macroafricaintel | Tanzania – Recent banking trends & outlook

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

“I will not give any money to failing banks.” In typical style, President John Magufuli has adopted a no-nonsense approach to the troubles of the Tanzanian banking sector. In March 2018, he ordered the central bank not to rescue any failing bank. Mr Magufuli’s angst towards bankers is underpinned by his view that previous government bailouts for the sector of about 40 banks currently were squandered or misused. In any case, it has been about a year since the Bank of Tanzania (BoT) announced new capital rules for banks, as non-performing loans rose sharply. How have Tanzanian banks fared since then? NPLs continue to rise, hitting profits. As a proportion of total loans, NPLs rose by almost a percentage point to 11.7 percent in December 2017 from 10.6 percent six months earlier; a deterioration from what was already double the offical cap of 5 percent. Most recently, though, in April 2018, NPLs to gross loans stood at 11.3 percent. The central bank has been wielding the big stick to stem the tide. It shut down 5 community banks in early January; namely: Covenant Bank for Women, Efatha Bank, Njombe Community Bank, Kagera Farmers’ Cooperative Bank and Meru Community Bank. The January move brought the number of such banks closed to eight. While this is laudable, it is the domineering few big banks that probably require greater scrutiny and supervision. Tightening of controls on foreign exchange has also been weighing on banks’ bottomlines. Return on assets declined to 1.7 percent in April 2018 from 2.2 percent only a year before. Return on equity dipped as well; to 7.2 percent in April 2018 from 10.1 percent in April 2017.

Interest rates falling, PSCE still low
Unsurprisingly, bank lending to the private sector has slowed. In mid-December, the IMF highlighted reduced public spending and policy uncertainty as some of the reasons why. The central bank gives the sector a clean bill of health, however; reporting in June 2018 that “the banking sector remained sound, stable and profitable with levels of capital and liquidity generally above regulatory requirements.” As at end-April, the BoT put banks’ core capital to total risk weighted assets and off-balance sheet exposures at 18.7 percent; well above the minimum 10 percent. Also, liquid assets to demand liabilities was 39.1 percent in the same period; well above the minimum 20 percent. The BoT did highlight a palpable deterioration in NPLs. Some of the measures it has put in place to remedy the situation is an insistence that banks compulsorily use credit reference bureau reports for the appaisal of loans; in addition to other strategies it wants banks to develop to “strengthen credit application processing, credit management, monitoring and recovery measures.”

To the BoT’s credit, though, a joint World Bank/IMF financial sector assessment programme (FSAP) vindicated its position on the soundness and stability of the Tanzanian financial services sector. They note the country’s payments, clearing and settlement systems are operating efficiently. In this regard, the central bank has begun engagement with relevant stakeholders to develop a national switch. While still far off, once in place, the national switch would greatly reduce the cost of payment services. Also to this end, the BoT is licensing more payment service providers. There has also been an increase in transactions in the banking system on the back of an increasing adoption of digital channels. And the BoT continues to make efforts to reduce interest rates. In this regard, it cut its discount rate by 300 basis points to 9 percent in the period between July 2017 to April 2018. Yields on government securities have certainly followed suit; easing to about 4 percent in April 2018 from a little above 13 percent a year before. By and large, interest rates on commercial loans eased as well; albeit still high at about 17-18 percent. But it is an improvement from about 22 percent hitherto. Encouraged by easing measures by the BoT, which in addition to slashing its discount rate also reduced the statutory minimum reserve requirement, one bank cut its interest rate by half to 11 percent from 22 percent previously. Consequently, private sector credit extension (PSCE) should improve. Still, PSCE growth of almost 1 percent in April 2018 is an improvement from negative growth rates in late Q3-2017 and early Q4-2017. Total assets have also been growing steadily; up 5.3 percent year-on-year to 29.9 trillion shillings in April 2018.

Moody’s, a rating agency, is similarly optimistic. In a mid-March 2018 research note, it avers the Tanzanian “banking system will remain resilient, with improving operating conditions, solid capital and liquidity, despite asset quality and profitability pressure.” Christos Theofilou, vice president and senior analyst at Moody’s explains further: “We expect operating conditions to gradually improve as private sector businesses adapt to higher taxes and liquidity in the system improves with the payment of government arrears and more focus on infrastructure and development plans by the authorities.” Moody’s also assesses the country’s banks’ capital buffers as “among the strongest in sub-Saharan Africa and globally.” However, it acknowledges their declining profitability “due to lower interest income, reduced business activity and rising loan-loss provisions.” It also believes NPLs might rise some more “due to the continued, delayed impact from last year’s public sector job cuts, a corporate liquidity crunch and lower corporate margins following a crackdown on tax collection.”

