Consider this – according to World Bank figures, sub-Saharan Africa has a population of around of around 1 billion people. Yet the African Development Bank estimates that only about a quarter of these people have bank accounts. At the same time there are more than 50 countries and a variety of currencies.
Overlay this with the desire of many in Africa to hold US dollars, euros, Swiss Francs or other hard currencies and the region has vast needs for forex services of different sorts.
Yet, despite the continent’s currency needs, only one African country and currency make it into the BIS Triennial Central Bank Survey of foreign exchange and OTC derivatives markets in 2016; South Africa and the Rand.
However there is perhaps one startling and significant statistic about the region that stands out like a technological beacon that signals the way forward for the development of e-trading of foreign exchange. The penetration of mobile phone use is approaching 100 per cent. It is as if the vast population is voting for its membership of the global wired community and is determined to overcome the failures of local fixed line telecoms. This, as we shall see, is a factor that market participants flag up as an indication of the way electronic FX may develop in future.
Where are we now?
For sure, in sub-Saharan Africa one size does not fit all. Absa Capital’s head of eFICC product Robert Cousins explains, “The advancement of the FX Market in Africa varies from country to country. Markets like South Africa and Nigeria are advanced with electronic trading playing a big role in FX execution. South Africa has a sophisticated institutional and corporate client set and Nigeria, a sophisticated retail speculation community. The other side of the spectrum is that countries like Mozambique and Tanzania are relatively unsophisticated in comparison.”
He goes on to list four main challenges for corporate and institutional clients that were considered in their successfull roll-out of BARX Africa to 12 countries across the region:
1. The network and IT infrastructure. “Even in Africa’s most developed markets like South Africa,” he says, “there are network and IT challenges in the more remote areas outside of the major urban centres.”
2. The sophistication of the FX markets outside of South Africa. “Most trades are done on a same day value date basis with little appetite or need for any product outside of this.”
3. Liquidity. “The majority of the markets trade their own onshore currencies in FX, which in certain markets trade at very different levels to the offshore market. This results in limited liquidity and limited participants and can make sourcing of onshore liquidity a challenge.”
4. Regulation or exchange controls. “These vary from zero exchange controls in Kenya to very strict controls in markets such as Tanzania.”
Together these factors determine what can and can’t be achieved with e-FX at the moment. Moreover, many multinational corporations locate their treasury management operations for Africa offshore in places like Dubai, where they use major players like Citi and other US or European banks to help them look after strategic risk and cash management concentrating on efficiency in overall regional and global treasury management.
However this should not cloud the developments in Africa itself. Buy side clients are moving very rapidly to e-trading and systems that would be recognisable anywhere in the world. “We have seen a significant growth in electronic execution across our franchise and client base in the past number of years,” says Tim Hutchinson, head of e-FX at Standard Bank in Johannesburg. “Currently we have 55% of all our flow being done by clients themselves through a self-service channel such as our single dealer platform or payments FX solution. It has taken a while for us to get here and in the beginning we felt like we were pushing these solutions to clients rather than them pulling from us. This has definitely changed and whilst we are still aggressively marketing our capability we now see clients pulling equally as hard. We have significant growth in the last three years, which we believe is attributable to us re-focusing our strategy in terms of what type of business we wish to see electronically as well as investments we have made in improving our offering.”
He points to a four-fold focus on liquidity sourcing, price formation, distribution and risk management. Standard Bank offers strengths as a regional bank that operates across 20 African markets with functionality that caters for various settlement nuances in the different territories as well exchange controls.
Also, perhaps counter intuitively, they have introduced a new voice offering. “We’ve recently introduced a new voice sales tool leveraging all the benefits of our single dealer platform to our sales people to capture deals on behalf of their clients. This is a significant step forward for us, as not only will our sales people be able to see a real-time view of all available liquidity across the continent but also our traders will be able to receive risk far more efficiently.”
Anglorand Forex offers a variety of trading and hedging techniques to its clients and Chris Scorer, the firm’s director of FX and trading, says, “With exchange controls being a major part of many African economies this has proved to be a barrier to entry to multi-quote competing technology platforms that are prevalent elsewhere in the world. Currently there are several in house bank trading platforms that have been growing in both South Africa and sub-saharan Africa but the availability of competing multi-bank trading platforms is still very much limited. Generally these platforms which are seen as the norm in Europe and the US are still only reserved for the large multi-nationals or the banks themselves in Africa.”
Kaon Capital is an Africa-focused financial services and capital markets company with specific expertise in Currency, Fixed Income and Equity derivatives structuring and trading and their quest has been to propagate the use of e-trading platforms across several asset classes including FX. Kaon’s CEO Brigid Taylor says that in the past Internet access was a challenge across Africa, however that has been largely improved in recent years. “As a large continent with 54 countries, it proves beneficial for financial hubs to utilise technology when communicating or transacting efficiently. Technology is therefore important, however one issue that often presents itself is the bespoke nature of many African countries – this requires a robust solution, not merely ‘plug and play’ solutions built for European and US markets that are largely standardised. Costs are also an issue, as ‘hard currency’ transactions are expensive when paying in local currency.”
She notes that South African banks and the Johannesburg Stock Exchange (JSE) had to develop solutions specific to the domestic nuances faced in South Africa when transacting with foreign counterparts. “African countries,” she adds, “are often engaged with SA banks and JSE in an effort to seek robust solutions to problems they may experience in their domestic economies, that are often not understood by European/US IT providers.”
