Author: Edmund Higenbottam

Publication: MicroCapital Monitor, January 2017, Vol 12: Issue 1


Date: 14 January 2017

Raising Funds for Non-bank Financial Institutions in Africa


The non-bank financial institution (NBFI) sector, often referred to as the alternative finance sector or the shadow banking sector, around the world is largely dependent on the institutional market for funding. By regulation, NBFIs in most markets are prohibited from gathering deposits or restricted from transactional banking services, which are critical to attract deposits. In most markets, banks themselves are reluctant to lend to NBFIs, given the potential long-term competitive threat. For example, Capitec of South Africa and Equity Bank of Kenya, which are now very much fully-fledged banks, have roots as NBFIs.
In South Africa, the deepest and broadest market in Africa, NBFIs have been largely focused on borrowing from the domestic market. This is not without risks given, for example, the significant reversal in domestic investor sentiment following the collapse of African Bank in August 2014. African Bank’s largest peer, Capitec, was less affected because of its successful deposit mobilising strategy. While no NBFI went under as a result of a drying up of funding following African Bank’s collapse, anecdotally, many CFOs and treasurers in the sector reported a scrambling for alternative funding, higher costs and an involuntary slow-down in asset growth. Foreign NBFIs with JSE-listed bonds, such as Trustco and Letshego, were also impacted.
In 2015 and 2016, Namibian financial services group Trustco turned its funding activities to the global institutional market and completed several successful transactions, culminating in November 2016 with a ZAR 450 million financing package arranged by Verdant Capital. Trustco also acquired Fides Bank, now Trustco Bank, bringing a deposit-taking entity into the group. This is another example of an NBFI transitioning over time to become a bank. The Namibian dollar has been pegged one -to-one to the South African rand since Namibia’s independence in 1990; and as such, Namibia’s financial market is often seen as an adjunct to its much larger neighbour.
Trustco, following a route trodden by many similar institutions in Africa, was successful in tapping an audience of specialist financial inclusion funds. These funds, mainly located in North America and Western Europe, target investments in emerging- and developing-market financial institutions, especially those with an explicit financial inclusion agenda. These may include NBFIs or banks with a broader focus than most commercial banks, such lending to SMEs or the bottom of the pyramid. The financial inclusion investor community grew out of the microfinance world over the last 10 years. While lending to microenterprises is still an important focus, these investors now support a much broader range of entities, for example those involved in SME lending, leasing, invoice discounting, education lending, mortgage lending and fintech.
New focus segments arise all the time. For example, one segment that came into vogue last year is financing small businesses and homeowners to purchase distributed renewable energy. Examples of institutions in South Africa specializing in end-market funding in this space include GreenFin and New Southern Energy.
Depending on the precise classification used, Verdant Capital estimates the assets under management of the financial inclusion investor base to be around USD 15 billion, of which about 20 percent is earmarked for Africa. In addition, this sector continues to be strongly supported by development finance institutions – the development arms of rich-world governments.
One of the factors that has helped develop this market is the growth in foreign exchange hedging. Traditionally in Africa, hedging was available only for the South African rand, but now three- to five-year hedges are available for the currencies of most of the large and medium-size economies in Africa. The hedging market is a critical risk mitigant for NBFIs lending mainly in local currency but borrowing from international funds.
Fintech has enabled NBFIs to originate new types of loans to unbanked customers, typically at much smaller unit sizes, but at a manageable operating cost. Examples of this include mobile lending products brought to market by the likes of Jumo World or Getbucks. However, asset growth is only one side of the coin, and these entities need to originate funding in order to fulfil customer demand for loans.
Profitability in the South African NBFI sector is impacted by rate caps as well as the high level of consumer indebtedness. However, many NBFIs in South Africa have carved out profitable niches in enterprise lending that are unaffected by consumer indebtedness and fall outside the scope of rate caps. One example is Retail Capital, which brought the merchant credit advance business model to South Africa.

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