The future of African banking

The future of banking is digital, and Absa CIB is working closely with financial technology (fintech) companies to shape that future. The relationship makes sense, says Robert Cousins, Head of Global Markets Digital Product at Absa Corporate and Investment Banking (CIB).

"Fintechs come with a niche set of capabilities, while as a large bank, we tend to take a more broad-based approach,” he says. “We know that we can’t build the capabilities for every new solution ourselves, so we partner with fintechs to develop those niche solutions.”

A few fintechs have caught Absa’s attention in the foreign exchange (forex, or FX) space – and while the tech often has application in corporate and investment banking, Cousins says that it usually starts out as a consumer solution.

Remittance solutions

“A lot of fintechs are producing diaspora solutions around cross-border remittances, which drive FX flows in Africa,” he says. “They typically don’t have banking licences, so they look to partner with banks to further the reach of their product. We provide them with FX liquidity, which they convert from developed market currencies into African currencies. We also help them with the ‘last mile’ remittance into the beneficiary account – whether it’s a bank account, a mobile money wallet or even a cash pickup in one of our branches.”

Cross-border remittances play a key role in FX liquidity, he adds. Foreign currency flows are boosted as euros, pounds and US dollars come into the continent from people who are sending money “home” to Africa.

“This is a very busy space, and as Absa CIB we have a strong appetite to work with remittance fintechs, because it gives us that FX liquidity,” he explains. “For example, if we have an importer client in Kenya who needs US dollars, we have to get those dollars before we can provide them to him. If we don’t have those FX flows coming in, we can’t service the other side of our business.”

The cross-border theme extends into cryptocurrencies and digital assets, where several fintechs are looking to disrupt Africa’s traditional remittance market. “And again, it starts off in the consumer space, before leading into CIB,” says Cousins.

Data Analytics

That’s not to say that fintechs aren’t active in corporate banking, though. Cousins points to a wide range of digital platforms that are helping corporate treasurers to better manage their FX.

“Among larger corporates, we’re seeing more and more data-driven solutions that help our clients to manage their risk,” he says. “For example, we’re working with a platform which captures the client’s full book of imports, exports and other FX flows and provides a whole suite of analytics. This gives them a risk management view and lets them look at alternatives to how they hedge and manage their risk.”

Another example is a fintech that helps the bank manage its own client base and risk management. “The value-add there is a whole bunch of analytics and insights that would take us ages to build ourselves,” Cousins says.

Solutions for Africa

While Africa has a number of tech hubs (Johannesburg, Cape Town, Nairobi and Lagos being chief among them), Cousins says that the biggest fintech developments are coming from global companies aiming to access the continent’s largely untapped markets.

“One example is a UK-based company that provides cross-border payment solutions to tier one banks that cater for Africa’s exotic corridors,” he says. “Then on the digital asset side, a good example is a distributed platform that largely uses dollar stablecoin (USDC) to facilitate FX flows from the US and UK into Africa.”

Sub-Saharan African currencies tend to be so illiquid that they are classified as “exotic” currencies. African markets are complex, and fintechs in developed markets are looking for partners who can navigate the local landscape for them, rather than having to build the capabilities themselves to manage those complexities. That’s why Absa is quite attractive. Our Pan-African footprint means we can help global fintechs reach into Sub-Saharan Africa.”- by Robert Cousins, Head of Global Markets Digital Product Absa CIB The future of African banking
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Two IMF Fixes That Could Channel Billions to Africa

The formula for allocating SDRs, an invaluable source of funding, was agreed in 1944 and channels the most money to the richest nations.

It is a truism that the countries and citizens that face the greatest challenges in tackling global problems - from pandemics and food inflation to the climate crisis - are they ones with the least financial resources to address them. Take Covid-19, for instance, in response to which the G7 spent over $6 trillion while the whole of Africa spent just $130 billion over 2020-21.

Novices to international economics might assume that the role of international financial institutions is, at least in part, to correct this. The International Monetary Fund (IMF), after all, is the lender of last resort for many countries, while the World Bank provides billions in loans and grants to low-income nations.

