Financing African businesses and projects
Martin Ike-Muonso, a professor of economics with interest in subnational government IGR growth strategies, is managing director/CEO, ValueFronteira Ltd. He can be reached via email at firstname.lastname@example.org
December 21, 2020475 views0 comments
African entrepreneurs are not bereft of profit yielding ideas. The massive number of successful African entrepreneurs both within the continent and in diaspora attest to this. There are as many great entrepreneurs, innovators and inventors in Africa as there possibly are in other parts of the world. However, the performance and output differences between those within and outside of Africa is explainable by the environment. As should be expected, Africa has a highly uncertain macroeconomic environment of business which gravely affects the ease of access to finance by its entrepreneurs. Impaired access to finance in turn frustrates the actualization of lofty entrepreneurial dreams. Through very rampant, public sector corruption and the ballooning of government expenditures, inflation through the distortion of economic prices continuously orchestrate highly uncertain business environments. Macroeconomic uncertainties interacting with inflated costs of transacting frustrate domestic and the prospects for meaningful foreign direct investments.
The obvious implication is the hibernation of fund suppliers within the short-term time zone as it becomes increasingly difficult to peer into the long-term. Although naturally designed for short-term fund provisioning, most commercial banks in Africa are far too comfortable in providing ninety-day facilities as opposed to three years or more of credit. The public sector’s knack for frivolous spending and heavy fiscal deficits funded by borrowing shifts the interests of the investment banking sector from the creation of long-term investment opportunities to short-term government instruments. It also further frustrates investors through the crowding out process. Attracting foreign direct investments [FDI] are, therefore challenging as a consequence. Besides the stated reasons is the menace of insecurity and the impaired levels of the rule of law. Foreign investors and indeed, all investors prefer an environment that is conducive enough for business and where contracts are respected and kept. Africa still has a long way to go in this respect.
Consider the high macroeconomic uncertainty levels and the prospects for attracting substantial levels of foreign direct investments again. Unfortunately, a reasonable fraction of the unconducive environment of business is a consequence of the fiscal activities of the government. With the budget design guided by, the goals of filling the personal pockets, the quality of budgetary spending end up not creating a substantial quantum of net economic value. How can this possibly be, when the resource allocations for commercial farms, hospitals and schools end up in the private pockets of some government officials? The demand for extra-budgetary spending despite the heinous resource diversions further aggravates this ugly situation. Substantial fiscal deficits, much of which vanish into thin air is the bedrock of the salvos of inflation, which distorts virtually all economic prices [exchange rate, interest rate] and markets. As we know from our basic economics, things become worse when more money pursue few goods. Political leaders, in tandem with the central banks, make it easy for paper money to triumph over things of real value. Defective accountability, public resources embezzlement and other similar vices all contribute to the personal accumulation of the funds that would have sustained the creation of those valuable things that are exchangeable for money in the marketplace.
The race by politicians in Africa to outdo themselves in the acquisition of wealth from publicly owned resources results in the design and implementation of budgets that deliver those reprehensible subterranean objectives. The results are the ever-increasing rates of interest in finance and the steady depreciation of the currencies of most countries against the dollar. Of course, these become worse by the absence or the low quality of the public goods that these misappropriated public resources would have brought into existence. Overall, the resulting high costs of transacting makes production in the continent less competitive relative to other countries outside it. Excellent entrepreneurs and particularly foreign investors shy away from investing and producing under such conditions. The financing that would have followed their entry is also lost.
To make matters worse is that the rule of law in most countries is dysfunctional and does not adequately protect investor resources. People rarely keep promises. Without adequate compliance with the provisions of constitution-backed contracts, the prospects of attracting and retaining foreign investors are quite low. Several indices of human life protection show that Africa has a very nasty story in that respect. Hostage-taking, kidnapping, religious insurgencies and ethnic militancy are widespread in several countries within the continent. Almost half of the Nigerian territory is practically in the grips of insurgents and religious extremists. Such religious extremists took as many as 300 students, hostage, twice. Countries like Somalia, South Sudan, Nigeria and Libya are useful reference points in discussing the insecurity conditions within the continent. In much the same way, the continent is replete with poor governance. Underneath this is the defective implementation of the rule of law. It appears that since the underlying motivation of most of the political leaders is their pockets, it is convenient for them to undermine and bypass constitutional rules to achieve their objectives successfully. Violation of the rules of law coupled with the massive number of persons that are practically “above the law” it is evident that the constitution of many countries in Africa is otiose.
