African Countries’ Effort to Attract FDI Through Financial Sector Improvements
Casablanca Finance City Tower © Morphosis Architects
The COVID-19 pandemic temporarily deaccelerated the inflow of foreign direct investment (FDI) in Africa. As a result, African countries have bolstered their efforts to attract FDI through favourable policy changes, substantial projects that promise high returns, and their COVID-19 response, all of which improve the financial sector. FDI contributes to the development of African countries’ financial sector, and in return, an improvement of Africa’s financial environment attracts FDI, creating a flywheel effect. The term flywheel effect originates from the book Good to Great, describing the process of repetitively pushing a large flywheel, which gains momentum after each push, to the point where it can turn by itself. This term suits the iterative and impetus-gaining process of improving the financial sector with FDI to attract more FDI.
A large portion of FDI is gained through Private Equity (PE) investors. Their funds are pooled from various sources including foreign institutions. For example, CDG Capital Private Equity, located in Casablanca, Morocco was created with funds from CDPQ (Caisse de Dépôts de Placement du Québec) in Canada and CDG (Caisse des Dépôts et de Gestion) in Morocco. Although local institutions sometimes contribute a portion of the funds to some PE firms in addition to already existing foreign funds, we will include those specific PE firms, containing both local and foreign funds, as contributing to the deployment of FDI. The incorporation of these firms follows from the fact that foreign institutions that supply funds to these PE firms are usually larger in assets under management (AUM) than local institutions.
According to the African Private Equity and Venture Capital Association, investment activity has regained momentum in 2021, with the largest share of deals in the financial services industry. Naturally, FDI in the financial sector creates a sustainable inflow of capital. The more funds and investments financial services firms receive, the more resources are devoted to improving financial literacy within financial institutions, the larger the returns these institutions generate for potential investors, leading to more investment.
Several countries in Africa are competing to become the continent’s financial hub. The Global Financial Centres Index 30(GFCI 30), ranked the Moroccan city of Casablanca first in Africa followed by South African cities Cape Town and Johannesburg. However, looking beyond rankings, Nigeria and Kenya are also aiming to quickly catch up and become main financial centers in Africa.
Private Equity firms have geared to invest in Africa. According to the 2021 Deloitte Africa Private Equity Confidence Survey, more than 50% of PE firms believe the economic climate in Africa will improve. Development Partners International (DPI) raised $1.2 billion to invest in Africa, which reflects Africa’s impressive response to the COVID-19 pandemic, its policy changes favourable to investments, and its substantial projects that promise large returns.
Taking Africa as a whole, the response to COVID-19 proved successful, relative to Western counterparts[CM1] , given that Africa’s cases only make up 3.28% of world cases as of December 2021. Reasons for COVID-19 response success are the Africa Centres for Disease Control and Prevention’s (CDC) meeting to coordinate African countries’ response to the pandemic with the help of organizations that have a regional focus, the fast implementation of lockdown measures, and the quick adoption of public health measures. From a PE perspective, the pandemic imposed a temporary slowdown in investment, but they are regaining momentum.
With regards to substantial projects which promise high returns and policy changes favourable to investments, cases that demonstrate the effort put into attracting FDI are Morocco, South Africa, Nigeria, and Kenya.
Morocco is at the forefront of the effort to make Casablanca a financial center in Africa with Casablanca Finance City(CFC), climbing to first place over Cape Town and Johannesburg. CFC’s goal is to attract both large national and international institutions aiming to gain access to French-speaking North and West African markets as well as Morocco’s economic and political stability. Since its inception in 2010, CFC attracted 160 businesses, including McKinsey, Boston Consulting Group, Lloyd’s of London, AIG, BNP Paribas, all of which receive regulatory and fiscal benefits. For example, the corporate tax rate of 30% in Morocco drops to zero percent for the first five years once a firm is CFC designated and visas to other African countries are fast-tracked for firms operating in CFC. CFC is creating 35,000 jobs for young Moroccans, which will attract more FDI to Morocco due to the financial sector’s increased recognition and stability. Morocco is now steadily recovering from the pandemic, having offered vaccines to 61.2% of citizens.
South Africa, considered a leader in the fintech industry in Africa, is focusing on further improving the fintech sector, which will enhance the financial services industry and attract more FDI. Venture Capital (VC) investment in South Africa is continuing to grow, reaching $145.7 million across 25 deals in the first Quarter of 2021.
The Central Bank of Nigeria (CBN) is launching the Nigerian International Financial Centre (NIFC) in September 2022 with the aim to make Nigeria not only a financial hub in Africa, but also the world. “The NIFC will take advantage of our existing laws … to create a fully global investment and a financial hub where monies, ideas, and technology will move freely without hindrance.” Kenya, on the other hand, struck a deal with the UK to make Nairobi Africa’s financial center. In the next 5 years, they expect $2 billion worth of deals to take place. The country also offers political stability, a large talent pool, and a stable exchange rate.
African countries are aiming to develop their financial sector enough to start attracting FDI consistently. In other words, they want to reduce the volatility of FDI inflow. A way for African countries to attain lower volatility is to establish themselves as Africa’s financial hub. Various approaches contributed to the financial sector’s growth including policy changes and large, ambitious projects. Africa’s successful COVID-19 response was a decisive factor in accelerating the inflow of FDI to African countries. Casablanca has adopted both methods, creating CFC and new policies, whereas Cape Town, and Johannesburg are focusing on the start-up and VC environment. Casablanca, Cape Town, and Johannesburg are leading the effort to encourage FDI through a constant improvement of their financial sector. Other cities like Abuja, Nigeria, and Nairobi, Kenya, have followed suit after seeing the strategy’s success. Looking forward, it will be interesting to see which country and city will set in stone the title of Africa’s Financial Hub and whether improving the financial sector is the best strategy to attract FDI. For now, Morocco and South Africa have a clear first-mover advantage, as they use the power of the flywheel in the race to become Africa’s Financial Hub.