The reality, however, is that all too often, the mandate and instruments of these financial institutions are so limited that they, at best, offer temporary respite to poor countries and, at worst, exacerbate existing inequities.

There is no better example of this in relation to Africa than the recent fiasco around Special Drawing Rights (SDRs). These international assets were established by the IMF to supplement the reserves of member countries. They remain the IMF's only instruments that can provide "quantitative easing" for countries without specific conditions on the use of the finance.

In August 2021, the IMF issued $650 billion in SDRs ostensibly to support countries responding to Covid-19. Yet rather than distribute them based on need, the IMF's board, which is dominated by its largest shareholders - the world's wealthiest countries - decided to issue the SDRs to countries based on how many IMF shares they own. This meant that African countries, who collectively have just 5% of IMF shares, were allocated just $33 billion. Japan and China each got approximately $42 billion of SDRs. The US received $112 billion's worth.

Unsurprisingly, African leaders argued for more and received some support. In May 2021, France had proposed that $100 billion of wealthy countries' SDRs should be reallocated to low- and middle-income countries. A few months later, it committed to rechannel around $10 billion of its SDRs for this goal. In November 2021, China one-upped France by committing to rechannel $10 billion of its SDRs specifically to Africa.

Slowly but surely, more promises trickled in and, at the Paris Summit in June 2023, IMF Director Kristalina Georgieva announced that $100 billion of pledges had been collected. Approximately $60 billion of that, she said, was specifically pledged towards two of the IMF's distribution instruments - its Poverty Reduction and Growth Trust (PRGT) and a newly-created Resilience and Sustainability Trust (RST).

On paper then, it seemed an inequity in the SDR distribution had been - albeit partially and voluntarily - corrected. But a new problem emerged, and remains. Just a tiny proportion of the pledged $100 billion has been disbursed. African countries received just $10.9 billion through the PRGT in 2021-2, while only one country (Rwanda) has received a disbursement through the RST of $320 million. To put this in context, the African Development Bank (AfDB) has, as part of its normal business, approved projects to African countries over the same time period worth approximately $14.5 billion.

From an African perspective, then, it is clear that these international responses - from the initial skewed allocation to their general amorphous "pledges" - have been inadequate and should not be repeated in this or other contexts.

One short-term solution: 

Our view at Development Reimagined is that there are two key solutions to this disappointing outcome going forwards - one short-term and one long-term.

First, in the short-term - and especially as African countries continue to face significant fiscal challenges from the impact of Covid-19 as well as global food and fuel inflation and the need to take action on climate change - there is a strong case for wealthy countries to commit a specific and significant allocation of SDRs to Africa's own institutions, in particular the AfDB. The reallocation of SDRs to the AfDB is rightly a major focus of the COP28 discussions and top priority for the COP28 presidency.

France's $100 billion proposal should be maintained, with at least $50 billion of that earmarked for Africa, which accounts for over 50% of extreme poverty worldwide. If, say, each of the G7 plus three or four other countries were to contribute equally, this would require a pledge of around $5 billion of SDRs each for Africa. 50% of these reallocations ($25 billion) could go to the AfDB, 25% ($12.5 billion) to other African financial institutions, and the remaining 25% to other channels such as the RST or even bilateral swaps.

This is highly feasible, not just because of the disbursement capacity of these African institutions but because the AfDB and others are already designated as "prescribed holders" of SDRs. That means they can hold, convert, and use SDRs.

In addition, the AfDB over the last two years has been designing a "Hybrid Capital Instrument (HCI)" through which new SDRs can be leveraged 3-4 times to on-lend to member countries. It has announced that for the HCI to become operational, the AfDB needs at least five SDR contributor countries. Furthermore, some potential contributor countries have specific ongoing joint funds that could easily be replenished with SDRs. For instance, AfDB and China's Peoples Bank of China (PBOC) together run the Africa Growing Together Fund (AGTF), which was capitalised with $2 billion in 2014 and is due for renewal in 2024.

