EYe on Africa
Volume 3 | March 2011
Investment opportunities in Kenya
Review of the Islamic finance industry
World Entrepreneur Awards 2010
Winners and Lifetime Achiever
Africa is still golden in the
Mining & Metals sector
4. Editor's note
5. Our African footprint
6. Regional highlights
-Ernst & Young at the Mining Indaba
-2010 World Entrepreneur Award winners
-Ernst & Young East Africa Tax team provides
successful training to Kenya Commercial Bank
10. Africa is still golden
11. Consumer products in Africa: Hunting big game
13. Why invest in Kenya?
15. Hidden opportunities
17. A review of the Islamic Finance Industry
18. Eye on Africa profile: Q&A with Sugan Palanee
The Africa Business Center™
You have come to the right place
Africa remains at the centre of the global investment stage. 2011 got off to a flying start, with the world literally converging on the
Cape Town International Convention Centre for the Mining Indaba. Mining economies, including Zimbabwe, Niger and Tanzania,
showcased their potential to the rest of the world. We feature highlights from the Indaba and give more perspective in
“Africa is still golden”. As we did in our previous issue, we compare the performance of some of Africa’s stock markets with those
in the developed economies for the past ten years. For this, see Jonathan Kruger’s piece “Hidden opportunities” on page 15 and the
9 Year market performance to 31 January 2011
Kruger’s research emphasises the importance of looking beyond the recent uprisings in Egypt and Tunisia in order to identify
Africa’s true economic potential; especially in 2011 – during which more than ten countries on the continent will conduct elections.
Uganda concluded theirs in February, but everyone is keen to see what will happen in Nigeria and Zimbabwe.
Following our past interview with the CEO of consumer products giant Tiger Brands, Derek Engelbrecht, Ernst & Young’s Retail and
Consumer Products Africa Leader, shares his insights on the opportunities and challenges of selling to Africa’s billion consumers.
We also shed some more light on banking in Africa with our focus on Islamic banking; a fitting tribute to the recognition of Nigeria’s
Central Bank Governor, Sanusi Lamido Sanusi, who received the honour of being named the World’s Central Banker of the Year by
The Banker (a publication of UK-based Financial Times). The award affirmed our decision to feature the Nigerian banking sector in
EYe on Africa previously. Add to all these a Q&A with Sugan Palanee on the role of India in the future of the continent’s economic
growth and our regular “Doing Business in...”, this time the focus is on Kenya, and you have a true African feast.
Enjoy EYe on Africa, Volume 3.
Contact us for more on how you can grow your business in Africa – the new and last economic frontier.
Associate Director, Africa Business Center
Tel: +27 11 772 5249
This year's Mining Indaba, described as the
"world's largest gathering of investors,
financiers and mining professions in African
mining", saw the largest number of delegates
attending in the history of this event.
Adrian Macartney, Sector Leader for Mining
in Africa commented that the mood was very
buoyant and that “there is certainly a buzz in
the air, which we haven't experienced in the
industry over the past 18 months.
Africa remains a huge focus area for many
investors across the globe, and we are
expecting the amount of M&A activity to
significantly increase in the next 12 months.”
A few of the key issues discussed at the
conference included resource nationalism,
mining investments in Africa, resources in
Africa and the role of China and other BRIC
countries in terms of investing in Africa.
Victor Kgomoeswana, Adrian Macartney and James Thomas
World Entrepreneur Award Programme
spreads into Africa
Emerging entrepreneur category:
As Africa enters a new decade, and joins China and India in
crossing the billion-person mark; business and government
leaders have more reason than ever to be optimistic about
future growth prospects. With plentiful natural resources,
sustained improvements in infrastructure and a desire to be
part of the global economy, it is no surprise that Africa is seen
by many overseas investors as the land of opportunity. “The
enormous potential of the African market is further enhanced
when you consider the natural entrepreneurial spirit that exists
within African people and business leaders. As we have seen
within the BRIC economies, building a stable business
environment where entrepreneurs can thrive will be a key
ingredient of sustained economic success, we are pleased to
announce another dimension to the competition.
Entrepreneurs across Southern, Western and Eastern Africa
have, for the first time, been given a global stage from which to
compete and be recognised," announced Zanele Xaba, Director
for the World Entrepreneur Awards Programme.
