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THE ROLE OF AFRICAN FINANCIAL INSTITUTIONS AND CAPITAL MARKETS IN WEALTH AND JOB CREATION Presentation by Mrs. Stella Kilonzo, MBS Third Africa Governance, Leadership and Management Convention Mombasa August 8, 2012 1


• Introduction – Meaning of wealth creation and state of wealth and employment in Africa • Addressing unemployment in Africa- Key areas of focus • Forms of national wealth- Africa’s wealth score card • Types of Projects that generate large scale employment • Capital Markets and role in wealth creation and job creation • Critical success factors in wealth and employment creation • Way forward

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MEANING OF WEALTH Wealth: Assets of an economic unit that generate current income or have the potential to generate future income. •Africa is considered a rich continent owing to vast resources such as arable land, mineral and energy deposits; •However these resources are finite and are likely to be depleted; •Even recent discovery of fresh resources (oil, bauxite, iron-ore, natural gas) across the continent is not sufficient for sustainable wealth accumulation 3


STATE OF WEALTH AND EMPLOYMENT IN AFRICA • About 90% of global wealth is distributed in North America, Europe, and "rich Asia Pacific" countries (excluding India), • 1% of the global population is estimated to hold 40% of world wealth • Africa constitutes 1.5% of World Net Worth (WNW) and contributes to 2% of world GDP • Some positives: Africa’s wealth grew

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STATE OF EMPLOYMENT IN AFRICA

• Global unemployment rate stood at 6.2% in 2010,6.3 %in 2009 and 5.6% in 2007 • Africa accounts for 15% of world’s population (after Asia) with more than 75% in vulnerable employment • Rising growth of educated young people, with 60% of unemployed being youth 5


STATE OF WEALTH AND EMPLOYMENT IN AFRICA

• Informal sector employs 90% of African population • Africa not creating enough jobs to absorb the 10-12 million youth entering its labour market each year• The direct consequence is poverty with 72% of the youth population in Africa living on less than USD 2 a day • It is important to convert the high youth population into ‘Demographic dividends’ 6


ADDRESSING UNEMPLOYMENT IN AFRICA Focus should be on: (a)Creating employment for Africa’s growing population through innovation (b)A vigorous private sector is the most important source of jobs for the youth (c)Private sector should work with the public sector to create wealth to promote job creation in the informal sector and in rural areas

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WEALT H

Political capital

Natural Capital

AFRICA’S WEALTH GENERALSCORECARD STATUS COMMENTS -High level of Democracy across the continent -Cases of unrest in Northern Africa -Few cases of disputed elections -Instances of disputed elections and social unrest -Low sovereign rating

Growth declined to 3.4% in 2011 due to popular uprisings and political unrest.

Abundant supply of natural resources -not fully exploited - Does not fully benefit from its resources as there is no value addition (Primary exports)

Resources are not permanent Costly to exploit Need to grow expertise in value addition

Needs visionary and committed leadership at highest level

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WEALTH

Financial Capital

AFRICA’S WEALTH SCORECARD GENERAL STATUS COMMENTS -Low savings -Low risk appetite -Capital flight (USD 700 billion between 1970 and 2008)

Mobilization of savings for investments critical & diversified financial products portfolio incl bringing in the populace that is not using mainstream financial products eg Muslims, informal sector, 9 SMEs (it is


WEALTH

Built capital

AFRICA’S WEALTH SCORECARD GENERAL STATUS COMMENTS Underdeveloped infrastructure

Regional infrastructure projects critical to enable trade integration

Intellectu Good innovators (Mal capital PESA, Nokia awards ICT etc) -Intellectual Property Rights

Needs strengthening through legislation

Human capital

Needs transformation, High youth unemployment 10

Aggregate life expectancy, education and standard of living in Sub Saharan Africa very


ROLE OF CAPITAL MARKETS IN WEALTH & JOB CREATION • Provides equity and debt capital to entrepreneurs by mobilizing long-term savings • Encourages broader ownership of productive assets by small savers to benefit from economic growth and wealth distribution • Diffuses stresses on the banking system by matching long-term investments with longterm capital • Enhances corporate governance 11


ROLE OF CAPITAL MARKETS IN WEALTH & JOB CREATION • Provides exit mechanism for entrepreneurs to unlock their investments • Improves efficiency of capital allocation through competitive price discovery and valuation of entities • Gateway for global investors and foreign direct investments (FDI).