When it come to climate action, SDRs are also especially useful in that allow countries to address key challenges without incurring additional debt. With the ongoing COP28 forum focusing on innovative mechanisms for scaling up climate finance and development finance, this is a great opportunity for countries to commit to reallocating their SDRs through AfDB and other African financial institutions.

One long-term solution: The second solution to the SDR problem is more systemic and long-term. As our CEO recently explained in a session on global financial architecture reform, the need to reallocate SDRs to African countries would not have arisen if the African continent had a larger share of the $650 billion's worth of new SDRs in the first place.

The current "quota formula" for sharing SDRs was first agreed in 1944 by 44 founding countries. Of those countries, only four were African, of which two (South Africa and Egypt) were not yet independent. At the same time, some founding members, such as the UK and France, were still holding 35 other colonies and argued that this should afford them greater quota shares. This history, along with the SDR fiasco around Covid-19, raises the question of whether a long-term answer is to change the quota formula.The fiasco of SDRs in Africa has shown that the mandate and instruments of financial institutions such as the IMF are far too limited to address the world's current and future problems. If the G7, G20 and other groups of wealthy countries are truly committed to managing future global financial challenges and tackling the climate crisis worldwide, then reallocating SDRs to Africa and African institutions as soon as possible, followed by significantly rectifying the IMF's quota formula in Africa's favour, should be at the top of their agenda. Two IMF Fixes That Could Channel Billions to Africa
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World Bank Development Loan to Bring Change to Coal-Dependent South Africa?

Cape Town — The World Bank Board has announced in a press release that a U.S.$1 billion Development Policy Loan (DPL) has been offered to support the government's efforts to promote long-term energy security and a low carbon transition. The World Bank intends for the loan to tackle two aspect's of the nation's energy crisis:It will facilitiate the restructuring of the energy sector via the unbundling of Eskom, the nation's embattled power utility which recently saw board chairperson Mpho Makwana step down from the position. This is intended to redirect resources towards investments and maintenance of existing power plants.
Secondly, it will support a low carbon transition, most notably through private investment in sustainable energy including by households and small businesses, and strengthening carbon pricing instruments.

The move comes as the nation faces a protracted energy crisis which has had a marked negative impact on productivity and safety. Additionally, plans for a Just Energy Transition Partnership (JETP) are underway with Presidential Climate Commission Commissioner Joanne Yawitch saying in December 2022 that initial funding of about U.S.$86 billion (R1.5 trillion) to transition to a low carbon and climate resilient society for the five-year period 2023-2027. A JET, according to the Paris Agreement, rests on creating decent work and quality job opportunities, and implementing climate policy in a way that is fair, inclusive and leaves no one behind.

Whether meaningful change can come from the World Bank funding will have to be framed against other additional difficulties, one of the most important being the nation's reluctance to transition away from coal use. 85% of South Africa's electricity is produced in coal power plants, The Conversation Africa reported. This is much higher than all countries except Mongolia and Kosovo, both of which have a higher dependency with much smaller populations of three million and two million respectively. "South Africa's dependence on fossil fuels gives rise to a range of climate, energy and transition risks, especially for affected workers, communities, businesses and exporters. However, embracing new economic opportunities in green technologies can drive industrial development and innovation, leading to a sustainable and resilient future with decent work, social inclusion and lower levels of poverty," Yawitch said in 2022, according to SAnews.

South Africa's population currently stands at 62 million. Under the nation's current Integrated Resource Plan (IRP), which charts the nation's energy mix plan for the next few decades, 11.3GW of coal power at seven old plants are scheduled to be decommissioned by 2030. However, the legislation is currently under review with a draft IRP expected to be published for comment before the end of 2023. Furthermore, a new study from the Centre for Research on Energy and Clean Air has found delaying the decommissioning of South Africa's coal fleet may help with load shedding, but it will cause thousands of air pollution-related deaths and comorbidities, Daily Maverick reported. World Bank Development Loan to Bring Change to Coal-Dependent South Africa?
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