Seeking alternatives for meat products that provide similar
levels of protein, and that have the same taste as their meat
counterparts, Fry’s Vegetarian was started in 1991 by Wally
and Debbie Fry in their own kitchen and a small office that they
owned from a previous business. What was a hobby pursued
more for personal satisfaction than for business ideals – the
Fry’s began experimenting with food types in 1989 looking for
vegetarian alternatives that were tasty, nutritious and easy to
make. In September 2010, Fry’s launched the Meat Free
Mondays campaign in South Africa as a global initiative to invite
South Africans to pledge their support and declare Mondays a
meat free day in their households. Meat Free Mondays has
begun as an environmental initiative aimed at raising
awareness of the environmental impact of meat farming and
production, and the impact a reduction in consumption could
have on the environment as a whole.
Wally and Debbie Fry - Fry Group Foods
Social entrepreneur category:
Olivia van Rooyen - The Kuyasa Fund
The 2010 winners included:
Marcel Golding and John Copelyn - HCI
Marcel Golding and John Copelyn became business partners in
1995. Prior to that, both held leadership positions in the trade
unions, Marcel was involved in the National Union of
Mineworkers in various senior capacities and John was the
General Secretary of the SA Clothing and Textile Union.
They were both founding members of the Central Executive
Committee of COSATU and were among the twenty union
leaders delegated to form part of the ANC National Parliament
list contesting the 1994 parliamentary elections. In 1997,
having sought and received permission to leave parliament,
they reversed their business interests into the JSE-listed shell:
Hosken Consolidated Investments Ltd (HCI). The vision of the
company was to bring the vast majority of the wealth to the
working population of the country. In order to ensure that they
were personally invested, Marcel and John structured their
investment into HCI through their own investment companies
by putting their own capital into the businesses in which HCI
Marcel became the Executive Chairperson and John the Chief
Executive Officer of HCI from January 1997. HCI was the third
company on the Johannesburg Stock Exchange to be regarded
as black empowered and the first to have a significant portion
of its shares owned by broad based black economic
empowerment. Over the last 14 years, Marcel and John have
built HCI into a prominent JSE-listed company with majority
shareholdings in a number of industries including buses,
casinos and hotels, television, clothing and textiles, mining,
renewable gas, property and motor component manufacturing.
The Kuyasa Fund (Kuyasa)is a non-profit social development
organisation that provides microfinance as a tool to improve
the housing conditions of South Africa’s poorer communities.
Olivia van Rooyen started Kuyasa to support community groups
to save towards housing, and grant loans to individuals who
qualify for the state housing subsidy-within their belief that the
poorer of the poor are still credit worthy and that through
mobilising savings they are able to build financial and social
capital – specifically housing. To meet their vision of enabling
these marginalised communities the ability to own and finance
their dwellings, Kuyasa provides microfinance services to those
with secure occupational rights but who are traditionally
excluded by the South African banking fraternity.
The underlying belief behind the business of Kuyasa is that by
improving the quality of housing of these people – the moral
and social fibre of the community is enhanced by pride felt in
being a home owner, and the stabilization it gives to families.
This year’s Lifetime Achievement award went to:
Dr. Bertie Lubner – MaAfrika TIkkun
Bertie Lubner grew up in an entrepreneurial family – his father,
Morrie Lubner, was one of the founders of the Plate Glass
Group. After school, he completed a B Comm at the University
of Witwatersrand and then joined the Plate Glass Group in 1951
as a trainee. In 1953 he moved to Rhodesia (now Zimbabwe)
to develop the company’s interests in what was then the Central
After 41 years with the Plate Glass Group, Bertie changed his
focus to allow him to undertake a number of new initiatives,
such as getting involved in major business organisations,
government bodies and his family’s philanthropic initiatives.
After 14 years, having developed the Group’s interest in seven
different countries of the region, he returned to South Africa at
the end of 1967. On his return, he assumed responsibility for
expanding the Group’s interests in the wood industry and
successfully launched this area of the business both nationally
and internationally. By the early 1990s the Group was
operating in 19 countries, employing 23,000 people, with a
turnover of over US $1 billion. Bertie and his brother Ronnie
were joint Chief Executives of the Group, and in 1982 Bertie
was appointed as Chairman, a role he held for the next eight
years. In 1992 the Lubner family sold control to SA Breweries;
however the family bought back, together with Management,
all its glass interests in South Africa, and continued with its
investment in the international glass arena.
• MaAfrika Tikkun – a Jewish-led community organisation to
assist previously disadvantaged children, ex-President
Mandela is the Patron-in-Chief of this organisation.
• The Field Band Foundation – an organisation which, over the
last few years, has developed 31 college style bands,
bringing not only musical skills, but lifestyle skills to over
4000 children from the most deprived areas;
• Trustee for the Worcester Home for the deaf and blind;
• Patron of the Lubner “Kibbutz” – a farming project in South
Africa, incorporating people with Downs Syndrome.
