Guardian

Fuelled by FDIs, banking, insurance uptake

WITH focus on infrastructure upgrade, increase in foreign direct investments, improved banking supervision and more insurance policy uptakes, gross domestic products (GDP) in Nigeria, South Africa and other African countries are expected to reach $2.6 trillion by 2020.

According to experts at the sixth KPMG’s Africa Conversations Series on transacting in Africa, discussions around the realities of doing business on the continent are now at a critical point and needed support must be provided to boost this development.

Head of Transactions and Restructuring at KPMG, John Geel, noted that historically multi-nationals and larger listed African companies, especially from the South have conducted investment into and across Africa.

“However, we are now witnessing an increasing number of smaller companies undertaking investments due to improved growth opportunities and regulatory and tax regimes. This means that companies are now seeking out the right entity to transact with, negotiate details of collaboration and sign legal contracts.”

Coupled with this increased investment appetite, Geel said that KPMG had also noticed that the banking sector on the continent had improved and there continued to be consolidation and expansion appetite.

According to him, in May 2012, KPMG Africa released the Africa Banking Survey to provide a better understanding of regulatory frameworks on the continent.

Though 14 countries were analysed in the region, he said that the survey provided information in several areas including the commercial, legal and tax and banking environments, as well as governance and reporting issues.

But in the insurance industry survey carried out on the southern region of the continent by KPMG, it was noted that life and short-term insurance markets were relatively mature, with few obvious merger and acquisition opportunities, it was also ultra competitive, well regulated and, in all likelihood, facing ongoing challenges regarding regulation such as IFRS Phase II, Treating Customers Fairly and others.

Partner and National Head of Insurance, Gerdus Dixon explained that with the foregoing, other African countries present insurers with new untapped markets, with massive potential customer populations and burgeoning economic growth, which was forecast by the International Monetary Fund to be 5.5 per cent this year and next “while Nigeria, Ghana and Angola’s growth rates are all in excess of this. In many ways, describing these African countries as the “new frontier” is also no longer accurate, as most of the big players are already out of the blocks, so to speak, and actively positioning themselves for an African play.”

Dixon stressed that it was essential that individual African countries were understood and assessed each on their own merits, the incredible diversity and subtle nuances are critical in unlocking the secrets to business success.

He, however, cautioned insurers against expecting African countries to provide them with a short-term growth solution.

“Africa’s gross domestic product is expected to reach $2.6 trillion by 2020, but expanding into African countries is not a short-term growth fix, it will take deep pockets and committed sustainable long-term business plans to develop the insurance market in these African countries – particularly the much vaunted retail or individual life insurance markets.”

According to him, it was important that shareholders understand the return profile of expanding into Africa, adding that those companies that did unlock the potential stand to benefit from improved margins on products coming from the fastest growing employed population on the planet. “There are 500 million people of working age in Africa and the expectation is that this will outnumber China and India by 2040.

“The underdeveloped formal economy and infrastructure will demand that innovative solutions need to be found with regard to strategy, product design and distribution. The barriers to entry are high, but Africa is simply too big and growing too fast for insurers to ignore,” Dixon stated.

However, it was also noted that despite the financial crisis of 2008, there is now more private equity available in Africa.