Capitalising on the New Digital Africa

by Peter Crawley, Managing Director, Treasury & Trade Solutions Head, Sub-Saharan Africa, Citi, and Geoffrey Gursel, Director, Sub-Saharan Africa Sales Head, Treasury and Trade Solutions, Citi

With strong annual growth rates of 5% or more, a wealth of natural resources, increasing urbanisation, expanding infrastructure and a proactive reform agenda in many countries, it is no surprise to treasurers that sub-Saharan Africa is becoming one of the most exciting regions for investment. To take full advantage of the growing opportunities offered throughout sub-Saharan Africa, corporations need a robust approach to cash and liquidity management. This can be challenging given the different levels of maturity in physical and financial infrastructure, and diversity in regulations, tax, payment practices and culture. Increasingly, however, these barriers are becoming more easily surmountable, particularly when working with a primary banking partner with the reach, depth of solutions and commitment to the digital agenda that is transforming the region.

Shifting trade patterns

While trade routes to and from Africa have traditionally followed colonial lines, this is changing rapidly, with increasing two-way trade between Africa (including West, East, Central and South sub-Saharan Africa) and Asia. For example, China has now become the biggest trading partner of countries such as Mali and Cameroon, followed by India and ASEAN countries such as Malaysia and Indonesia. In Central African Republic, while Belgium remains the biggest export partner, China was a close second in 2012 with strong growth since then. In Angola, nearly half of exports and a quarter of imports were with China, and in Tanzania, China and India were the biggest trading partners for both imports and exports.

It is not only the trading partners that are changing, but also the ways in which international business is conducted. Just as we have seen in other regions, importers and exporters in Africa are reducing their reliance on letters of credit in favour of open account. This paves the way for more automated, standardised processes to be established. Similarly, financing techniques, the trend towards export credit agency financing and supply chain finance that is prevalent in other regions also applies to Africa. As primary commodities form the bedrock of Africa’s exports, with refined products the most common imports, a variety of financing structures can be established that leverage these transactions.

Driving the digital agenda

One of the agents of change in Africa is the expanding breadth and sophistication of the digital agenda, proactively supported by banks such as Citi. Digitisation is taking many forms, from the development of automated electronic payment infrastructure in larger markets, reform of tax systems and collection methods, to new trading models and secure means of communicating between banks and corporations. However, countries in Africa are following different development strategies so corporations doing business in more than one country need to adapt their cash and treasury management strategy accordingly.

In Nigeria, the government is pursuing its Vision 2020 strategy, a multi-year digitisation programme in a traditionally cash- and paper-reliant economy. Progress in many areas is already substantial, with initiatives such as electronic admissibility of documents in courts already well under way. Payment clearing is being rationalised, with an automated clearing system that includes interoperability between participating institutions, leading to a high level of efficiency. For example, as cheques are now truncated, clearing time has been reduced from 21 days to one day, and new real-time offerings are also being introduced.

The financial infrastructure and payment culture in South Africa is quite different. While cash and cheques predominate in Nigeria, cheques account for less than 1% of payments in South Africa, down nearly 80% between 2008 and 2013. In contrast, cards, point of sale devices and ATMs have all grown in double digits over the same period, so solutions such as virtual cards can be particularly valuable for corporations doing business in the country, in which Citi is taking a pioneering role both in South Africa and other parts of the continent.

In East Africa, and Kenya specifically, where the M-PESA mobile solution has revolutionised payments, Citi continues to see significant interest in such disruptive payment innovations. With a population already accustomed to the use of mobile devices for payments, the user base for these technologies is growing rapidly, of which Citi is a pioneer having extended its mobile capabilities into Kenya. As a bank integrated with M-PESA in Kenya, Citi enables corporate and institutional customers to pay to and collect between mobile payment methods and bank accounts, including salaries, dividends, supplier payments, etc. This provides security and efficiency for Citi’s customers, convenience and control for the counterparty, and promotes financial inclusion across the region.[[[PAGE]]]

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Advent of shared services

One of the key business models that many corporations coming to Africa are keen to introduce, replicating their experience in other regions, is financial shared services. Shared service centres (SSCs) are less prevalent today in Africa than in other regions, partly due to the relatively small scale and maturity of many corporations’ business, and partly due to the diversity of payment cultures and infrastructure across countries in Africa. In some cases, Africa is included within the scope of an EMEA SSCs, usually based in Europe, but this specificity and diversity limits the value of this approach.

This is changing, however, as corporations become more confident in pursuing longer-term growth strategies in Africa, and digitisation continues. Citi currently support 26 SSCs based in Africa that have a pan-African reach with several more based out of hubs such as Dubai and Paris. These have typically been implemented in a series of phases to reflect the development of corporate strategy, and emerging opportunities for automation. For example, one SSC based in Cape Town, South Africa, initially connected to Citi to manage transactions and information on accounts they held with the bank. Over time, this has evolved so that they now connect to a larger number of banks and accounts across a wider footprint, but through Citi’s electronic banking channel.