More consolidation expected
On its part, the government has been tidying up its act in the sector, approving the merger of two of the banks it owns in mid-May; Twiga Bancorp and TPB Bank. It is part of a broader planned consolidation of state-owned banks. BoT deputy governor Bernard Kibesse explained the authorities’ thinking to the media thus: “We will see more mergers of government-owned banks until we remain with one or just a few banks owned by the government.” The central bank would like to see more consolidation in the sector: “We would like more mergers and acquisitions to take place between the existing banks in Tanzania, including those that are privately owned, so that we remain with a few efficient banks”, Mr Kibesse added. Key stakeholders in the sector seem receptive to the idea. In about mid-April, Ineke Bussemaker, chief executive of National Microfinance Bank (NMB), the country’s largest bank, told Reuters “if there is a coordinated effort to do a consolidation in the banking sector….NMB will play a role.” And Bussemaker, who took over as CEO in 2015 from a role at Rabobank in The Netherlands, which owns a 34.9 percent stake in NMB, is not just buying into the idea of the government, which has a 31.9 percent stake in NMB, it believes consolidation has become a necessity; with its chief executive telling Reuters further that “there are a number of small banks that are struggling with a relatively small capital base…[and thus]…forsee some consolidation in the sector.”

An edited version was published in the Q3 2018 issue of African Banker magazine

macroafricaintel | [#StopTheKillings] Kenya – Recent banking trends & outlook (1)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In July, a court temporarily suspended the implementation of a new 0.05 percent tax on bank transfers above 500,000 shillings ($5,000); a victory for the Kenya Bankers Association (KBA), which took the matter to court. Widely dubbed a “Robin Hood” tax, it was introduced in the 2018-19 budget by treasury secretary Henry Rotich in June 2018. In the first week of its implementation from 1 July, interbank transfer volumes halved to 11.2 million shillings, from 26 million shillings only the week before. Time will tell whether the reprieve would be permanent, perhaps as early as mid-September, when the suit would be formally heard. More pertinent is how this is just one of quite a number of constraints weighing on the Kenyan banking industry at this time.

Stifling regulation, tense labour relations
There remains the vexing issue for Kenyan bankers of the cap on interest rates on commercial loans at 4 percentage points above the central bank rate instituted in September 2016. Indications that the law might be reversed is gratifying but increasingly frustrating with every delay. Even so, Kenyan banks have not been particularly endearing themselves to the government and wider public in some spheres. Ten of them are being investigated in the ongoing corruption probe of the pilfering of the National Youth Service to the tune of about $100 million, for instance. The bad press would certainly make it difficult for them to stop a proposed financial markets conduct authority. Currently a bill in parliament, once passed into law, the central bank’s powers to rein in erring banks would be passed to it. The consequent duality is likely to slow the oversight process, certainly. And even as any central bank or institution would ordinarily resist any emasculation of its powers, Central Bank of Kenya governor Patrick Njoroge’s worry and view that his institution “is under attack” should be taken seriously.

Besides, the financial markets conduct bill was a disappointment for bankers in other ways. After earlier signalling that the bill would include the repeal of the rate cap law, its absence in what was eventually published and the silence of The Treasury afterwards, dashed hopes in the industry. If Reuters’ sources are right, treasury secretary Henry Rotich might not be entirely to blame. There was a worry that including the rate cap repeal in the bill might jeopardize its passing. Why? The rate cap law emanated from the legislature, not the executive. And a lot of lawmakers, those from the ruling Jubilee party at least, remain fervently opposed to any attempt to repeal it. Suggestions about a compromise range from increasing the cap to allowing banks charge differential interest rates depending on the customer segment. Some banks have chosen to play the waiting game. At an investor briefing in March, James Mwangi, chief executive of Equity Group, Kenya’s largest bank by value, says his bank has more than $2 billion available for lending in the event the rate cap is abolished: “There are no trade-offs because it’s not about us, it’s about the market”, he added for good measure. Other banks might be more accommodating if the cap is raised, though.

Labour relations have also been tense lately. Most recently, the sector’s union attempted to block the payment of bonuses to more than 2,000 managers at KCB Group, the largest bank in Kenya by assets. Their argument was that quite testing quarterly reviews, the basis upon which the bonuses are paid, are discriminatory. A court ruled otherwise in about mid-April. Even so, it highlights how global pushback against what are widely considered to be disproportionately high remuneration for bankers despite their many misdemeanours, is closer to home in the Kenyan case. In a country where about 40 percent of its almost 50 million population live below the poverty line and at a time when a multitude of depositors are still scrambling for their money in at least three failed banks, a bank chief executive earning $1.5 million in bonuses alone, is hardly endearing.

