Africa has remained the least attractive to investors compared to other emerging markets despite its huge untapped potential.
According to research by Rwanda Finance and Africa Legal, concerns around security, political stability, dispute resolution and transparency have traditionally made investors hesitant about increasing their exposure to Africa. In this report, Africa Legal and Rwanda Finance — which is developing the Kigali International Financial Centre, said Africa is exploding with potential.
People are engaged, motivated and increasingly well educated. Add youth and enthusiasm and you have the ingredients for success. However, the challenge is changing the entrenched narrative that says the professional skills that should guide decision-making around investment in Africa are found somewhere else,” said Nick Barigye, Chief Executive, Rwanda Finance.
He said that the overriding opinion is that Africa is undersold. It has the skills and there are certainly opportunities. What can be improved are legal and regulatory frameworks that give investors confidence that they will do what investors come to do – make money.
“And there are the obvious and, in the scheme of things, small improvements that can lead to quick and easy growth: internet access, office space, good transport links, decent hotels and nice places to eat. Add rule of law and the money starts to flow,” said Barigye
Changing the story of Africa and why it should be an investor’s first port of call is the driving force behind Rwanda Finance through the Kigali International Financial Centre (KIFC).
Attracting investment capital into Africa has never been easy. Negative perceptions ranging from corruption to political instability have historically deterred investors from deploying capital across the continent, with foreign direct investment into Africa the lowest across all main developing economic regions.
Available figures indicate that in 2020, foreign direct investment( FDI) into Africa was just $40 billion, down from $45 billion in 2019, according to the United Nations Conference on Trade and Development’s 2021 World Investment Report.
Much of that investment was concentrated in a handful of countries— US$5.9 billion went to Egypt, US$4 billion to Congo, US$3.1 billion to South Africa and US$2.4 billion to both Nigeria and Ethiopia. More than 20 African countries received less than US$0.5 billion each, the data showed.
By contrast, FDI into Latin America and the Caribbean was US$88 billion and investment into Asia was US$535 billion.
As a share of global FDI, Africa accounted for just 4% in 2020.
“There are some excellent and highly talented professionals on the ground in the intermediaries space in sub-Saharan Africa, but these are concentrated in a handful of countries like South Africa, Nigeria and Kenya, but beyond the major hubs and the larger countries you then see a huge capacity gap,” said Jennifer Mbaluto, a partner and co-head of Clifford Chance’s East Africa practice.
To assess the true state of investment into Africa, A survey was done covering a range of investment professionals—including external investment advisers, which comprised private lawyers, accountants and financial advisers, and investment company workers.
The idea was to better understand the factors that impact capital deployment on the continent and the barriers that need to be dismantled to facilitate greater pan-African investment.
Some 78% of survey respondents—who are spread across the world, but with the highest concentration in Tanzania, Rwanda, Kenya and Nigeria—said they work in an external advisory capacity for the investment industry, yet when advising on African deals, only ‘sometimes’ will an African entity be involved as a key component of the deal (excluding the recipient of the funds).
Meanwhile, 22% of respondents who work internally for an investment management company said they use an African entity slightly more often than those organisations that work in an advisory capacity—scoring 31 on a scale where 0 is ‘very often’ and 50 is ‘sometimes’.
African entities that external advisers most engaged with were investment advisers, followed by co-funders and then insurers.
For the respondents who work internally at an investment management company—the majority of which were private equity funds—the African entities they most often engaged with to help facilitate deals were legal advisers and investment advisers, followed by co-funders and insurers.
Most significantly, none of those investment management companies used Africa-based IFCs to help facilitate deals, highlighting the relative lack of existing IFCs on the continent. Aside from the lack of investment services infrastructure, there are other deeper-rooted fears that make investors nervous about deploying capital in Africa.
“There are often concerns about the stability of regulation, or that regulation would change ad hoc or too quickly,” said Batya Blankers, Chief Executive and Co-founder of Chancen International, a non-profit organisation that helps finance tuition fees for low-income students in Rwanda. “The KIFC can help overcome these concerns by ensuring there is consistency in implementation of new laws that have been passed,” said Blankers.
In addition, Blankers says it is important that audit firms and law firms are up-to-date and very familiar with the new laws that have been passed so that the advice they are giving is consistent. “When investors reach the stage where they are doing their own due diligence or reaching out to a local legal firm as a final step before they disperse capital or sign any contracts, if there is a mismatch of information it can lead to a little bit of concern around the stability of new regulations,” she said.