I stumbled across an interesting piece by Ceri Jones entitled “The Rise And Rise Of The Continent’s Financial Markets,” which first appeared on Interactive Investors.

In light of yesterday’s post on Botswana, I felt it fairly apropos. Jones quotes Roelof Horne, an African fund manager at Investec, who reiterates the point that “a lot of negative news comes out of Africa and because it is a big continent, commentators tend to tar it all with one brush. There is this impression that Africa is struggling, but in reality it is improving rapidly every year. No matter what macro-economic numbers you look at, development is astounding. The continent no one wants to touch is growing at a rate of 6%/annum, and that is sustainable for the medium-term. Its people are naturally entrepreneurial. Everywhere I go, I am amazed at what has been achieved with so little.” Horne also makes the point that this growth is not oil dependent. Only six of 54 countries are exporters, and thus Africa’s “non-oil story is compelling,” says Horne. The numbers back him up. According to the IMF, Africa is enjoying its best period of sustained economic expansion since independence. Real GDP growth is expected to rise from 5.7% in 2006 to 6.1% this year and 6.8% in 2008.

Commodities for instance and the general increased demand in Africa’s resources, particularly from China and India, has created what Jones labels a “virtuous cycle,” whereby per capita income increases, creating increased demand for manufactured goods and thus in turn job growth and rising wages. Go down that kind of road long enough and voila–you’re on the verge of creating a bona fide middle class, still unfortunately a foreign concept to much of the continent (you still need other ingredients of course, including access to personal credit, see below).  Foreign aid has also helped the cycle, as has better economic management, more openness and more stable politics.  And a report last November from the World Bank concluded that promoting access to financial services in Africa should be a priority because it boosts growth and helps reduce the income gap between rich and poor. It seems people are [finally] listening.

Jones pinpoints the financial services sector (and particularly banking) as one sector where increased consumer confidence is revolutionizing the market. “Over the last three years, banks across Africa have put a huge effort into developing products for a broader market, particularly in consumer lending.” Thus, Jones writes, “as the workforce becomes creditworthy, they are eligible for bank loans to empower them.” Still, myriad roadblocks remain, and it would only be naive to assert otherwise. Economist points out that only 20% of families in Africa have bank accounts, and that small and medium-sized firms struggle to borrow. Private credit accounts for 18% of GDP in Africa—and less than 5% in Angola, Chad, Congo, Guinea Bissau and Sierra Leone—compared with 30% in South Asia. Moreover, Ethiopia, Uganda and Tanzania have less than one bank branch per 100,000 people. And opening an account in Cameroon requires $700—more than many of its people earn in a year. That said, progress is also evident. “In many countries, not only are better and more predictable monetary policies improving the environment for banking. but privatization of state-owned banks has also created opportunities, and better regulation has helped too,” the paper reported. “The improving climate has caught the attention of foreigners. The Industrial and Commercial Bank of China, in the largest ever single investment in Africa, offered $5.6 billion for a 20% stake in Standard Bank, of South Africa, which has operations in 18 African countries. [And] in 2005 Barclays, a British bank that has been working in Africa for over a century, bought a majority interest in ABSA, another South African bank.”

Jones identifies some of the biggest banks across the region as the Moroccan-listed Attijariwafa Bank (BCM), Societe Nationale Morocco D’Investissement (SNI), Banque Marocaine Com. Morocco Exterieur (BCE) and Banque Centrale Populaire (BCP) in Morocco, and First Bank Nigeria (FBNBK), Zenith Bank International (ZEN), Union Bank Nigeria (UBNBK), Intercontinental Bank (INTCON) and United Bank for Africa (UBABK), all in Nigeria. But pay particular attention to the Egyptian financial sector, she reasons, which has been “transforming itself even more than other nations, thanks to the Government’s moratorium on property ownership and a reduction in the stamp duty on property transactions to a flat rate of just 300 Egyptian pounds (then roughly $600).” With this in mind, watch National Societe Generale Egypt Bank (NTSG) and Commercial International Bank (CMIB), writes Jones.

Telecommunications, and mobile phones in particular, is another sector worth keeping tabs on. Because while few Africans have a bank account, a growing contingent have mobile phones. Economist writes that in Kenya and Botswana, for example, 17% of those who are unbanked own a mobile phone, according to the FinMark Trust, a research group seeking to make financial services more accessible. This should sound familiar. As BusinessWeek reported last November, for instance, “mobile phones are changing developing markets faster than anyone imagined. Today there are some 3 billion mobile subscriptions worldwide, and that will grow to 5 billion by 2015, when two-thirds of the people on earth will have phones, according to Finnish handset maker Nokia Corp. (NOK). Nowhere is the effect more dramatic than in Africa, where mobile technology often represents the first modern infrastructure of any kind. The 134 million citizens of Nigeria, Africa’s most populous country, had just 500,000 telephone lines in 2001 when the government began encouraging competition in telecommunications. Now Nigeria has more than 30 million cellular subscribers.” Jones writes that nearly one third of Africans have a mobile phone (over 300 million people), a remarkable statistic when one considers that only roughly 4% of the continent’s population even has access to a landline! Mobiles in and of themselves have a tremendous effect on emerging economies, and especially in Africa, by providing everything from banking (e-commerce) to more efficient communications about weather and impending crop yields. “A growing body of evidence suggests that access to communications boosts incomes and makes local economies far more efficient,” according to BusinessWeek. And Economist writes that “mobile phones have improved poor people’s lives tremendously, providing political news and health-care information in remote areas to fueling commerce.”

Jones reports that “three of the most liquid operators in the [mobile phone] segment are all Egyptian-based: Telecom Egypt (TELE), Vodafone Egypt (VOD) and Mobinil-Egyptian Company for Mobile Servcies (EMPN).” And “companies that are riding the boom [vis a vis the building of new infrastructure to support upward mobile demand] include West Africa Portland Cement (WAPCO) in Nigeria and El Ezz Aldekhela Steel (ALFS), Suez Cement Egypt (SZCT) and Egyptian Iron and Steel Company (EISC) in Egypt.

Personally, if it’s an African telecom that you’re after, I’d look no further than South Africa’s MTN (quick disclosure, I have no position…yet), the biggest operator in Africa (number seven, by the way, in this unofficial ‘fastest growing African telecoms’ list). The company had been seemingly on the verge of being bought by Bharti Airtel, the largest mobile-phone operator in India, a deal that Economist noted “would unite the leading companies in the world’s two most promising mobile markets,” while adding that “in neither market have penetration rates yet exceeded a third of the population. India is adding more subscribers per month than any other country. In Africa, subscriptions are projected to grow by 11% a year until 2011, according to Gartner, a research firm.”

However, that deal was called off this past weekend. Pundits now believe that Bharti’s domestic rival, Reliance Communications, is the new frontrunner to land MTN. At stake? 68m customers in 21 African and Middle Eastern markets. But it is a vital market, especially if continued social and economic progress across the continent is to be realized. Mobile phones have improved poor people’s lives tremendously, from providing political news and health-care information in remote areas to fueling commerce. They are the ultimate ‘leapfrog’ technology, so to speak, and frontier investors should be mindful of the impact they will continue to have as per capita income continues to increase and new subscribers continue to come.

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