Cumulatively, these challenges make it very difficult for an entrepreneur to invest over long periods. Similarly, providers of funds equally find it challenging to give out funds over long periods because of the significantly nebulous investing time terrains. The highly uncertain environment of business means that distant planning horizons may not be the best. The shorter, the better. That is why a short-term mindset dominates the market for funds in Africa. Commercial banks, which naturally focus on short-term credit provision, dominate the landscape for fund provision. A key reason for this is that the time frame for its operations is consistent with the demands of the challenging environment of business. Consequently, many investors with massive projects requiring long-term fund deployment find out that they are in a trap in seeking and accessing high interest extremely short-term funds that are provided by commercial banks. The implication on the overall cost of the project is usually high and affects project profitability and viability.
The continent’s investment banking space is yet to play the required critical role expected of it in leading development. As a long-term, high-volume business fund providing segment, it has not lived up to the call. Many of the investment banks merely engage in financial trades and end up attracting speculative portfolio investments. While it is true that the onus is not on them to alter the environment of business entirely, it is nevertheless a major charge on investment banks to take the lead in designing vehicles and platforms for the mobilization of long-term investable resources notwithstanding the socio-economic circumstances. A good part of the problem is that mother 65% of entrepreneurs in Africa rarely knows about the unique role that investment banks should play. Many cannot differentiate one operator in the long-term segment of the market from the other. In general commercial banks appear to be more visible and in possession of more funds. 85% of the investment banks in the continent suffer grossly inadequate capitalization. Many of them cannot conveniently arrange $1 million of funding for up to five years.
In fact, not only do they lack funds of their own, up to 95% of them have extremely weak linkages with serious global financing sources that they can leverage to access long-term funding for their clients. The implication is that many of these investment banks, in turn, depend on commercial banks for their funds and survival. Until Africa’s domestic investment banks establish stable linkages with the sources of critical long-term funds, it will still be very challenging to address long-term business financing in the continent. It is therefore not surprising why most of the global capital is in the developed world with minimal levels of macroeconomic uncertainty and violations of the rule of law. But in addition to that is the well-known politics of global finance which significantly excludes Africa. In the eyes of many international investment banks, the African continent should at best remain a field for the exploitation of raw materials for use in the industrial hubs of the developed countries. As a fact, the global economic Trinity – the World Bank, the International monetary fund [IMF] and the World Trade Organization [WTO] – considers that what Africa needs is more of financing to facilitate its survival from hunger and poverty rather than heavy investments in high-tech infrastructure.
Accessing long-term financing in Africa remains a vast challenge despite being a core determinant of the success of the continent in its journey to prosperity. Like in other challenging areas, the continent and its leaders are the culprits. First, until the rule of law and accountability are elevated and given their rightful place in the governance architecture of most of the countries in the continent, self-rule will continue to destabilize fiscal programs that orchestrate market distortions. These will usher in the well-deserved environment for the emergence of foreign direct investments and their monies. Second, a robust plan for extensive capitalization of organizations operating within the capital market segment of the financial system will improve the capacity of investment banks in the continent to play a role in long-term fund provision for entrepreneurs. Third, beyond adequate capitalization investment banks in the continent need to develop impressive collaborations and linkages with leading investment banking groups in the financial markets of the world. Apart from the opportunities for skill improvement is the direct access to project financing through the already established relationships and networks. Fourth, massive entrepreneurial education facilitating the understanding of the roles of investment by and how to identify and access them by entrepreneurs quickly is critical in member countries.