This led him to initiate and become the founder of a significant
number of outreach programmes, such as:
Nicole Sykes, Bertie Lubner and Lauren Patlansky
Lead Director: World Entrepreneur Awards - Africa
Tel: +27 11 502 0261
Ernst & Young East Africa Tax Team trains
Kenya Commercial Bank Regional Finance Team
November 24th and 25th saw the Ernst & Young East regional
tax team come together at the beautiful Karen Leadership
Centre in Nairobi to train the regional finance team of Kenja
Commercial Bank, including representatives from the finance
departments in Kenya, Uganda, Tanzania, Rwanda and
Southern Sudan - all countries where the bank has a presence.
Facilitators for the session were carefully selected from our
Kenya, Uganda, Tanzania and Rwanda offices.
The bank has had a long relationship with Ernst & Young which
was taken to a higher level when minds were brought together
to discuss tax issues affecting the bank in all jurisdictions of
Discussions were very interactive and focused more on the tax
exposures the bank has had in earlier years and whether the
recommendations given have been implemented, transfer
pricing and the need for the bank to have it in place, customs
and trade and how the bank can plan on a tax efficient supply
chain, tax exposures in each of the jurisdictions, as well as a
review of tax litigation cases related to the banking sector
around the region.
The Business Development team from our Johannesburg office,
Zanele Xaba and Victor Kgomoeswana, also offered their
support by enlightening the client about our Africa Interactive
tool as well as the upcoming Entrepreneur of the Year awards.
From the client’s side the Kenyan Finance Manager Mr Yusuf
Idarus confessed, that when they heard the training was to take
place they thought it would simply be about the usual general
tax matters that they have always heard of. "Little did we
know," he said, "that the training was more focused on what
practically goes on in the business including live issues like
exposures we have earlier had and how we can mitigate them."
They were specifically blown away by the “extras” they received
like case law about banking sector, Africa Interactive tool and
Customs & Trade, which they thought was not much of a
concern to the banking sector.
Africa is still golden
When it was suggested a year ago that Africa’s economic
recovery was on track, many thought this premature. However,
a quick look at current figures shows that there can be little
doubt that the continent is definitely ‘open for business’.
In early January 2011, the International Monetary Fund (IMF)
forecast that Africa will take seven of the top ten places for the
World's ten fastest-growing economies over the next five years.
And with Africa once again presenting good value to investors,
its mining economies are once more in the spotlight.
As far as mining goes, Africa's share of global deal-flow tripled
from 5% in 2009 to 15% in 2010. The bulk of these deals was
inbound and showed a significant growth in volume, signifying
the increased interest of the rest of the world in Africa.
“In one major deal, Rio Tinto offered US$3.9b to buy
Mozambican coal miner Riversdale, while Xstrata is paying
US$513m for Sphere Minerals, with the goal of gaining three
iron ore projects in Mauritania. When one takes into account
the increasing interest in Africa’s mining sector from companies
in China, India, Brazil and Russia, it is easy to see why the
future looks rosy,” says Adrian Macartney, Mining Sector
“Taking South Africa as an example, some 31 mining and
metals transactions were completed during 2010, either in
South Africa or by South African-based firms abroad, with the
total value of these transactions amounting to US$2.9b. Of
course, the local industry was negatively affected by the
ongoing nationalisation debate, as well as concerns over
licensing and the availability of energy.” However, says
Macartney, by early 2011, a note of positive sentiment has
been underlined by the news of increased mining output for
2010, coupled to expected announcements on licensing, as
well as the commitment of organised labour, corporations and
government to ensure that the country capitalises on the
current high demand for minerals.
“Zambia has long been viewed as a low risk investment
destination, and its copper-based mining sector has thus
attracted high levels of foreign investment in recent years. With
copper demand set to outstrip supply from next year until at
least 2013, things are looking up for the country. Further good
news is that the Zambian government has confirmed that it will
not reintroduce its proposed 25% mining windfall tax, provided
for in the 2008 Mining Act,” he says.
“Perhaps the biggest clue to how well Africa’s mining industry
is doing is the fact that even Zimbabwe’s economy is stabilising.
Official figures indicate that after a contraction of 17.1% in
2008 in its mining industry - the largest decline in five
successive years of negative figures - the sector grew by 8.5%
in 2009. Furthermore, it was expected to grow by an additional
31% in 2010. The government has also issued more licenses for
diamond mining and has completely liberalised its gold market.”
“Of course, it is still facing a number of issues, notably the need
to overcome the gulf between electricity demand and supply.