Newer SSCs are implementing cash management strategies that have proved successful in other regions, such as appointing a single payments bank, with which they communicate via a host-to-host connection. Indeed, Citi has seen a 25% increase in the use of host-host connectivity over the past year, supporting more than 100 customers and 500,000 payments annually. While centralised payments processing and bank connectivity remains challenging in supporting business flows in some countries, the barriers are lowering, particularly if the payments bank has a network of partner banks connected through SWIFT.

A specific feature of development in Africa is the role of not-for-profit and non-government organisations (NGOs) in fuelling growth. These organisations are often leading the way in financial and process efficiency, such as the use of innovative payments technology and XML ISO 20022 to achieve visibility and automation over transactions and balances. As these organisations have often been established for a longer period than some multinationals coming into Africa, or African corporations expanding cross-border, they often provide a very useful model for financial efficiency in the region.

Addressing liquidity challenges

Cash and treasury centralisation in Africa is also prompting treasurers to seek comparable levels of liquidity efficiency to other regions, to fund working capital requirements, minimise borrowing costs and enhance returns. This brings specific challenges in Africa given the diverse levels of maturity in regulatory frameworks and restrictions on currency convertibility and transferability. However, Citi’s depth of presence and digital innovation are removing the obstacles to regional liquidity management. The first step is achieving visibility over cash, which is particularly complex when accounts are held with multiple banks, each of which has different systems, with varying degrees of automation. Citi supports this objective by offering consistent, standardised channels across Africa that enable customers to access both Citi and third party bank accounts. Citi’s TreasuryVision® account reporting tool expands this capability further through sophisticated analytics such as cash-flow forecasting.

Having achieved visibility over cash, treasurers then need to mobilise this cash to meet liquidity management needs and optimise balances across the region. Citi achieves this through domestic and cross-border cash concentration and notional pooling wherever possible, cash repatriation and passive or active investment solutions. In the CEMAC and UEMOA (Economic Communities of Central African and West African states respectively) zones, all payments are treated as domestic, single currency payments, which Citi supports through payment hubs in Cameroon and Gabon in CEMAC and Cote D’Ivoire and Senegal in UEMOA. These hubs support efficient liquidity management solutions across the countries that comprise each economic community.[[[PAGE]]]

A digital approach to local and regional challenges

One of the key factors of successful cash and treasury management in Africa is the ability to leverage solutions that meet specific local needs but within an integrated regional framework to ensure efficiency, control and standardisation wherever possible. While these solutions resonate on a country-by-country basis, their value is often amplified in a centralised treasury or shared services environment.

For example, with electronic filing (eFiling) of tax records being introduced in a growing number of countries, such as South Africa and countries in East Africa, this capability is now an integral part of Citi’s electronic banking platform CitiDirect BESM, offering greater certainty and ease of making tax payments in either single or multiple jurisdictions. This benefits corporations doing business in these countries, and also supports governments’ development efforts by improving the integrity of tax collection processes. Currently, the percentage of tax revenue collected as a proportion of GDP is half that of Western Europe, but this is increasing as reporting and collection methods become more sophisticated.

Digitisation is impacting on treasurers not only at an infrastructure and regulatory level, but on a personal level too. Increasingly, Citi is seeing a change in the way that customers connect with the bank, and the launch of the mobile banking solution, CitiDirect BESM Tablet in 2013 was met with considerable enthusiasm, as the experiences of Kenya Airlines illustrates (see box). Citi is seeing the highest adoption rates in Africa, with customers in every country in which Citi has a presence now using tablet devices to access real-time positions and transactions on-the-move, changing the way that treasury functions are structured across the continent.

As companies centralise, automate and streamline bank communication, such as using host-to-host connectivity, they are taking advantage of Citi’s Integrated Payables solution. This solution is available in South Africa and is quickly being rolled out more widely. Citi’s Integrated Payables is a sophisticated tool delivered as part of our electronic banking offering that monitors payment files and compares vendor payments against a master data such as MasterCard directory and supplier finance database. Payments are then automatically channelled to use the most efficient and cost-effective payment method. For example, payments to suppliers that have signed up for a SCF programme are processed according to the terms of the programme. If not, the system will check to see if the supplier accepts card payments, which is then enabled through Citi’s B2B commercial card and virtual account offering. Otherwise, payments are processed in the normal way using manual or electronic payment methods as appropriate. This form of intelligent payments processing offers considerable value to treasurers and SSCs by reducing payment costs, improving working capital metrics and improving the service to suppliers whilst maintaining standardised, straightforward processes.

While the Africa story is one of growth and opportunity today, both for foreign multinationals investing in the continent and African corporations expanding their activities cross-border, the outlook is even brighter. For example, 60% of the world’s available agricultural land is in Africa, but it is currently a net importer of food staples, highlighting its future potential. As investment, industrial development, and urbanisation continue, opportunities for corporate investors are likely to proliferate in the future.