An edited version was published in the Q3 2018 issue of African Banker magazine

Also published in my Businessday Nigeria newspaper column (Tuesdays). See link viz.

macroafricaintel | Banking in East Africa: Recent trends & outlook

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

What are the recent trends in the East African banking industry? And what does the future portend for the sector in the region? For perspectives on these questions, African Banker got the views of two highly-esteemed Nairobi-based banking professionals: George Mutua, managing director and chief representative officer for the Kenyan office of Societe Generale, a French bank, and Elizabeth Ndungu, head of research at Genghis Capital Investment Bank. Expectedly, Kenya, the region’s largest economy, dominates. And government policy there is perhaps the most stifling for the sector at the moment. Good news is there are indications some of the measures might be reversed. First is the capping of interest rates on commercial loans at 4 percent above the central bank rate by the Kenyan government. Another is the recently introduced 0.05 percent “Robinhood tax” on cash transfers of more than 500k shillings from 1 July; which halved daily interbank volumes in the first week alone. A proposed Financial Markets Conduct Authority in Kenya also adds to increasing concerns about over-regulation. There is probably a need for stiffer rules, though. For instance, 10 Kenyan banks are currently under investigation for accepting stolen funds. But stronger rules could be self-defeating if they end up weakening the ability of central banks to rein in erring banks. For evidence, reformist Central Bank of Kenya (CBK) governor, Patrick Njoroge, put it bluntly: “The [Financial Markets Conduct] bill emasculates the central bank”, adding the CBK “…is under attack.” Without a doubt, there is increasing political interference in the region’s central banks and indeed elsewhere on the African continent. Curiously, Tanzania’s president John Magufuli, well-known for his heavy-handedness, does not plan to bail out struggling banks in his country: “I will not give any money to failing banks,” Mr Magufuli said earlier this year in March, adding “it’s better to have a few viable banks than dozens of failing banks.” The recurring theme is clearly one where on the one hand, governments in the region are more overbearing on banks with more regulations while on the other hand, in the Tanzanian case, for instance, not so supportive of those that flounder.

Reduced profits, rising NPLs
Undoubtedly, top-of-mind amongst bankers in East Africa is the expectation that the Kenyan government would repeal the law capping interest rates. Since the legislation, credit has slowed. Mr Mutua lets in on his expectations: “We expect the interest rate caps to be repealed through an act of parliament- sometimes in 2018. This should lead to more lending by commercial banks to the SME sector. Easier access to credit will drive economic growth and should improve GDP growth.” Ordinarily, banks were increasingly loading up their books with government securities. The rate cap made doing so more a necessity than a strategy. Should the rate cap be abolished, SG’s Mutua believes “banks would invest less in government securities and more in the private sector.” The move would be beneficial for banks’ bottomlines certainly with interest margins to increase gradually as banks take more risk and charge relatively higher margins to the private sector,” Mr Mutua adds. Genghis Capital’s Ndungu provides additional insights: The banking industry in Kenya has experienced a challenging operating environment over the past year. This has mainly been attributed to interest rate caps introduced in the third quarter of 2016 that has seen banks record reduced profitability on account of reduced net interest income. In response to this, we have witnessed banks adjust their business models through a combination of initiatives aimed at reducing costs such as cutting down branches, laying off staff and enhancing operational efficiency, coupled with revenue diversification so as to tap into non-funded income.” On interest rate caps, Ms Ndungu’s view is thus: “While the interest rate caps have been a pain to the banking sector in Kenya, the East African region has been grappling with increasing non-performing loans (17.4% in Burundi, 12.4% in Kenya, 8.2% in Tanzania and Rwanda, 6.2% in Uganda), primarily on account of the high interest rates in neighbouring countries and inadequate risk assessment, which could affect economic growth in the region adversely. Lending rates in Uganda, Tanzania and Rwanda range between 18.0% and 21.0%, which has seen borrowers suffer the full brunt of accessing credit and led to high default rates. This in turn has stifled private sector credit growth as banks enhance risk management to curb this trend.” On NPLs, for Kenya at least, SG’s Mutua observes “no major shift in NPL levels considering that banks have been forced to clean-up their books and make provisions in good tome by the Central Bank of Kenya,” however, and expects “credit growth in agriculture, construction, manufacturing, retail/FCMG- as banks come up with a lending mandate in support of the president’s Big Four [agenda]”.

Stiffer regulation, consolidation, regional expansion & new entrants
Even as it is expected the authorities would abolish interest caps in Kenya, they would continue to rein hard on banks who charge their customers disproportionalely. SG’s Mutua believes there would be stiffer regulation on how and what banks charge to borrowers [with] the Central Bank of Kenya [insisting]…on transparency on the type and amount of financial cost”. Another development Mr Mutua expects is “…more consolidation in the banking industry – across the industry in the region. We still have too many small banks in Kenya, Uganda, Tanzania and there’s need for consolidation. It will be pushed by both business viability needs and regulatory requirements on adequate capital levels. We see the big local banks continuing to expand and deepen their presence across the region. [And] top local banks in Kenya, Tanzania, Uganda will start looking for regional dominance.” Mr Mutua also sees “the continued adoption of mobile-money and digital solutions by banks over additional/new investments in brick and mortar network [and an] increase of the agency banking model. Furthermore, there should be “more and better market segmentation with a new emphasis on wealth management, financial planning solutions,” SG’s Mutua believes.