Another major cause for concern among investors is the
government’s drive towards Indigenisation.” However, this is
just part of a more widespread continental sentiment. It is not
only indigenisation in Zimbabwe or Black Economic
Empowerment in South Africa, states Macartney, Africa as a
whole is moving toward providing more benefits for the local
people. Moving forward, mining companies will have to have
local partners or will have to undertake various forms of local
participation. In addition, he points out that environmental
sustainability is increasingly gaining importance and will surely
affect the cost structure of mines in the future.
“Ultimately, the abundance of mineral resources on the
continent, coupled with the lack of local capital and capacity,
opens the door to mutually beneficial opportunities for local
and foreign firms to work together in identifying and realising
the enormous mineral potential of Africa,” concludes
Tanzania continues to be a rising star in East Africa, with
geophysical surveys finding more gold and coal reserves in
areas where these were not expected. In addition to these
reserves, Tanzania’s ability to attract investments in mining
equipment manufacturing has been highlighted by the signing
of a large deal.
Lead Director: Transaction Advisory Services and Mining & Metals Sector
Tel: +27 11 772 3052
Consumer products in Africa:
Hunting big game
With over a billion people, 53 countries and some of the best
Gross Domestic Product growth rates in the world, Africa
presents a tantalising prospect as a significant growth market
for consumer products companies. However, tapping that
market is not without its challenges; far from homogenous,
beset with issues relating to geography and climate, political
and social unrest, African markets present that most prosaic of
investment equations: weighing increased risk against the
promise of great reward.
As companies develop their presence, the challenges they face
will tend to fall into four categories:
1. Resource prioritisation – where and how to prioritise for
greatest return and lower risk
2. Brand and product portfolio – how to determine what is right
for each market
3. Organisation – how to structure for success
4. Sustainability – how to protect growth and performance
1. Resource prioritisation: Where and how to prioritise
Africa’s vital statistics are becoming progressively more
compelling. Gross national income is already greater than that
of China or India in 14 of the continent’s countries. GDP is
comparable to that of Brazil and is rising at around 6% per
annum. With consumer spending rising at 16% compound per
annum, Africa is, and looks set to remain, one of the fastest
growing economies in the world.
At a more granular level, GDP per household across the
continent has more than doubled in the last 15 years. Further
impetus is added in the fact that foreign direct investment
nearly quadrupled from 1998-2008; today, around 85 million
African households earn at least US$5,000 a year. This
development comes off a low base and with many millions more
households aspiring to own, acquire and use consumer
products, the stage is set for continued substantial growth.
Consumer products companies are taking note of these
changes and making bold moves to get established, or to
accelerate expansion in what is a collection of the world’s preeminent emerging markets.
Weighing the challenges
But while the opportunities may be without parallel, so too are
the challenges. Africa is seen by many companies as the final
frontier for a reason. Over 1,000 different languages are
spoken by multiple ethnic and religious groups. And Africa
suffers more wars, civil commotion, corruption and economic
and political instability than any other continental, though the
situation is improving. While Africa is making great strides to
combat poverty, up to half the population is at or below the
poverty line. Cash flow is irregular, there is little access to credit
and many live in informal settlements on the edge of cities or in
remote villages. Economic growth and business prospects are
markedly different from country to country and region to
region, making many traditional routes to market ineffective –
particularly for consumer products companies keen to target
the working and emergent middle class. This means global
businesses have constantly to recalibrate the balance between
risk and reward, in order to ensure that Africa makes a positive
contribution to business growth and ultimately, the bottom line.
The million-mile view: A blueprint
While the investment case and approach for each organisation
will differ, there are some commonalities which should inform
the macro-view of entering or accelerating participation in the
African consumer products market.
Considering potential markets for entry or expansion in Africa
is a complex exercise which requires a kaleidoscope analysis.
This should enable companies to assess the strengths and
weaknesses of each potential market through a variety of
lenses, depending on their strategic priorities. Simply put,
analysis of multiple indicators is essential to develop a more
sophisticated view of how different markets might perform for
Conventional macro-economic indicators are where most start
their market analysis. On this basis, South Africa, Tunisia,
Egypt and Morocco are all reasonably mature, diverse and open
economies, with relatively positive growth prospects.
Some of the less developed economies that stand out as having
good prospects in an exercise of this nature also include
Angola, Ghana, Kenya, Tanzania and Mozambique – populations
are rising, growth is strong and political stability is improving in
all these markets so ease of doing business is starting to
improve. Other, less geographically-based analyses can also
shed some light. Cultural analysis reveals that Africa is home to
one third of the world’s Muslim population, living not just in
North Africa as many suppose, but also in sub-Saharan
countries like Nigeria, and in East Africa. This insight enables a
more meaningful perspective of African consumers that stands
apart from historic, colonial boundaries.