Standard’s Tim Hutchinson sees bank technology offerings as falling into two distinct camps. “The one type are those who look to add electronic markets as an add-on to their business. These tend to have multiple of platforms and systems available and are operating far more as agent that principle (including in their local currency). The other type of participant (to which Standard Bank subscribes) is to integrate technology and e-FX specifically into the business and transform the business around the changing world. In these organisations you find many of the same roles and methodologies that would be found in any large global bank. We do see ourselves more in the minority though and by and large our experience is that many banks are leaning more to the first model which I believe will have negative implications for certain players and markets.”
South Africa as role model
What is clear is that South Africa, highly sophisticated and well-wired to the rest of the world, but not without infrastructure problems of it own, is sub-Saharan Africa’s e-trading proving ground.
Tim Hutchinson continues, “It is without question that SA has led the African market in terms of e-FX, but I think there are many lessons learnt through this that has taught us both how to get it right as well as how not to. South Africa definitely does not have all the answers and in some respects has succumbed to many of the pitfalls of electronic trading. In Africa you copy and paste a solution at your peril and without a doubt there is no one size fits all in any of our markets. Where we see the market being liquid and less heavily regulated in terms of currency controls there is the ability to deploy things far more easily compared to others. From an SA perspective and having being involved in electronic trading for many years now, we have seen the need for the local players to be very vocal and influential in the development of their markets. It is important for participants to have understood fully the kind of players who want to get involved in the local market, this includes makers, takers as well as vendors. From our standpoint we work very closely in each market with our traders in building out appropriate solutions, such as price formation algo in east Africa, or even just rolling out an order management solution to cater for central bank fixing orders in countries such as Mozambique.”
Absa’s Robert Cousins agrees. “South Africa does provide a good template in that it used to be an unsophisticated market with strict regulatory requirements but has become a very good story for e-FX take up. In fact the South African model has served as a launch pad into the rest of Africa given the strong regional network for banks and clients. All markets require some form of tailoring to fit the nuances in place for that market but as a whole the South Africa does provide a good template.”
In another way too South Africa has been a template. It’s historically commodity based economy has been a boon in times past but has suffered when global commodity prices turned down. The same phenomena affect many other sub-Saharan African countries. Kaon’s Brigid Taylor describes the heavy reliance on export commodities as currently the biggest risk to Africa. “The cyclical nature of commodities can hurt economies when investments made are no longer viable – as was the case with the recent oil price deterioration and the effect on economies like Ghana, Nigeria, Angola. Africa remains a continent with many various resources, and if these are managed more efficiently, can most definitely add significant value to the various economies across the continent.”
Nonetheless, therein lies the opportunity for e-FX as ABSA’s Cousins points out. “As a whole, increasing trade flows (though not only commodities) between Africa and the rest of the world will drive the requirement to manage the currency flows. The role of e-FX is important in how risk management solutions get delivered to clients. In particular, the access to liquidity across the continent as well as the access to FX product would be key drivers. The collaboration of developed markets and African markets would primarily be facilitated by technology platforms.”
Standard’s Hutchinson adds that this is not without its challenges. “Those people who wish to do business in [African] markets need to appreciate that e-FX solutions may be different to what was seen or are used in other markets.
This is quite a hurdle to overcome for many players and I can think to many examples of conversations with treasurers and counterparties who needed to revisit certain policies and procedures around how they operate in order to do business electronically in Africa. An example of this is how many treasurers have internal policies that mention they need to use a multibank platform to obtain quotes. Given the sensitive nature of liquidity in our markets, letting a number of makers know client interest could be negative for best execution.
This means that counterparties looking to get the benefits of electronic execution (such as STP) would need to consider using a bank’s single dealer platform and only call a single bank for pricing – which obviously challenges an internal treasury policy in larger firms.”
Yield and future growth
A key attraction in investing and trading in Africa and its currencies is yield. Traditionally investors have accessed African markets through London or other overseas marketplaces. New technology is now giving them direct access to markets and e-trading and settlement enables them to be able to track their trades and audit their processes.
But which African currencies will offer the best growth opportunities in the foreseeable future? We asked out interviewees in turn. “East Africa offers the best medium term opportunities, as the region is dedicated to development and growth,” says Kaon’s Brigid Taylor. “The Kenyan Shilling, Ugandan Shilling, Tanzanian Shilling remain the most accessible, however. Rwanda and Ethiopia are also poised for good growth longer term. In sub-Saharan Africa the Botswana Pula offers value, and in West Africa the Ghanaian Cedi is likely to strengthen as a result of the oil price improving.”
ABSA’s Robert Cousins agrees that economically East African currencies and the Nigerian Naira could draw the greatest interest. However he adds that the Rand will remain the most tradable of African currencies.
Standard’s Hutchinson says, “If we look at it from a pure e-FX standpoint then any market where there are free and open markets where access to liquidity is freely available, will naturally see growth in currency being traded electronically.Markets such as Kenya, Uganda, Botswana and Mauritius are already seeing an uptick in e-FX and will continue to do so. Whereas any market which has far more restrictive currency control and liquidity is not available will naturally lag in the evolution scale (e.g. Angola, Mozambique and Nigeria).”
And so, as ever, Africa is aided and abetted by its own diversity. It is impossible to freely trade all African currencies and is likely to remain so for some time. Yet international businesses whether indigenous or from outside the continent are using e-platforms and capabilities widely and successfully.
Technology is bringing new trading and transacting dimensions to the continent. Leapfrogging old and inadequate telecoms infrastructures, mobile is clearly the way to reach out across the vast and varied African land mass and link its one billion people.
How long before the e-FX possibilities are fully realised, because, for sure, the possibilities are breath-taking in scope.