On the outlook for NPLs and banking in the East African region, Genghis Capital’s Ndungu says: Going forward, we expect this trend to be managed as banks tow in line with the requirements of IFRS 9, that requires a forward looking approach in loan provisioning. This will force banks to be more prudent in their assessment and will also require fiscal consolidation (government support) in order to ensure that private sector credit growth in the region does not deteriorate as a result of the crowding out effect. With a population growth rate of 3.0%, compared to other developed countries below the 1.0% mark, coupled with increasing financial inclusion and more uptake of financial services products, the East African region offers an attractive proposition for long term investors looking to take advantage of the attractive valuations.” SG’s Mutua also sees the “entrance of new global and regional payers- the likes of JP want to establish a rep office covering East Africa in Nairobi. The replacement of Barclays by ABSA in Kenya and Tanzania. He also expects “more competition from local banks- empowered by mobile money solutions, agency banking, and digital banking- the “traditional” local banks will pose new competition to established international brands in the region.” In conclusion, Societe Generale’s Mutua sees “more and better regulation of banks in Tanzania, in terms of how they classify and provide for bad debt in their books, more focus on supporting/financing intra-Africa trade [as] banks in East Africa…target traders involved in exports and imports across Africa, better and stronger relationships with multilaterals, DFIs, insurance bodies, to put in place guarantees and de-risking solutions that will make certain sectors [like] agriculture, commodity trading more bankable. 

An edited version was published in the Q3-2018 issue of African Banker magazine

macroafricaintel | [#StopTheKillings] UK-Africa post-brexit trade scenarios (2)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Still, global firms with operations in the UK are making contingency plans. Ahead of the formal exit of Britain from the EU in March 2019, JP Morgan, an American bank, has begun to relocate some of its London-based employees arocss the EU, for instance. Add to the mix for them the possibility that Brexit might not even happen at all; and thus all that expensive scenario planning becoming all for naught. In fact, there is a cohort of influential and powerful politicians and businessmen believed to be making a concerted effort towards stopping Brexit or making it as soft as possible. In late June, for instance, former British prime minister Tony Blair called for Brexit to be delayed in a chat with British think tank Chatham House: “We should plan now for the possibility we need to extend the March 2019 deadline”. A delayed or soft Brexit are probably the only options left now: Queen Elizabeth assented to the European Union Withdrawal Act 2018 in June. So, yes, unless there is a change to the law, the United Kingdom will exit the European Union either in March 2019 or later.

Same old
Amidst all these is Britain’s relationship with her former colonies. By being a member country of the EU, the privileges enjoyed by the UK were extended to members of The Commonwealth as well. For example, a British visa or passport, which is relatively easier to attain for citizens of Commonwealth countries, allowed holders access to the wider European continent. With Brexit, that would no longer be the case. It begs the question then of how the UK’s trade and investment relationship with Africa would fare after Brexit? “We’ve got a UK-Africa trading relationship that’s worth more than £27 billion and the UK is the second-largest investor in Africa, with over £21 billion of investment,” says Emma Wade-Smith, UK trade commissioner for Africa to African Business in March. And “the government is very clear that no trading relationships should be worse off because of Brexit.” And “British companies that are active in Africa genuinely care [and] want to do good business,” she adds, mentioning the many community support schemes by British companies “as a result either of their investment into Africa or their exporting relationship.” Malte Liewerscheidt, Vice President at London-based Teneo Intelligence, a research firm, is not so optimistic about the African trading relationship post-Brexit, however: I’m not enthusiastic about this at all. Yes, Britain would need to make an effort striking new trade deals, but priority would be given to large trading partners such as the United States or Australia. Besides, the emphasis would be more on opening markets in Africa for Britain, rather than the other way around. [Besides,] most African exports to Britain are primary commodities that are already duty- and quota-free.” The evolving soft Brexit scenario, whereby the UK would retain existing EU trade rules, suggests there would probably not be much change to the current arrangement.

This is the second and final part of my column on 28 August 2018 titled “UK-Africa post-brexit trade scenarios (1).” An edited full version was published by African Business magazine in August 2018.  