2. Brand and product portfolio
There are a number of very strong messages coming out of
Africa in terms of brand preferences and the drivers of
consumer purchasing behavior. Companies which can
understand what is different about African consumers are able
to target priority consumer segments with a tailored brand and
price proposition; if they can do this and overcome the
difficulties of poor local infrastructure and lack of modern
trade, they are most likely to perform well.
African consumers are a complex and varied group, but there
are a number of common themes, irrespective of earning
power. In general, African consumers are pro-Africa and have a
strong sense of national identity. When SABMiller tried to enter
Kenya with its Castle (traditionally South African) brand, it was
blocked by East African Breweries’ (Diageo) Tusker beer.
Consumer products in Africa:
Hunting big game
With its black and yellow elephant branding, and the slogan
‘My country, my beer’, Tusker appealed to the fierce
nationalism in Kenya. Africans demonstrate status through
wealth. Trading up is a common trend, so the concept of the
‘third party’ observing choices is very important in the
purchase and use of products. Many consumers are also
strongly influenced by religious practices (particularly in
countries with a strong Muslim or variable ethnic contingent) —
affecting everything from clothing, through personal grooming,
to eating and drinking practices. Clothing requirements are also
behind some key sales trends. For example, the volume of
shampoo sold in Egypt (population 70 million) is the same as
in Lebanon (4 million) due to the fact that 87% of women in
Egypt wear headscarves. Because wearing veils can lead to
rashes, odour and hair loss, the perceived need for particular
beauty products is increasing. Price also remains a key issue;
single use or low-cost products are also seeing increasingly
3. Organisation: Structuring for success
Companies that can execute consistently across all markets to
deliver reliably to customers and consumers, drive down costs
and reduce risks are more likely to achieve long term operating
success. Efficiency is pivotal to allow consumer products to
reach mass markets at low cost. The paradox, however, is that
the heterogeneity and massive complexity of African markets
dictate that there is no one-size-fits-all solution. While many
companies want to leverage their size and scale and establish
some consistency with their global operating model, it is not
always possible in Africa. The principles on which companies
have built a US or Europe operating model very often simply do
not apply. The informal economy is a key feature of life in Africa
— estimated to account for around 42% of GDP in 2000 with the
highest figures in Zimbabwe (59.4%), Tanzania (58.3%) and
Nigeria (57.9%). South Africa is the least informal market –
only 28.4% of GDP.
Distribution is a central issue across Africa; when local markets
are too small for a multinational to offer just the core range, it
is commonplace to extend distribution facilities to other
businesses to bulk out ranges and cooperate with others to
reduce transportation costs. Poor infrastructure, remote areas
and a highly fragmented retail base make distribution one of
the major challenges for consumer products companies —
which are tackling the issue in a variety of inventive ways.
4. Sustainability: Building for the future
Laying strong foundations for long-term profitable growth is
perhaps one of the toughest African challenges, given the
diversity of market conditions, the speed of consumer change
and the unpredictability of legislation and regulation. Deciding
where and how management should focus to protect growth
and drive performance is critical for ongoing success.
Four key areas warrant attention to safeguard the future of
African operations in:
• Implementing an effective controls and compliance
• Retaining local talent
• Fostering strong relationships with local regulators; and
• Ensuring that the principles of corporate social responsibility
are properly embedded.
To engender sustained adherence to good control standards
and build an environment with greater focus on continuous
improvement, it is particularly important that global consumer
products businesses operating in Africa focus on winning the
hearts and minds of local staff to demonstrate why internal
control performance drives better business performance.
A complex challenge with potentially enormous reward
While early entrants have had the opportunity to influence
consumer preferences, build brand loyalty, shape industry
structure and establish long term relationships, new entrants
are actively assessing the marketplace and looking for
opportunities to leapfrog the competition.
In such a complex, competitive and fast-changing environment,
critical factors for success will always include consumer insight,
execution excellence and strategic improvisation. The ability to
translate learning from other sectors and even geographies into
game-changing market approaches are likely to be the key
qualities that will set winning companies apart. Businesses that
possess these qualities will be able to navigate the challenges of
poor infrastructure and low penetration of formal retailing.
They will prioritise their resources to effectively target the
burgeoning middle and top of the African consumer pyramid
and organise themselves in an efficient and flexible manner.
And more than that, companies seeking to do business on the
continent have to decide whether they are African companies,
or merely companies headquartered elsewhere which are doing
business in Africa. It is those which show the greater
commitment which are likely to prosper.
Lead Director: Retail and Consumer Products
Tel: +27 11 772 3567
Why invest in
Kenya is an attractive destination because of its growing
infrastructure: roads and rail, airlines hub for major regional
and international routes. The Port of Mombasa is a major
gateway to all surrounding countries and a major tea and
coffee auction market. Nairobi is the headquarters for UNEP,
UNESCO, WFP, USAID, World Bank and IMF regional offices.
