Building Africa’s capital markets

As many of Africa’s markets progressed from bare infrastructure to fulfilling most of the G30 recommendations, the custody industry has played a key role in advancing the region
By Jake Safane(2147484770)
Augustine Kwakye-Agyekum

As many of Africa’s markets progressed from bare infrastructure to fulfilling most of the G30 recommendations, the custody industry has played a key role in advancing the region

Until Augustine Kwakye-Agyekum started working at Standard Bank in 1994, he had no knowledge of securities services, with only a general background in banking. Recalling his interview for the securities services job, he jokes that he told the human resources manager he was not interested because he had no military or firearms experience. Once he understood the position, though, he was on his way to improving the capital markets across Africa.

“At the time I got involved, there were few stock exchanges on the continent, and apart from South Africa, the product was new in sub-Sahara Africa. Also at the time, there were few instruments listed and traded on the stock exchange, mostly equities, and they all had very long settlement cycles.”

Earlier this year, Kwakye-Agyekum joined Societe Generale Securities Services (SGSS) as project manager, Africa, based in Johannesburg, using his experience to expand SGSS’ presence on the continent. This desire to expand in Africa exemplifies how much the region developed, which he says fell in line with his expectations.

“After a number of years in the industry, I saw the direction that the industry was taking, and to be honest, I expected it to move in the direction that it has.” Since the ‘90s, African financial markets have become more automated and active, with shorter settlement cycles and deeper listings. “We have seen more markets work hard to reach all or most of the G30 recommendations.”

Along with the improvements in the capital markets themselves, there have been changes in the investor landscape.

“In the early 1990s, the stock exchanges were driven by foreign investors with very little or no interest among domestic investors,” says Kwakye-Agyekum. “But from pension reforms in some markets, we have seen more and more domestic institutional investors investing on their local stock exchanges or even doing some cross-border investment. There’s also a shift from one or two custodian banks in most of the markets to quite a number of custodians. For example, in Ghana, the number of custodians has grown from two to 15, and this has brought about competition and also improved service level, and it has resulted in a reduction of fees for clients. These changes have come about to make the markets more attractive to international investors and has been advocated by global custodians.”

While Africa has had an influx of custodians, the rest of the world has mainly seen consolidation in custody, and Kwakye-Agyekum thinks many African markets like Ghana have reached the point where they should consolidate. And while the market improvements have been clear, he wants to see Africa further modernize.

“Going forward, I want to see a reduction of settlement cycles to T+3, as you still have some markets operating T+5, especially in equities (such as South Africa, which is in the process of moving to T+3).

“I want to see the automation of stock exchanges operating in the markets where they still do trading physically, like Malawi and Swaziland. But I must say, the speed with which the African markets have introduced automation has been very encouraging. A few years ago you were not sure they would make it. Even Zimbabwe would have had economic challenges but now has been able to introduce a central depository and automation in the market.

“I also want to see true DvP (delivery versus payment) in these markets. If you ask, almost all the markets would tell you that they operate DvP, but if you drill down, it’s not true DvP because there’s a time lag between when assets and cash move. So I expect to see them working to have a more instantaneous movement of cash and securities.”

Illiquidity has also been a significant challenge in most sub-Saharan markets, other than some of the larger ones like South Africa, Namibia, Nigeria and Kenya.

In order to remedy this, “there needs to be regulation to allow turnaround of back-to-back trading as well as securities lending. These two products are not common in most of the sub-Saharan African markets. To improve liquidity, we also have to see greater integration of stock exchanges. I commend East Africa stock exchanges. We are actually coming closer to integration. The rest are talking about it, but East Africa seems very serious.”

Beyond improving liquidity, Kwakye-Agyekum sees custodians playing an important role in helping institutional investors.

“Custodians have brought about additional functions, which include outsourcing of operational risk by investors,” he says. “If a client decides to do their own custody in-house and they miss a corporate actions event, for example, it could be very expensive for them. But if they give their business to a custodian, then they will save themselves from that embarrassment and that cost.”

As a whole, the work of Kwakye-Agyekum and others in the industry have helped advance Africa’s standing on the world stage.

“Custodians have helped shape African markets. Having custodian banks…has promoted international best practice, and has attracted a lot of international investors into African markets. Safety of client assets is very important for global players.”