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz.

macroafricaintel | Lessons from Milost’s experience in Nigeria

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Milost Global, an “American private equity firm” is a subject of controversy in Nigeria. Its botched $1 billion Unity Bank acquisition deal is a subject of investigation by Nigeria’s Securities and Exchange Commission (SEC). After negative media reports about the deal and a disavowal by the management of Unity Bank about any firm commitment to proceed on the transaction, Milost chief executive Kim Freeman released an elaborate timeline of his firm’s interactions with the bank. According to Mr Freeman, the request for a possible deal came from Unity Bank’s chief executive Oluwatomi Somefun in early August 2017 and a term sheet for a $1 billion mix of debt and equity capital investment was agreed, signed and approved by the board of Unity Bank a month after in early September 2017. In mid-November 2017, a binding commitment was also finalised, according to Milost. In response, Unity Bank denied there was any plan to take capital from Milost talk less delist from the Nigerian Stock Exchange (NSE). However, it acknowledged there were engagements between them but insists these were “preliminary discussions, which must necessarily be subjected to relevant regulatory, statutory and corporate governance compliance parameters before such discussions could become elevated to the level of a “binding commitment agreement.” A source at Nigeria’s Securities and Exchange Commission (SEC) said via a phone conversation in late August that SEC enquired about the botched or purported Unity Bank transaction by Milost at the Nigerian Stock Exchange and found none of Unity Bank shares were bought or exchanged between Milost and any other party. In other words, the transaction did not take place. Of course, that is generally in line with was revealed by both Milost and Unity Bank. And in the absence of an actual transaction, there is not much SEC can do about it. When asked if SEC was still investigating the matter, the source said it was likely the case but he could not say so definitively.

Too good to be true?
Undeterred, Milost went ahead with negotiations with other Nigerian listed firms. In February 2018, Japaul Oil & Maritime Services Plc revealed it had signed a $350 million financing deal with Milost; $250 million in equity and $100 million in convertible loans. Months later, Japaul “resolved that in view of the numerous red flags associated with the proposed equity injection that management should in consultation with the Company’s retained counsel take prompt steps to pull out of the transaction in a non-prejudicial manner.” There was also news in late March 2018 that Aso Savings & Loans Plc had entered into a $250 million equity financing deal with Milost; news Aso Savings asserted was “false”. There was not similar controversy with the relationship between Resort Savings and Loans Plc and Milost, however. In March, Resort notified the Nigerian Stock Exchange (NSE) that it had signed a commitment letter with Milost for a $250 million financing deal; $100 million in equity and $150 million in debt. All these firms have one distinct characteristic: they are NSE-listed firms. Milost changed tact later, it seems. Hitherto, it sought private firms for investment. In December 2017, Femab Properties Limited received an initial drawdown of $10 million from an agreed $500 million financing deal with Milost. About a month later, in January 2018, Primewaterview Holdings Nigeria Limited, another real estate firm, closed a $1.1 billion deal with Milost for a 100 percent interest in the company. It was Milost’s intention to follow these with acquisitions of “a large Nigerian bank and an insurance company…before the end of March 2018.” If successful, this would have been a step-up for Milost; as banks and insurance firms that would necessarily be of interest would be listed on the NSE. In light of the events that ensued, the botched Unity Bank deal for instance, this would not be the case.

What is certainly clear is that the Nigerian firms that did business with Milost, that is, Unity Bank and the others, did so informedly but cautiously. With the negative publicity the activities of Milost have generated, however, there are likely not so many Nigerian firms, listed ones at least, that would be willing to engage with it at this time. Perhaps then, Milost should have simply stuck to its strategy of seeking private firms in need of capital without the attendant publicity. This tends to be the modus operandi of PE or investment firms which have capital from individuals and/or businesses who perhaps prefer to be anonymous. Since the principals and managers of Milost are certainly aware of the risks of being so “open” and yet effectively “closed”, what can be inferred is that there is a desire by Milost to be a respectable investment firm. But could it hope to do so without being as transparent as necessarily possible? Its experience in Nigeria thus far is certainly a lesson for investment firms looking to make inroads into African or frontier or emerging markets on how not to proceed.

But what is the truth? Is it possible Milost would court such publicity if it had a great deal to hide? Would it threaten legal action to clear its name in Nigeria while mindful of the intrusive procedure that would entail? In any case, what do seasoned professionals in the Nigerian investment industry think of Milost? Quite frankly, some think Milost is too good to be true. A highly respected investment luminary, who in light of the sensitivity of the matter prefers anonymity, provides an assessment as follows: “I don’t know anything about them for a fact. I’ve never interacted with them. But from what I read and how they conduct themselves there is something not right about them. They simply don’t behave like a fund manager that has billions to invest. It is hard for me to articulate but it’s something that most real finance professionals will also say (based on discussions with some). They are either a scam, are investing ill-gotten money (whose owners don’t want, need or haven’t been accepted by professional managers), or have way way less money than they claim.” The respondent is as fair-minded and objective as they come. To ensure fairness, I presented the respondent’s views via an email to Milost CEO Kim Freeman. Mr Freeman sent a reply on 20 August 2018 as follows: “Thanks for your emails asking questions about Milost Global for an upcoming article in one of your publications. Unfortunately, due to pending litigation against a Nigerian newspaper, I will not be able to answer your queries.”

