Opinion: It Is Time Investors Took a More Accurate Measure of African Risk

Samke Mhlongo, programme director at this year’s Bullish Africa Annual Summit, captured something important in her closing reflections when she said, “We are not asking the world to be optimistic about Africa. We are asking it to be accurate.” I recently had the opportunity to join Wendy Emali, Senior Vice President at BNY, for a fireside discussion on African market expansion at the summit, held in New York on the sidelines of the United Nations General Assembly, and Mhlongo’s sentiment resonated with much of what emerged from the summit and from conversations with investors and other stakeholders throughout the week.

What stood out was a conviction taking hold in Africa’s ability to finance more of its own growth, supported by changes taking place within its economies that are making productive investment more achievable. There is also a clearer appreciation of the role African capital can play in that process, which makes the question of how investment opportunities are assessed and financed exceptionally relevant.

Africa has for too long been treated as a single category of investment risk, despite the considerable differences in the fundamentals of its economies.

The continent’s natural endowments and expanding markets offer substantial opportunities, but the conditions under which businesses operate can differ significantly across countries, even within the same sectors. Investors need to understand those differences well enough to judge what is genuinely bankable and structure capital around the distinct risks involved.

Investors can generally assess and price risks they understand, and across Africa there has been meaningful progress in strengthening the institutions and financial systems that make those assessments possible. Greater access to reliable information is also helping investors form a clearer picture of individual markets, although progress has naturally been uneven. Policy and regulatory predictability still matter enormously, especially for investments where capital must be committed over many years, because unexpected changes can alter the assumptions on which financing decisions were made. Continued improvements in these areas would give investors greater scope to commit long-term capital with confidence, building on the considerable advances already made.

The progress being made also creates greater scope for Africa to draw on its own financial resources, like the substantial pools of long-term capital already held by pension funds, insurers and other institutional investors across the continent.

Connecting more of those savings to productive investment will require deeper capital markets and bankable projects, supported by investment structures that allow institutions to participate at an appropriate level of risk. After all, these are ultimately people’s savings, and the responsibility to protect them must inform how that capital is deployed. With more projects able to meet those requirements, a greater share of African infrastructure and business development could be financed through African institutional savings, while international investors would have a clearer basis on which to assess individual opportunities.

And when we think about where Africa’s future growth will come from, we should pay more attention to smaller businesses. SMEs are the lifeblood of many African economies, and their ability to grow into larger employers will matter greatly for the continent’s development. They are often considered difficult to finance, yet many have sound commercial prospects and simply lack the working capital or support needed to take on larger contracts. Helping them become more capable and competitive can also change the assessment of risk, making financing more viable as their businesses grow.

Our experience in Kenya has shown that access to finance is only part of the challenge, though, as businesses must also be able to meet the requirements of larger buyers if they are to turn commercial opportunities into sustained growth.

Through Absa Bank Kenya’s work with the IFC on Sourcing2Equal, procurement readiness has emerged as an important part of helping smaller businesses secure a place in corporate supply chains. The programme has brought businesses closer to actual procurement opportunities while helping them understand what larger organisations expect of their suppliers. Some responsibility also rests with those organisations, whose procurement practices can exclude capable smaller firms long before financing becomes the deciding issue.

For banks, this reinforces the importance of understanding how businesses operate within their industries. The better we understand the commercial relationships on which our clients depend, the better placed we are to structure financing around genuine opportunities and help them participate in markets beyond their own. That understanding becomes especially valuable as African businesses seek to move further along regional value chains, where the ability to fulfil a contract can depend as much on the relationships surrounding an enterprise as on the strength of the enterprise itself. That’s why Absa continues to invest towards befitting financial solutions for SMEs, answering to their unique working capital needs and providing other structured financial and nonfinancial support that drive their growth.

As businesses develop the capacity to serve larger markets, their commercial prospects can change considerably, and the risks associated with financing them need to be judged against those prospects.

Some investments will still be difficult to justify, of course, but others may be more viable than a broad assessment of the market would suggest, especially where the right financing can help a business take advantage of demand that already exists.

There is considerable scope for African capital to support that growth, provided we continue developing businesses and projects that can attract investment on sound terms. The more consequential task now is to turn the advantages Africa already possesses into commercial activity that can sustain itself and expand across borders. As that happens, the case for investing in Africa can increasingly be made through the performance of its businesses and the opportunities they are able to pursue, giving investors a firmer basis for judging the risks they are being asked to take.

Yusuf Omari is the Managing Director and CEO, Absa Bank Kenya

Youssou N’Dour (Senegal)

Most Famous Song: “7 Seconds” (with Neneh Cherry)

Short Bio: Youssou N’Dour (born 1959) is a Senegalese singer, songwriter, and composer. He is a prominent figure in African music, known for his soulful voice and his role in developing “mbalax,” a popular Senegalese music genre that combines traditional griot percussion and praise singing with Afro-Cuban arrangements. He has also served as Senegal’s Minister of Tourism.

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