The country is an agricultural bread basket for the region.
Kenya’s Vision 2030
The government’s blueprint for the year 2008 to 2030 aims
to transform Kenya into a newly industrializing “middleincome country providing a high quality of life to all citizens
by the year 2030”. The plan also aspires to achieve the
country’s MDG by 2015. Anchored on economic, social and
political governance, it seeks to achieve and sustain annual
economic growth rate of 10 percent until 2030. Growth is
widely distributed, covering all economic and social sectors,
resulting in the reduction of poverty from 56% in 2002 to
46% in 2006. The plan identifies six key sectors under the
economic pillar: tourism; agriculture; manufacturing;
wholesale and retail trade; financial services and business
What is the key to successful investment in
Firstly, lessons learnt over the years show that potential
investors and traders must have a country engagement strategy
and invest in gaining insight about Kenya’s business landscape.
Success in investment and trading goes beyond text books,
qualifications, out-of-country corporate skill-sets, and an
injection of resources. A successful investment strategy will
require a matrix of country-insight, innovation, product/service
adoption and fit-for-use that is normally a result of relevant
research, trial-runs, investment in proof-of-concept projects,
local partnerships and alliances. Even more vitally important is
an understanding of the need to support a sustainable
beneficiation of the entire value-chain in the selected sector.
opportunities in Kenya
Sector and description
Agriculture and Agro processing Horticulture
• Livestock industry
• Food processing
• Agro- processing
• Aquaculture, marine & freshwater
Investments by – Steers, Debonair’s, KFC, Nando’s,
Starbucks, Java cafés, Spur Restaurants, Holiday Inn,
Engagement of foreign and local partnerships that
facilitate optimal productivity and value-chain growth and
sustainability Joint venture opportunities for short and
• Consumer products
• Building and infrastructure materials
• Pharmaceutical and cosmetic products
• Packaging products
• Agricultural inputs and equipment
• Wood based products
• Animal and leather-based products
Investment by – Tiger Brands, Nampak, Metro Cash &
Carry Enhancing productivity in all sectors through
technology, innovation, beneficiation and partnerships
Leveraging cost-effective domestic labour for delivery of
local value and regional trade Innovative adoption of
product and services for selected markets and countries,
recognizing differing levels of maturity, acceptance and
adoption with consumers
Financial services in the telecommunications and banking sectors
• Mobile money transfer
• Mobile Banking
• Inbound remittances
• Micro-finance Industry and cross-industry integration,
shared-services, data and communication
• Consultancy and professional services
Investments by – Stanbic Africa, Old Mutual, Alexander
Forbes, AON, Didata Telecommunication companies –
Safaricom, Bharti Airtel, Yu, Orange Professional services
by – KPMG, Deloitte, Ernst & Young,
Export trade opportunities to EAC, DRC and COMESA countries
Investors can leverage Kenya as a hub for the export of goods and services to the DRC, and to countries in the East African
Community (EAC) and the Common Market for Eastern & Southern Africa regions(COMESA).
As the largest economy in the region, Kenya’s economic development, superior infrastructure, export processing zones, status as a
central hub, gateway to Uganda’s new oil discovery in Lake Albert area and to the newly forming resource-rich South Sudan,
position the country as the springboard to the rest of Africa. There is much room for improvement in establishing and growing
intra-regional trade in all forms of product, services, enabling platforms and infrastructures. The domestic partnership route is now
an ideal strategy for any continental investor or trader.
EGN South Africa provides a local and international platform that facilitates interactions and sparring between senior executive
leadership, exchange of ideas, perspectives, opinions, challenges, common issues, etc., across all sectors of business, government
and professional services, through electronic and physical networks in functional groups such as CEO’s, CFOs, CIOs, CSROs,
CHROs and special focus groups such as Business Development in Africa, Water and Energy, Professional Services, etc.
John Ndinguri | Business Development Manager
Executives’ Global Network (South Africa)
Tel: +27 (0)11 791 4229
Mobile: +27 (0)82 511 0173
Recent political unrest in Egypt and Tunisia has caused investors to look very carefully at their African investments. Fear gripped the
Egyptian market causing investors to flee and drive the market down over 20%. However if an African investor had been holding a
diversified portfolio across various African stock markets, the numbers tell a different story. It would be myopic to paint all African
markets with the same brush. Although Egypt and Tunisia have had negative returns, the other African markets have produced
exceptionally good returns over the past year. Kenya and Nigeria performed particularly well. In fact a diversified equally weighted
African portfolio* would have produced a 9,57% return over the last year. The important thing to remember is you reduce the risk of
a portfolio by diversifying across countries and stocks. Even political risk can be diversified because political risk is often localised as
each country has different political dynamics. A sharp downturn in a particular market, possibly from irrational panic selling, may
also provide an opportunity to enter the market at lower prices.