Better suited for private investments
I also sent questions about Milost’s seeming change in strategy to seeking investments in publicly-listed entities instead of private ones hitherto to Mr Freeman. These went unanswered, however. The litigation against a Nigerian newpaper that Mr Freeman refers to relates to a series of articles by BusinessDay, a Nigerian business daily. (Disclosure: The author of this article is a columnist for BusinessDay.) In its article of 28 March 2018, BusinessDay asserts various analysts believed Milost was engaged in a “classic pump and dump strategy…in the stock market”. In that article, BusinessDay quotes a source at Unity Bank that Milost put pressure on them to sign an equity subscription agreement but that the bank “resisted and never signed any agreement whatsoever”. I asked Frank Aigbogun, publisher & chief executive of BusinessDay in Nigeria about any litigation against the newspaper or any of its journalists by Milost. In response in late August, Mr Aigbogun said “I am aware their lawyer wrote to BusinessDay threatening a lawsuit but cannot recall we got any court papers in this regard. I will check.”

Similar controversy trails Milost in South Africa. In July 2018, the Johannesburg Stock Exchange (JSE) suspended trading in the shares of WG Wearne, a building materials supplier, and Visual International Holdings, a real estate company. The move followed the failure of the companies to file their provisional financial statements within the stipulated period. According to Business Report, a South African online publication, both companies “entered into debt-funding agreements with…Milost Global which they claimed were not fulfilled.” For WG Wearne, Milost “committed to invest up to R300 million” via an equity subscription agreement entered into in October 2017 but terminated in May 2018 by WG Wearne, according to Business Report. Had the financing arrangement gone ahead, there would not have been a need for WG Wearne to recapitalise and hence be late to submit its financial statements to the JSE. For Visual International, the company revealed in June 2018 that Milost Global failed “to pay the claw-back subscriptions of R10.23m in line with the new terms of a debt-financing agreement published in May to recapitalise the company”, according to Business Report. Has Milost had any successes then? Milost Global Inc and Isilo Capital Partners (launched by Milost in November 2017 to raise $5 billion for African transactions) took over Primewaterview Holdings Nigeria Limited and appointed Isilo Capital chief executive Tiny Diswai as chairman in January 2018. In response to questions about the current status of the Primewaterview acquisition, Mr Freeman replied thus on 29 August 2018: “No comments on Primewaterview can be made for the same reason I mentioned in my email on 20th August.” The Primewaterview transaction happened under a different chief executive then at Milost called Mandla Gwadiso. Kim Freeman took over as CEO in February 2018.

Mining origins?
An analysis of the curriculum vitae of Mr Freeman suggests Milost is probably funded from proceeds of mining. Considering how opaque the mining industry can sometimes be, with a lot of transactions under the shroud of secrecy, it is likely that Milost is an investment vehicle for the preservation and growth of capital from the firm’s mining activities or those of its capital providers. Although the firm’s website does not reveal much, an examination of Mr Freeman’s CV on LinkedIn suggests Milost probably started out as a mining investment firm or at least maintains mining interests. Mr Freeman replied to my email for confirmation of this supposition on 29 August 2018 as follows: “Despite my mining background, Milost Global’s origins were not in mining but covered all sectors.” Still, before becoming CEO of Milost Global Inc, Mr Freeman was managing director for mining at the firm from August 2017 to February 2018, after which he became CEO. His CV on LinkedIn also shows stints at RioZim in Zimbabwe as chief operating officer between April 2014 and August 2015. Mr Freeman also worked at Platinum Australia Limited between January 2010 and June 2011. Thereafter, he had a 4-month stint (February 2012-May 2012) with Mintails SA (Pty) Ltd in South Africa. According to the CV, Mr Freeman started his mining career as a graduate mining engineer at Roan Consolidated Mines in Mufulira, Zambia in October 1974. After two years there, he went on to become an inspector of explosives at the Department of Energy, Mines and Resources of Canada between September 1977 and July 1980. Thereafter, Mr Freeman became a mine manager at O’okiep Copper Company in Namaqualand, South Africa between September 1980 and January 1986. From there, he proceeded to De Beers Consolidated Mines Limited as mine superintendent between May 1987 and October 1990. Subsequently, Mr Freeman had a stint with Debswana Diamond Company as Assistant General Manager at its Jwaneg mine between October 1990 and January 1996. Other stints were as vice president (operations) at SouthernEra Resources Limited in Canada and South Africa and chief operating officer with Hindalco Industries Limited between April 2005 and July 2006, responsible for the firm’s copper mining operations in Australia and that for bauxite in India. Judging from his antecedents therefore, Mr Freeman is well known in mining circles. And this is also likely the case for Milost.