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ROLE OF CAPITAL MARKETS IN WEALTH & JOB CREATION •

Capital markets provide long-term financing through public and private equity and debt issuance by Governments and Corporations in all sectors and sizes. Investors who provide capital to these issuers include pension funds, insurance companies, investment companies and institutional investors (venture capitalists, hedge funds, global foreign funds), retail investors and high net-worth individuals Success has been noted - proceeds from capital markets transactions have been used to finance huge projects that create employment in various sectors - Mining (Oil and Gas, Ores) - Manufacturing - Infrastructure development (Transport, 13 energy, water,


ROLE OF CAPITAL MARKETS IN WEALTH CREATION Capital markets institutions include:  Issuers (Debt and/or Equity)  Investors (Retail and institutional investors)  Securities Exchanges (Stock Exchanges, Commodity/Futures (Derivatives) Exchanges, Over the Counter (OTC) Trading Platforms  Market intermediaries: Stockbrokers, Investment Banks, Fund Managers, Collective Investment Schemes, Credit Rating Agencies, Investment Advisors, Custodians, Venture Capital/Private Equity, Transaction Advisors etc  Central Securities Depositories

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Product Structure in Kenya

Equity market •Ordinary Shares

Debt market • Treasury Bonds •Corporate Bonds •Infrastructure Bonds •Commercial Paper

Derivatives market • Futures and Options •Commodities •Forward Contracts •Currency Dealing

•Municipal Bonds

•Asset Backed Securities •Mortgage Backed Securities Primary and Secondary Market

Secondary Market


EXAMPLES OF PROJECTS IN KENYA FINANCED USING THE CAPITAL MARKETS • Bonds issued by Development Finance Institutions - East African Development Bank Bond - PTA Bank Bond - Shelter Afrique Bond • Corporate and Infrastructure BondsKenya Electricity Generation Company (KENGEN), Safaricom, Celtel (now Zain), Housing Finance • Rights Issue - Kenya Airways US$250 Million

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SOURCES OF FUNDS FOR FINANCING KEY PROJECTS Pension Funds • Africa’s domestic pension Funds were estimated at USD 300 billion (2007) • Pension funds in South Africa, Ghana and Nigeria had already invested USD 625 million to fund pan-African projects during that period • In 2011, outside the African continent Pension Funds are even investing in Agriculture (estimated at USD 320 million) directly as well as through commodity exchanges (60 million Agricultural commodity contracts) • Learning from the Asian Tigers, pension funds can be used to fund infrastructure. The Government of Kenya instituted a policy in 2009 whereby the NSSF could only invest in Government Bonds • Currently pension funds in Kenya can invest up to 10% in ‘other assets’. However, given the potential investment returns and opportunities available, it is worthwhile to consider pension reform initiatives to allow pension funds to invest greater than 10% of their assets in “other assets” which includes private equity, and to consider actually letting fund managers in Kenya carry out the portfolio management on behalf of the trustees. 17


SOURCES OF FUNDS FOR FINANCING KEY PROJECTS Sovereign Wealth Funds • African governments should set aside a percentage of their annual revenue ( especially windfall from exports and dividends by State Corporations or institutions where the Government has an equity stake) to establish a sovereign wealth fund • This fund may be applied towards achieving specific strategic national goals in health, education, funding private sector industries etc • Nigeria has a sovereign wealth fund • The Panama Wealth Fund approved by Parliament in May 2012 has a key objective of creating jobs 18


OTHER POTENTIAL SOURCES OF FUNDS FOR FINANCING KEY PROJECTS IN AFRICA • Collective Investment Schemes (Unit Trusts and Mutual Funds) • Real estate Investment Trusts • Cooperative Society Savings • Asset backed securities sourced from Transport Industry revenues or bank receivables such as credit cards • Insurance Schemes • Diaspora remittances (USD 40billion remitted to Africa as at 2010) – Kenya issued a diaspora bond in 2011

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Way forward • Financial Institutions and capital markets across the Regional Economic Communities (RECs) have the capacity to provide the capital needed for wealth creation- Efficient Capital markets are the cheapest source; • Africa must tap funds away from traditional sources (look for funds from Pension Funds, create sovereign wealth fund, attract more Diaspora remittances for investment rather than consumption, explore other pooled funds); • However, the public and private sector should work together in ensuring proper job skills/education for the African population and a conducive environment that nurtures 20 innovation;


Way forward • Robust policy and regulatory framework that promotes publicprivate partnerships across the RECs should be supported by Governments; • Once the RECs have integrated their policies, regulatory and institutional framework we can pursue a Pan African model; • Commodity/Futures Exchange should be progressed to provide price stability (currency, transport, 21


Way forward • Need to scale up informal sector or small businesses in Africa so that they can create more employment • Through appropriate policies that nurture the small businesses or SMEs and the informal sector. • From a financial perspective the recent creation of an SME Segment at the Nairobi Securities Exchange will provide a new avenue for SME capital raising. 22


Way forward • Creation of Development banks to advance business development loans, export financing, (successful in China), institutions to formalize entrepreneurship training as well as support once in business of strategy, financial etc • Encouraging private equity companies as they bring in both funds as well as advisory input to grow business. Kenya is the East African hub of private equity investors. • Financial inclusion of various constituents through provision of services & products eg 23


Way forward For sustainable wealth creation: •Solid policies to grow sovereign wealth and to ensure expenditure is not more than wealth created or revenue generated – Eg Greece vs Norway •Africa has to focus on "capital formation" – to mobilize savings, set up strong financial institutions, employ prudent fiscal measures and develop its primary and secondary capital markets 24


Way forward • In short African Governments must individually and jointly review their policies on accumulating and increasing capital owned or under their control in order to create sustainable wealth that will address among other challenges, unemployment. • The private sector should play an active stakeholder role in the related policy development prior to the

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