*Equally weighted portfolio invested in Morocco, Tunisia, Egypt, Kenya, Nigeria and Mauritius. Source Bloomberg
If we look at the long term performance
of African markets we can see they
have outperformed developed,
emerging and the South African
markets. The MSCI Africa excluding
South Africa index, covering investible
African markets, produced the highest
return of 15.32% over the past nine
Figure 1: African Market Performance. Source Bloomberg
The graph(right) shows index
performance. However investment
managers are always trying to beat the
index through active management.
In the South African context the index
could be the All Share Index and in the
African context, the MSCI Africa
excluding South Africa Index.
Performance above the index is called
alpha. When markets become more
efficient the alpha opportunities
decrease i.e. shares trade closer to
their true value making it hard to
outperform the index.
A few reasons causing markets to
become more efficient are electronic
trading, improved financial reporting
and wider research.
Figure 2: Market Performance. Source Bloomberg
Rolling 3 year Alpha
South Africa quant model
Africa quant model
May - 05
Aug - 05
Nov - 05
Feb - 06
May - 06
Aug - 06
Nov - 06
Feb - 07
May - 07
Aug - 07
Nov - 07
Feb - 08
May - 08
Aug - 08
Nov - 08
Feb - 09
May - 09
Aug - 09
Nov - 09
Feb - 10
May - 10
Aug - 10
Nov - 10
The graph (left) illustrates how alpha
in the South African market and
African markets have diminished over
time. However alpha in the African
markets is still substantially higher.
The alpha difference is illustrated on
the chart below. Africa markets are less
efficient allowing professional asset
managers to exploit these
opportunities and generate higher
returns for their clients.
African quant model performance to 31 January 2011
The graph (left) shows how a
quantitative process can systematically
generate excess returns above the
MSCI Africa ex ZA Index
African quant model
Prescient Investment Management uses a quantitative, systematic and objective method to consistently generate excess returns
above an index. After many years of research Prescient launched their African Equity Fund building on the company’s previous
Jonathan Kruger | Portfolio Manager, Africa
Prescient Investment Management
A review of the
Islamic Finance Industry
Despite being at the height of the global financial crisis, when
most of the bastions of the conventional banking world faltered
and collapsed under the strain of weak and undercapitalised
balance sheets, growth in the global Islamic Banking sector
continued well in 2009 and in 2010 albeit at a slower rate.
A survey conducted by “The Banker” of financial institutions
practising Islamic finance indicates that “Shari’ah-compliant
assets rose by 8.85% from US$822b in 2009 to US$895b in
2010. It further indicates that Islamic finance has held a
compound annual growth rate (CAGR) of 23.46% from 2006
to 2010” compared with more modest growth rates of their
conventional counterparts in the same period.
So what makes Islamic Banks different to
The ability of Islamic banks to remain fairly incubated from the
contagion caused by the global financial crisis, is for the most
part attributed to the principles of Shari’ah (Islamic Law) upon
which Islamic finance is founded.
Islamic finance embodies the following key Shari’ah principles:
• The law of contract:
Under Shari’ah, contracts constitute a fundamental
component of financial transactions and contracts are
considered to be invalid and unenforceable unless the terms
of the contract are clear, unambiguous and all parties to the
contract agree on all terms eg. The asset, its price and the
delivery date etc.
• The prohibition of interest:
Parties to financial transactions and contracts are not
allowed to charge or receive interest or pay interest in terms
of these transactions.
• Prohibition of impermissable activities:
Islamic law prohibits participation in gambling, activities of a
speculative nature, alcohol related activity among others.
Investment in or the financing of prohibited activities is
• Asset backing principle:
Under Shari’ah, money is not a commodity in itself and the
generation of wealth should be from entrepreneurship
through trade and investment. Accordingly, every financial
transaction should be supported by an underlying tangible
asset or enterprise that requires financing.
Although the function of Islamic banks is similar to that of
conventional banks viz. to serve as financial intermediaries
between borrowers of funds and lenders of funds and to
provide investment expertise to clients, the implications of the
above mentioned prohibitions on Islamic banking means that
the Islamic banks have to fulfil their roles by providing
alternative forms of financing compared to those offered by
Key to the continued growth of the Shari’ah industry will be its
ability to develop financial products that provide Shari’ah
compliant substitute product solutions that match conventional
financial products and financial instruments. Conventional
banks generate returns from “maturity transformation” ie. the
difference between short term interest rates paid to depositors
and long term interest rates earned from loans and receivables.