Show your hands
What can be discerned for certain is that Milost has some capital that it wants to invest. How much capital it has cannot be verified, however. And a desire for US listing for its investee companies is likely to ensure that it is able to exit its investments with ease. Accusations that it might not really be interested in adding value to its investee companies but to strip them for profit may have some basis. But that is not a crime. After all, private equity firms are primarily interested in getting return on their capital. It certainly would help if Milost were to present a more transparent profile. If it indeed entered into a binding commitment with Unity Bank, for instance, it could make them public. It could also sue Unity Bank for breaches if indeed that were the case. By not doing so thus far, to my knowledge at least, suggests Unity Bank may indeed not have entered into anything binding with Milost. But these suppositions would be needless if Milost were more transparent. For it certainly cannot want to invest in high profile companies and perhaps move their listings outside of their local jurisdictions without expecting some level of scrutiny. Besides, did Milost register with Nigeria’s SEC and other relevant regulatory agencies like other foreign investment and private equity firms operating or investing in Nigeria do? If as Milost says, it plans to continue seeking investment opportunities in Nigeria and elsewhere in the West African region, it behoves it to come clean about its source of capital, its motivations and activities.

macroafricaintel | [#StopTheKillings] Nigerian doctors still see gold abroad

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In a recent encounter with a Nigerian doctor, as one recovered from the inevitable failures of the human body that tend to occur from time to time, it emerged the owner of the soothing voice that aided one’s convalescence was unhappy. Not with her patient, a challenging case no less, but with her career in her country of birth. And she is one of the fortunate ones. As a doctor in a private hospital in a highbrow area of Lagos, she was relatively well-paid. And judging from what one garnered from those long hours of forced idleness, there is a lot that gets by the hospital’s way in terms of cases. Imagine the irony: whereas the individual hopes to suffer little afflictions, if at all, the doctor’s joy comes from a case worth his or her time. The more complicated, the better. Still, a doctor’s experience, even in the best teaching hospital in the country, pales in comparison to that of lesser professionals in Europe and elsewhere. Money is also a huge motivating factor. Still, whether in the United Kingdom or the United States, the experience does not always turn out as dreamed. Racism is usually a problem. And career mistakes are punished severely. Nonetheless, those with some training in these climes beforehand are able to easily bank on a coping mechanism honed during their grinding student days.

Whereas other professionals, in financial services, law, and so on, could easily keep abreast of developments in their sectors, whether they are in their country or abroad, the peculiarities of the medical profession and rapid technological advances in the sector mean practitioners not adept in the most advanced and recent practices would find themselves no more than quacks over time. Ironically, being initially trained in Nigeria allows for mastery in the old-school ways of medicine that tend to come in handy in chiller climes where practitioners have become “spoilt” with various technological aids. And in fact, the continent is wealthier by the experience garnered by its medical professionals abroad, who whence accomplished often give back in the form of free surgeries and so on.

But how many Nigerian doctors actually seek greener pastures abroad? More than 60 percent of registered Nigerian doctors practice abroad. Most of the remainder who grudgingly ply their trade locally plan to cross the seas at the slightest opportunity. And despite the backlash against migrants in Europe and elsewhere, doctors and other advanced professionals are actively courted. Not entirely. The UK put a cap on the migration of skilled non-EU workers recently. Short of medical staff, the government has reversed itself. Now, migrant doctors with firm offers from UK hospitals do not have to worry about getting a visa: they will get placed. No doubt music to the ears of many expectant Nigerian doctors.

The exodus comes at great costs for the country, though. There is 1 doctor for about 4,000 Nigerians at the moment. With more doctors heading abroad, that statistic would only get worse by the day. And were the situation ideal, quality healthcare is out of the reach of those that need it the most. The privileged, who can afford healthcare anywhere in the world, are ironically the ones with the means to avail themselves of the local best. To be fair, the authorities are not insensitive to the problem. A compulsory health insurance scheme for Nigerians in paid employment means almost anyone with a job would be able to afford basic and secondary medical care. Of course, it is another matter if the ailment is more advanced and require extensive, sustained care; and perhaps more abroad. A newly instituted patients’ bill of rights also means that any Nigerian, of any means, would not be subject to the gross abuse that many poor patients, who also tend to be ignorant of their rights, get subjected to with impunity. What would prevail in practice is another matter, though. During one’s recent forced interaction with the medical universe, each stage of treatment was presaged by a business executive brandishing a point-of-sale terminal: swipe your card, get treated. Quality medical care in Nigeria remains exclusive.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz.

macroafricaintel | On the African auto sector resurgence

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In late June 2018, Volkswagen, a German carmaker, opened a new $20 million factory in Kigali, Rwanda. Parts for the VW cars would be sourced from South Africa and moved across a supply chain that passes through Kenya, both of which already host VW plants; a good model for intra-African trade. VW also has a plant in Nigeria. What is unique about the venture is that some of the locally built cars that would be rolling out of its factory gates are not aimed for sale. They would be used for a car-sharing service by VW. Global auto companies clearly realise countries where car ownership is low for income-related reasons could still be serviced by forward integrating into transportation. Besides, even in rich economies, ride-sharing services have been reducing the need to own a car outright. Ride-sharing services are certainly more affordable either way. Various models to make experiencing the delight of a good car a wallet-friendly endeavour are being explored. In early June, for instance, Mercedes-Benz, a subsidiary of Daimler, another German carmaker, announced a car-subscription service in two American cities. This was only about two months after its rival, BMW AG, another German automobile company, launched a similar service. American carmaker Fiat Chrysler Automobiles NV has also announced plans to launch a subscription service in 2019. There is another reason global auto companies are looking for new markets: tariffs on European Union auto exports by protectionist American president, Donald Trump. American imports of $300 billion worth of European cars and parts could halve consequently. So if successful, the Rwandan experiment would probably be replicated in other African countries and everywhere else in due course.

