The long-held perception that Africa is an opaque and challenging place to do business is changing, with investors flocking to the continent as never before. In this article Sneha Shah, Managing Director – Sub-Saharan Africa at Thomson Reuters, provides perspective on how investors are addressing risk, and why the opportunities outweigh the challenges.

Africa is home to five of the world’s fastest growing economies, with the youngest population in the world. Technology is thriving across the continent, especially in the mobile space, with pioneering solutions in healthcare, education and financial payments. Investors and economists are focused on the promise of the ‘next ten’ biggest cities in sub-Saharan Africa, whose population is projected to come close to doubling by 2030. Clearly all of these factors present significant opportunities and risks, and navigating these requires an understanding of the realities on the ground, beyond traditional views of the “dark continent”.

Fundamental challenges

The challenges facing businesses, governments and individuals in Africa are undeniable – from infrastructure issues to a reputation for instability and corruption, the continent is not for the faint-hearted. In Kenya for example, it is estimated that 30% of the country’s budget is lost every year to corruption.

“Many of these illicit transactions are related to interactions between the public and private sector. In a high-growth environment, and with several large scale projects needing multi-stakeholder partnerships, some organisations are gaining market share in unethical ways” explains Sneha Shah. EY reported that one in three Kenyan companies surveyed had paid bribes to win contracts and PwC notes that tender fraud is the fastest growing economic crime in Kenya. “These types of interactions don’t just affect the stakeholders of the projects and countries involved. They also give rise to networks that facilitate corruption and crime into and out of the African continent,” adds Shah.

The issue is stopping many organisations from doing business on the continent. “Barclays, for example, believes that allowing remittances to flow to Somalia through their channels is too risky,” says Shah. “Multinational corporations are increasingly concerned with compliance with international financial regulation and the potential risk to the firm, both in terms of reputation and possible legal penalties from the US and other jurisdictions.”

Apart from fines, failure to proactively identify and manage risk can directly or indirectly have deadly consequences. The so-called White Widow – real name Samantha Lewthwaite, widow of the 7/7 terrorist bomber in London and suspected of involvement in the Westgate massacre, was able to open bank accounts with two major South African banks under an assumed name. Limiting access to financing and cross-border flows for suspected individuals is therefore a key measure in fighting terrorism.

African challenges in global perspective

“While Africa does have some extreme examples of financial crime and corruption, the issue is a global one and the need to assess risk realistically and maintain perspective is imperative,” explains Shah.

Many commentators and business people in the west see illicit activity as a problem that plagues the developing world far more than countries like the US. However, while that may be true in some cases, where citizens in Lagos, Accra or Nairobi for example may be more often asked to pay bribes to get things done than in New York or London, recent global financial scandals, and record fines paid by banks in Europe and America suggest that the problem may manifest differently but is common to most countries in the world.

Take for instance former New Orleans Mayor Ray Nagin, a US politician sent to jail for abuse of power – officials say Nagin took at least $500,000 in under-the-table money in exchange for several contractors being awarded several millions of dollars’ worth of city contracts. Nagin joins a long list of politicians who have been found guilty of abusing their office.

“In the US today, the concentration of wealth in private hands is at an unprecedented level and with many corporations larger than some governments, the perceived political influence of private companies is a cause for concern to citizens,” says Shah. “Movements like “Occupy” reflect the loss of trust by citizens in business leaders and public officials.” In 1964, 29% of voters said that they believed that the government was run by a few big private interests that were looking out for themselves. In 2013, 79% of voters felt this way.

A recent study, “Risky Business”, by the Combating Terrorism Center at WestPoint, using data from Thomson Reuters World-Check, showed that perceived connections between private and public figures are real and can be dangerous and far-reaching. In a sample of 2700 individuals across terrorism, crime and other illicit activity around the world, the report found many more connections across other types of crime and terror networks than was expected, and extensive global connections between suspicious individuals in developed and developing nations. What this means for banks and corporations, whether investing in Africa, other emerging markets or the US or Europe, is that understanding and managing who they are doing business with is critical, as the consequences of partnering with or funding a high risk individual can be significant to the organisation as well as society.

By its nature, illicit activity and corruption is a hidden phenomenon and we will never truly know the scale of the problem. What we can be sure of though is that the issue is broader than bribes, or a few high profile financial or political scandals. Crime and corruption networks are interconnected, global and impact everything from national budgets and resources, to citizen safety, and solving the issue is the shared responsibility of governments, corporations and civil society in Africa and around the world.

Change on the horizon

How do we effect change on this issue at scale in Africa? The demographics of the continent are unique: with 200 million people aged between 15 and 24, Africa has the youngest population in the world. The current trend indicates that this figure will double by 2045. This generation are technologically savvy, more globally aware, and have higher expectations of business and political leadership than their parents. Thanks to innovations in education, even those in rural areas will have more access to information and education, and like their millennial counterparts globally, they want to be part of a cause or mission, and are not held back by traditional views of authority, boundaries and controls. Engaging and harnessing this generation in the fight against illicit activity will be important.

“In addition to leveraging the demand from the millennials for change, there are many other factors in Africa that support increased governance and transparency,” says Shah. “Technology, connectivity, regional integration and institutions are key, as is the global push on supply chain transparency and financial regulation.”

Technology and connectivity are helping Africa to leapfrog traditional economies in several ways. According to a recent study on financial habits by the Gates Foundation, the World Bank and Gallup World Poll, the sheer number of people using mobile in Africa is the highest in world. “In the financial sector there is a push for a cashless society to ensure a consistent paper trail and reduce fraud,” explains Shah. “Mobile telecom players such as MTN, Vodacom and Airtel Africa, are investing millions of dollars in infrastructure, consumer education and awareness to broaden mobile money propositions and drive financial inclusion.” Most people are aware of the pioneering mobile money transfer service M-Pesa, the first of its kind in the world, launched in Kenya and now used by over 24 million people in East Africa, but, although less written about, newer mobile offerings such as M-Kopa (a pay-as-you-go energy provision to off grid homes) or M-Shwari (a mobile bank account offering a combination of savings and loans), are exciting developments driving innovation, financial inclusion and transparency. Availing mobile services to customers means they shift cash transactions into a digital ecosystem relatively cheaply, securely, and reliably. Some countries, like Nigeria, are going even further with a biometric ID and payments system plan for all citizens.

In addition to technology as a driver for transparency, the cause is helped by several African states actively pushing for greater regional trade and economic integration. For instance, many African states subscribe to the Financial Action Task Force (FATF) and choose to be peer reviewed. The African Peer Review Mechanism (APRM), is an instrument voluntarily acceded to by member states of the African Union (AU) as a self-monitoring mechanism for African states to ensure that policies and practices of participating states conform to the agreed political, economic and corporate governance values, codes and standards. Another example is the SADC (Southern African Development Community) Payments Project, which is creating and implementing standards and regional interoperable payments systems that will increase efficiency and automate transactions and verification process across the sub-region.

A region of endless potential

“African countries that foster an environment of transparency and governance will surely benefit from greater economic opportunities,” says Shah. “The demographics, a rising middle class creating great product and services demand, and increased focus on land rights, rule of law, education and the development of financial markets are all promising trends for Africa.”

“The risk of corruption and illicit activity exists everywhere, including Africa,” Shah concludes. “However, by proactively assessing and managing risks and supporting initiatives that drive transparency, corporations, banks, investors and governments will be able to successfully harness the enormous growth potential of this region.”