The Evolution of Cash Management in Africa
Africa is experiencing an era of change, with strong long-term growth prospects due to its abundant natural resources. Couple this with improved political and economic stability and it’s clear that the continent is poised for a period of significant prosperity.
Challenges in Western economies have seen forward-thinking companies explore further afield for new sources of revenue. While only 10 years ago establishing a corporate treasury hub in Africa would have been a relatively unusual move, a growing number of businesses recognise the opportunities that the region has to offer.
There are several reasons why corporates are increasing their focus on Africa, whose fast-improving gross domestic product (GDP) is hard to ignore. The continent is experiencing significant GDP growth, and in the period from 2000 to 2008 Africa was the world’s third fastest-growing region. It also has an expanding consumer class, whose spending is expected to reach more than US$1 trillion by 2020. Africa is certainly not without its challenges, but while in many instances it is still a developing economy it has increasing potential to turn into a very prosperous location for international commerce.
From a treasury perspective many international companies entering Africa choose to start by setting up regional shared service centres (SSCs) or treasury hubs in established locations, often where there is pre-existing infrastructure. South Africa is a notable example, although other locations across the continent are becoming increasingly popular. Treasurers need to understand the different cash management and trade environments in the countries where they want to do business; ensuring they maintain visibility over cash, drive effective liquidity management and have oversight of their subsidiaries wherever they are located.
Given these motivations, treasurers typically look to centralise at least a degree of their operations. However, it is important they note the differing business environments across the continent and the variety of banking services and regulatory regimes in each of Africa’s countries.
The Right Banking Partner
It is vital that businesses have a banking partner on the ground with the relevant technical knowledge, coupled with an understanding of the nuances of the domestic market. Without an awareness of the local markets, including the different regulatory regimes and their implications, sophisticated treasury tools can become redundant. A treasury banking partner also needs to have a view of how the company’s local operations interlink with the overall structure of the global business. An ability to see into the country, as well as seeing the corporation’s overarching pooled cash position, is essential.
It is also important to remember that working with a local bank goes beyond the strict cash management and trade environment, by extending to opportunities to collaborate in tax advisory and foreign exchange (FX). Local banks can also replicate local structures for international companies’ subsidiaries in that country, helping them to present themselves as local businesses by adopting a local culture and thereby improving revenue streams in the longer term.
Cash Management Challenges
Although Africa can provide great opportunities, a treasurer looking to set up operations needs to be cognisant of the risks and challenges associated with the region.
In most cases multinationals want a single cash management platform, which can offer them pooling and netting across all the countries in which they operate. However, in reality there is no standard cash management environment available across Africa due to the different currencies, currency controls and regulatory environments in each jurisdiction.
One of the main reasons for these different environments is the existence of unique FX control rules in each country, which can mean it is not always possible to manage cash across Africa from a single platform. Despite substantial liberalisation of FX rules across the continent over the last few years, changes have not been consistent. Mozambique, for example, still applies heavy FX controls whereas South Africa is more progressive.
In addition, a number of African governments intervene in the foreign currency markets to manage the value of their currencies. For instance, last year and in 2012, the Kenyan, Tanzanian and Ugandan governments all intervened strongly to support the value of their respective currencies. This action included the imposition of very strict, but short-term, exchange controls to help to stabilise their currencies. This type of regulatory change can pose challenges to cross-border cash management. It is clear that these countries want to attract foreign investment, so there is expectation for a gradual relaxing of the stricter regimes as economies improve.
Despite these challenges, it is possible for multinationals to view balances across countries and to initiate in-country transactions from the same platform. In some markets it is also possible to manage notional cash pools or to concentrate cash, as some companies want to move cash between African countries, while others want to repatriate cash to their treasury centres. In these circumstances, the treasury has to manage these payments within exchange control rules.
At a regional treasury centre (RTC) level, whether in Nairobi, Johannesburg or elsewhere, corporates want visibility across the whole bank account architecture in Africa. Having the ability to see into the country as well as their overarching pooled cash position is essential. The issue in many African countries is the high incidence of trade settled with physical cash, the historical mistrust of banks by some segments of the community and the resulting ability of treasurers to predict flows.
Aiding the drive for greater visibility and transparency in the African market is the migration from physical to electronic transactions. This shift will not only allow more efficient cash management but it will also be better for the overall African economy, because cash transactions that can be seen can also be taxed.
Furthermore this transition will help to significantly reduce payment costs, with the elimination of physical cash functions such as counting, transporting and security.
New Products and Services
Having the right solutions in place is key to keeping up with local and global clients’ needs. Mobile payments have been in place in parts of Africa for some time. An example is M-Pesa in Kenya, which is primarily a consumer-to-consumer activity that allows individuals to make payments via a mobile phone and a virtual wallet outside of the traditional banking environment. Mobile solutions, both in terms of managing employees and transacting with clients, will continue to grow in importance. This will be a major development for a continent that is currently a cash-dominated society and it is already spreading to small businesses.
Turning to other payment instruments, corporate credit cards are increasingly being offered although they are not available in every country. The banking infrastructure plays an important role for credit cards; for example in South Africa ATMs are widely available but this is not the case in cities elsewhere in Africa. Despite moves to increase the use of electronic payment (e-payments) instruments, cash handling remains vital. This is particularly so for international retail companies, which are cash-heavy businesses and need the tools to collect large volumes of notes and coin across their distribution networks.
Another must for corporates in Africa is a robust trade finance and supply chain offering. One area that is attracting attention is distributor finance, which tends to be a more difficult part of the supply chain for companies operating across the continent. Distributor finance provides finance to creditworthy distributors in order to finance their purchase of finished goods from manufacturers. The benefits include access to working capital, increased liquidity, improved cash flow and better management of trading relationships.
Africa is a key market for corporates, with the potential to become a highly prosperous location for international business. Although there are challenges and risks associated with setting up operations in the region, through careful planning and strategic relationships these risks can be mitigated and new sources of revenue realised.