Treasury Today Country Profiles in association with Citi

Moving target: the state of financial regulation across Africa

Beautiful sunset in Africa

For companies looking to make their first entrance into this vibrant market the dynamic regulatory environment can seem daunting. Treasury Today takes a quick look at the big themes of the day.

When thinking of Africa, images of vibrancy and opportunity will often be tempered by contrasting scenes of political challenge and administrative difficulty. For the treasurer faced with the kind of regulatory environment that underpins – and sometimes undermines – the 54 separate and diverse jurisdictions, operating ‘pan-Africa’ can seem like a daunting task. But it is one that increasing numbers are facing as many African countries seek to become more open, democratic and market friendly, attracting more direct foreign investment.

According to, the African Development Bank, the UN and the OECD painted “a rosy outlook” for the continent in their African Economic Outlook report 2013. In it, Africa was seen as showing “resilience to regional and global headwinds”. Foreign investment at that point, it declared, had “fully recovered from the effects of the [global financial] crisis”.

However, given the relative youth of some African nations – and the kind of events many had experienced leading up to and beyond their independence from colonial rule – commerce may well be far from straightforward even in the African power-houses of Kenya, South Africa and Nigeria.

For a start, many of the markets are highly regulated from a banking perspective. For the international player, trapped cash is a common experience because almost all African countries have exchange controls in place. The precise nature of control varies from country to country but typically has a knock-on effect for certain corporate liquidity structures. Cross-border notional pooling, for example, is not permitted in most African countries because the underlying exchange control regulations usually insist that goods and services have to accompany any foreign exchange transaction, but Kenya and Botswana, for example, are more open to notional pooling than Nigeria. The lack of regulatory standardisation in this context (and it is by no means an Africa-only problem) means treasurers operating across multiple geographies may still need to set up their cash pooling arrangements with global, regional and in-country banking partners, adding complexity, risk and cost.

Free trade

The benefits of facilitating global trade are well understood by many African authorities and intra-regional co-operation is increasingly the way forward, many under the auspices of the African Free Trade Zone. The benefits for corporates are clear. Whilst currency controls exist in South Africa, for instance, once approved by the Reserve Bank there is no limitation as to the amount that a South African corporate can invest into one of the 14 other Southern African Development Community countries. Of note too is the East African Community – a regional intergovernmental organisation comprising of Kenya, Uganda, Tanzania, Burundi and Rwanda – which is striving for a regionally co-ordinated approach to trade. Current policy promotes the core aspects of a Common External Tariff on all imports from third countries, duty-free trade between the member states, and common customs procedures. Similarly, the Economic Community of West African States (including, of course, Nigeria) is a regional group of fifteen countries, and the Common Market for Eastern and Southern Africa is a 20-member body, stretching from Libya to Swaziland. All are trying to create a movement similar in aim to the European SEPA model, forming a common payments infrastructure and encouraging freer trade amongst members.

Currency controls and tax havens

To mitigate the risk of currency controls mentioned above, a number of large MNCs with interests in Africa have established companies on the island nation of Mauritius, effectively using it as a tax haven. From here they enjoy limited withholding tax and zero capital gains, and many use it as a practical centre for sweeping and pooling.

Offshore centres such as Mauritius arguably deplete local tax revenues. The South African authorities have responded recently to this, the government issuing new holding company (HoldCo) rules for South African corporates with African and other offshore operations. The rules, announced in early 2014, free up exchange controls and allow sweeping between other African countries. It is intended for non JSE-listed companies but also allows listed firms to transfer in and out up to $186m provided such transfers are “reported on regularly and are not undertaken to avoid tax”. Extra amounts require approval from the Reserve Bank.

The HoldCo option requires a separate entity to be established which is then subject to the 28% local corporate tax rate. The same corporate could establish a Mauritian office and pay only 3% tax but the choice is not so obvious. Both options grant more freedom to move cash but a business has to have a strong presence in Mauritius to be able to justify the tax benefit. “It’s not everyone’s ambition to go and work in Mauritius and finding the right people is not always easy,” notes Hennie De Klerk, CEO of South Africa-based treasury firm, Treasury One.

One company that has moved to Mauritius is Shoprite, a South African retail giant operating in 16 countries across Africa and the Indian Ocean Islands. According to Whitey Basson, the firm’s CEO, it chooses to operate out of Mauritius partly because, like many major retailers, it must continue to expand to ensure profitability. This requires the purchase of land which often calls for a quick move to secure a deal. Having all its money trapped in South Africa is, for a pan-African firm, not practical as it takes on average one month to get Reserve Bank approval for the acquisition of an offshore asset, by which time the deal has slipped away.

The new HoldCo rules are intended to ease the flow of cash for firms such as Shoprite (although it is not known if it is considering the move back to SA). The first corporate that has taken the option, notes De Klerk, is global supply chain and logistics firm, Imperial Logistics. For other companies that may follow, he says having local people with local skills can be the decider. With a satellite office, he notes, you only ever get second-hand information whereas a local HoldCo will facilitate an easier and quicker flow of treasury data.

New hubs

South Africa is clearly positioning itself, alongside Nigeria and Kenya, as the ‘go to’ African treasury hubs for the predominantly European, Chinese and North American entrants. In Kenya in particular, the government is putting “a lot of clout behind enabling MNCs to operate shared services centres in the country”, says Anushia Maharaj, Head Client Access, Transaction Products and Services, Standard Bank. But in many jurisdictions across Africa, she says the Central Banks are becoming “increasingly mature” in terms of the way corporates are required to report before funds are transferred, impacting their general operations in the market and tending to influence how cash is moved and concentrated across the region.

The Angolan National Bank, for example, supervises all exchange operations and a number of its regulations set the rules applicable to specific transactions for goods, current accounts and capital transactions. New exchange control regulations in Angola (whose oil and gas sector is experiencing “phenomenal growth”) require local payments only to be made in kwanza (the local currency) but with these controls in place, corporates are understandably reluctant to move funds into the country, instead trying to fund operations in-country or borrowing locally.

Don’t go it alone

The continent as a whole remains challenging in terms of capturing the nuances of each market and understanding the impact of change. This is particularly so as new regulations are inevitably applied to changing market conditions and where a burgeoning middle market drives the need for new financial channels and products. With many countries across Africa transitioning from cash to more sophisticated payments models, local knowledge is vital, says Maharaj.

A consultancy practice or bank with a strong pan-African presence would be the starting point to get to the “nuts and bolts” of operating in this environment, she says. “For the MNC going into Africa we try to localise many efficiencies within South Africa or Nigeria, or wherever the company wants to be hubbed, facilitating cross-border compliance, account opening and overcoming regulatory hurdles from one place.”

The large banks operating in Africa – such as Standard Bank, Absa and Nedbank, plus tier one global players such as Citi and HSBC – will often partner with smaller local operations to extend their reach, but some of the smaller institutions are starting to catch up on the larger players. GT Bank, for example, has become the first international commercial bank in Nigeria. As the commercial life of the continent becomes more competitive, so all the stakeholders – including the legislative and regulatory authorities –are forced to become so much more dynamic in response. This can only serve to benefit the corporate treasury community as their service providers – especially the banks – jostle for position. The regulatory environment across Africa may be a mixed bag, but change is in the air and it seems to be going in the right direction.