In comparison, Islamic banks generate their returns through
profit sharing related products whereby depositors share in the
risk of the banks’ lending. Depositors earn a return instead of
interest and borrowers repay loans based on profits generated
from the projects on which the loan is lent.
A review of the
Islamic Finance Industry
Africa, with its Muslim population of approximately 500 million
people, represents a huge untapped market for global banks
and insurance companies to grow their markets. South Africa
with its sophisticated economy and sound regulatory and
legislative framework is seen as a portal to the rest of Africa
and a perfect platform for global banks to launch Shari’ah
banking to the rest of the continent. Currently, in South Africa
the number of fully Shari’ah compliant banks is limited.
Conventional banks that recognise the potential within the
market are operating through Shari’ah windows offering
specific tailored financial products.
The National Treasury recognises the need to place the
burgeoning Islamic banking industry on an equal footing with
the conventional banking industry in this country, and has
engaged with relevant stakeholders on this matter.
Consequently, certain amendments have been proposed to the
current income tax and VAT legislation. When effective these
amendments will provide equal tax treatment between certain
Shari’ah transactions and those of western banks benefiting the
Shari’ah investor (who has up to now not enjoyed the same
exemptions as his/her counterpart in the conventional banks).
So what are the future prospects for the Islamic Banking
Industry? The increasing levels of awareness and the growing
popularity of Shari’ah finance in Africa and globally together
with the acknowledgment by regulators and legislators of the
need to accommodate the requirements of Shari’ah finance
within the regulatory and legislative frameworks both bode well
for continued growth of this sector. The Ernst and Young South
African practice has established a specialist Islamic Finance
Centre of Excellence which works in conjunction with The Ernst
and Young Islamic Financial Services Group (IFSG group) in the
Middle East. The aim of the Centre of Excellence is to cater to
the specific needs of both Islamic and conventional financial
institutions requiring Islamic financial assurance and advisory
services in South Africa and the rest of the African Continent.
These solutions include strategy development, operational
framework and product development, policies & procedures,
structured finance advisory, market and feasibility studies.
The Centre of Excellence has been involved in providing
assurance and advisory services to conventional and Islamic
Banks in South Africa and in the African Continent.
Lead Director: Banking & Capital Markets
Tel: +27 11 772 3491
EYe on Africa profile: Q&A with Sugan Palanee,
Regional Senior Partner, Advisory Services
Q. Are Indian multinational companies with long term growth ambitions factoring
Africa into their strategies?
A. India multi-nationals are following China into the African continent. As both
economies grow at pace, they need to sustain through resources. Africa offers this.
In fact, the continent provides for 25% of China’s oil and 15% of India’s. The African
continent offers land mass, resource reserve and close to a billion consumers. It is
virtually untouched in comparison to Europe and other continents. The common
theme at DAVOS recently was the focus on emerging economies.
Q. How many of these businesses are looking at acquisitions as a means to strategic
growth vs survival? How does this compare to deals to Africa from other markets?
A. Africa has been the preserved jewel across continents with growth rates in energy
economies significantly higher than established economies, India, China, Brazil and
Russia would lead the investment into Africa followed by more strategies and
measured investments by the US and rest of Europe.
Q. To what extent are they looking at acquiring established African brands?
A. India multi-nationals will aggressively target brands that have potential
e.g. Godrej Group’s recent acquisition of the Kinky brand.
Further into the continent, Bharti’s acquisition of Zain in the telecoms space.
Q. Which sectors is deal activity to Africa from India being seen the most?
A. The sectors of interest appear to be oil and gas, mining and metals,
infrastructure and telecoms - specifically around data.
Regional Senior Partner - Advisory Services
Tel: 031 576 8077
Contacts in Africa
You have come to the right place
Congo and DRC
Gabon and Equatorial Guinea
Madagascar, Mauritius and Seychelles
Ajen Sita, CEO, Africa
Ernst & Young offers you a one-stop shop if growing your business in Africa is your
priority. The Africa Business Center connects your business to our team across the
continent to help you navigate the opportunities and challenges of doing business in
what has been called the next frontier of business growth. Now, let the Africa Business
Center broaden your business perspective of Africa and deepen your insights with our
new software, Africa Interactive. Featuring country information, some sector-specific
data and trends to help you better understand Africa as an investment destination, a
15-minute demonstration of our Africa Interactive software will make sure you never
look at Africa the same way again.
Contact Kim du Plessis on +27 11 502 0788 for further information.