New investments
Also in June, Mercedes-Benz announced an almost $1 billion investment in its East London plant in South Africa. And India’s Mahindra & Mahindra Ltd opened an assembly plant in South Africa only just a month or so before in late May. PSA Peugeot Citroen, a French carmaker, has also revealed it would set up a car assembly plant in Nigeria in the first quarter of 2019. Considering its previous venture in the country failed and perhaps only managed to last as long as it did because of a government decree that all cars used by officials must be those produced locally, it is a little surprising the French automobile firm is giving it another go. But it is not doing so blindly. Aliko Dangote, Africa’s richest man and certainly Nigeria’s most successful entrepreneur, is a partner in the new venture. There are other foreign car manufacturers aiming for Nigeria. In July, for example, executives from Volkswagen, Nissan, Bosh, BMW, and Uber met with Nigerian officials and other stakeholders in the country’s automotive sector to discuss opportunities and seek clarification on policy. Furthermore, if ongoing talks succeed, Renault SA, a French car company, and another three automakers, could partner with Simba Corporation, a Kenyan company which already assembles trucks for Japanese, Chinese and Indian auto brands, to assemble cars in Nairobi soon. Mahindra & Mahindra and Nissan, a Japanese carmaker, also plan Kenyan plants. In the meantime, Mahindra & Mahindra would probably export cars to the rest of the African continent from its Durban plant in South Africa.

Business-friendly policies key
But what informed the choice of the African countries for investment by the global auto companies? Malte Liewerscheidt, Vice President at London-based Teneo Intelligence, a research firm, provides some insight: A preference for comparatively more stable countries like South Africa or Rwanda is…understandable…These countries combine…competitive advantages such as access to a large domestic or regional markets, good infrastructure and a skilled workforce.” Mr Liewerscheidt has a point. Concessions secured by the foreign automakers like easier taxes and discouraging the importation of used cars could easily be overturned by current and new administrations. So, as Mr Liewerscheidt avers, there is some level of political risk. Thankfully, the incentives are being legislated instead of simply being government edicts. In the Kenyan case, a law on the tax incentives for the auto sector and requirement that used cars be newer, is in the works. South Africa, which already hosts myriad global automakers, is more ambitious; albeit stakeholders there insist it has yet to match its ambitions with action. A new 15-year South African auto policy from 2021 being negotiated is expected to target more than double the current car production of about 600,000 units. The authorities wish that incentives in the plan would make it even cheaper for the automakers to produce for export across the world from South Africa. However, the car companies do not think the government proposal, which also includes that they double their workforce, is far-reaching enough. Local auto brands have also been springing up across the continent. In Nigeria, Innoson Vehicle Manufacturing Ltd, set up a plant in 2007. Ghana’s Kantanka Automobile Company, which started operations in 2004, is another. But they are struggling; in part because Africans trust foreign brands more than they do local ones. And for good reason. The foreign ones are more reliable. They are also greater status symbols than local ones. Another challenge for local car manufacturers is skilled labour. Financing also. A case in point is Innoson which is at loggerheads with one of its banks.

Still long way to go
In any case, African auto sales are still quite small. According to Statista, almost 900,000 passenger cars were sold on the continent in 2017, about 1 percent of global sales of over 80 million units. As the type of ride-sharing service in Rwanda spreads across the continent, there would likely be a predictable level of demand. But there is a greater opportunity for exporting cars to other parts of the world. For this to happen, African governments would have to offer more than just tax incentives. They would certainly need to build world-class infrastructure. It must also be easy to do business on the continent. Rule of law must be respected, logistical costs low and agreements respected. In this regard, South Africa, the continent’s dominant car is probably best suited at the moment. London-based Charles Robertson, Global Chief Economist at Renaissance Capital, an emerging markets investment bank, wonders about the timing of the seeming african auto sector resurgence, though, reckoning it is probably “a decade too early for most countries.” Why? There is “not enough electricity to support car manufacturing”, for instance. So does that mean the foreign car manufacturers making a bet on the continent would lose money? Not exactly. Rencap’s Robertson explains: “South Africa can make it work. The others can do low value-added assembly and probably small-scale [manufacturing]”. Mr Robertson is, however, doubtful Africa is as yet ready for high value-added car manufacturing.

An edited version was published by African Business magazine in August 2018