s) before setting up and get it involved at the planning stage. Any established local bank that has been advising client treasurers in African markets for decades will be fully aware of the potholes and dangers and will have established working relationships with the regulators and investment agencies across its foot print. This allows the bank to introduce clients in a way that they develop an understanding of their needs and priorities, and grow a good working relationship.
For companies present in multiple markets across Africa there are huge advantages in setting up regional treasury centres, consolidating proceeds or cash positions from multiple operations in several markets. Setting up a regional treasury allows businesses to use their working capital more efficiently. For example, excess US dollars (USD) in Kenya could be leveraged for the business in Zambia – where the local operation might be USD-starved.
Depending on local market legislation, regional treasurers can also pool funds for new or big investments; thereby reducing the amount of debt that businesses operating on the continent need to raise. Pooled funds also save businesses from having to physically convert currencies at cost, or physically transfer USD between territories.
That said, physically converting and transferring cash is probably – at least for the present – unavoidable in Africa. Even so, centralised treasuries help keep the cost of these transfers to a minimum by providing a consolidated view of liquidity availability across several jurisdictions. Also, merely having a consolidated electronic view of several liquidity positions in itself saves the time, expense and inefficiency of having to physically consolidate spread sheets across multiple markets.
Holdcos and shared service centres
Mauritius has traditionally been the preferred base within Africa from which to develop a consolidated treasury across multiple African markets. The Indian Ocean island has unfettered access to global liquidity and no exchange control. It also provides various incentives, along with a highly-developed financial sector operating in a high-skill economy.
That said, central bank the South African Reserve Bank (SARB) has recently developed a holding company (holdco) structure encouraging corporates operating across Africa to establish and operate regional treasuries from South Africa. Provided the business is South African-registered, it can now get SARB approval to transfer capital amounts from US$1bn upwards per annum into a holdco. Once registered in the holdco, these funds no longer require SARB approval to use, spend, transfer or invest into any country.
While the holdco will continue to be taxed as a normal South African entity it allows businesses to leverage their existing South African treasury operations to act as a central treasury for multiple African markets potentially saving costs and the added hassle of setting up a separate operation. Given the scale of transactions for most entities operating in South Africa compared to other African markets, this is likely to spur the growth of treasury shared service centres (SSCs) in the country.
The evolution of treasury functions in Africa, including SSCs is about much more than just managing capital. Instead, this evolution is seeing the application of advanced globally-compliant treasury capabilities across and between multiple and diverse African jurisdictions, all from a central point.
Standard Bank has a central role in driving this evolution through its connectivity, local presence and contacts and is diversifying and empowering African markets from a financial infrastructure perspective. The bank’s treasury expertise connects investors, suppliers and legislators across multiple value chains. This greater meeting of minds improves the efficiencies of value chains, driving the appetite and will for investment and growth.
For UK treasurers looking to manage financial risk within their organisation, recent news of an interest rate rise from 0.25% to 0.5% was a mixed blessing.
Whether responding to questions from other stakeholders or seeking to monitor the effectiveness of their risk management processes, treasurers and FX managers in growing companies with expanding foreign currency exposures need solid analytics to support their decision making.
From corporates investing in Asia to small and medium enterprise (SME) suppliers wanting to make sure they get paid, companies are trying to discern whether countries and counterparties in Asia are actually risky.
Having shown remarkable resilience in the face of last year’s geo-political turbulence, and with investor demand bolstered by continued ECB appetite, the ... read more