Asset servicers told to keep pace with boom in African market

Providers of asset servicing are going to have to evolve quickly as the pace of change in Africa continues to gather momentum.

A number of African countries are making rapid strides in developing their market infrastructures, while many are witnessing an enormous increase in pension fund and insurance assets. Pension fund Assets under Management (AuM), for example, totals around $379 billion in ten African economies. Furthermore, foreign investment into frontier markets is also on the rise.

“Pension fund assets are growing on average around 8% to 10% in Africa. In some markets, we are seeing significant growth. Nigeria, for example, has seen pension assets increase by 25% to 30%, while Kenyan pension assets have grown by 20% consistently. We also believe insurance assets will grow, with the insurance sector expected to increase by 38%,” said Charl Bruyns, head, investor services for South Africa at Standard Bank, speaking at NEMA Africa in London.

As such, service providers believe the African market will be potentially lucrative despite short-term fears about China slowing down and the recent commodities rout. Bruyns highlighted that a number of local pension funds want more information about their performance and flows, as well as other end to end capabilities. Bruyns said this was demand was only likely grow as these capital markets develop. Asset servicers must stay on top of these market developments if they are to remain competitive in these rapidly changing economies.

Foreign investment into Africa is increasing. The Emerging Markets Private Equity Association (EMPEA) said private equity firms raised $4.2 billion to invest in Africa, which was double the average for the previous five years. Passive fund managers will invest into Africa once the MSCI upgrades markets from its Frontier Market Index to its Emerging Market Index.

At present, only South Africa is on the MSCI Developed Market Index, while Kenya and Nigeria are on the MSCI Emerging Market Index. Other markets which will likely be upgraded in the near-future include Angola, Botswana, Uganda, Zambia and Ghana.

Many African markets are handicapped, however, by a lack of liquidity. “The size of some of these markets is still small, and this can make it quite expensive to operate it. However, as they expand and the asset base grows, the costs of doing business will fall,” said Bruyns.

Markets have certainly grown. South Africa’s market capitalization has increased to $1.1 trillion from $516 billion, while Nigeria now boasts a market capitalization of $117 billion, up from just $22 billion in 2005. Even small markets have recorded impressive growth. Botswana presently has a market capitalization of $47 billion, an increase from $15 billion.

Market infrastructures are evolving at a rapid pace too. Many local markets are developing central securities depositories (CSDs). Kenya is growing its nascent derivatives industry with the launch of a derivatives exchange through the Nairobi Securities Exchange. This would make it the second bourse in Africa after South Africa to offer derivatives instruments. Other changes include the introduction of securities lending in Nigeria, and the emergence of exchange-traded-funds in Ghana and Zambia.