South Africa: NewFrontiers - Winter 2013

Last Updated: 12 August 2013
Article by   KPMG

A GLOBAL INTEREST IN AFRICA

In March, KPMG Africa was honoured to host KPMG's annual Global Board & Global Council meetings in Johannesburg. All of our firm's top leadership from around the world spent a week together in the Southern tip of Africa to discuss our firm's strategy and how we continue to service our clients around the globe, adding value while delivering to the highest possible standards.

Our clients benefit from the global connection our African practices gain from being member firms of the global entity that is KPMG – a simple but powerful business model built on the premise of being globally connected while remaining locally relevant. Our values, governance, core services, knowledge and experience – in short, our "KPMGness" – are globally aligned, ensuring that our clients receive the same breadth, depth and excellent standard of service from any KPMG member firm, anywhere in the world.

Our clients also benefit from the global mindset our people bring to the table through this connection. It allows us to stay on top of global best practices across industry sectors, and ensures a common thread flows through everything we do to help our clients take on their most complex challenges. Yet, as each practice remains physically present and independently-owned and managed, we are able to provide local insight into our clients' challenges and growth opportunities, informed by global knowledge but always relevant to you in your space, in your country.

This common thread reaches both ways. We know that our clients are increasingly interested in Africa – a continent that is home to some of the world's fastest growing economies and rich in opportunity for investors. KPMG globally knows this, too, and in recent times, KPMG as a global entity is seeing more and more interest from international clients in entering or expanding into Africa.

With KPMG offices in 152 countries, our global leadership could have met anywhere in the world. They chose to meet in Africa because of the continent's importance to our firm and our clients, all around the world. We are seeing growth in Africa, and helping our clients to do the same.

During this visit, our local and global leaders hosted a number of clients and together we celebrated our growth at an event held to open 'phase two' of KPMG Wanooka Place in Parktown, Johannesburg. This expansion to our national office in South Africa is a proud step for us, and with phase three already in development, it is also a clear indication of our confidence in the African opportunity.

Several of our clients attended the celebration – thank you from everyone at KPMG for the continued support! KPMG's Global Chairman, Michael Andrew, personally extended his thanks in his speech and gave some key insights into just how important Africa is on the global stage (there's more on this inside this publication).

I know that we as a firm, and you as our clients, will continue to make great strides into Africa. We look forward to continuing the journey with you!

Moses Kgosana
Senior Partner, KPMG Africa
Chief Executive, KPMG in South Africa

AFRICA IS ON THE ROAD TO MEANINGFUL ECONOMIC GROWTH

Insights from WEF Africa 2013

By Oluseyi Bickersteth

Key players and investors from all over the world convened at the 2013 World Economic Forum on Africa (WEF Africa) from 8 to 10 May 2013 – themed "Delivering Africa's Promise". The summit sought to address three key themes, Accelerating Economic Diversification, Boosting Strategic Infrastructure and Unlocking Africa's Talent.

While Africa has been acknowledged as the economic breadbasket of the world in recent years, a big majority of participants at WEF Africa agreed that Africa is experiencing sustainable economic growth.

"This growth must, however, be inclusive and broad-based to be really meaningful and prevent political and social instability. Whilst most commentators have focused on the resource exploitation-based background of the current economic growth, the reality is that this growth is broad-based," says Oluseyi Bickersteth, National Senior Partner at KPMG in Nigeria.

With the BRICS Summit held in South Africa in March this year, still fresh on everyone's mind, discussions around the BRICS development bank continued at WEF Africa. The main point of conversation was around issues of funding and how the required US$50 billion starting capital would be raised.

Yunus Suleman, KPMG Africa Chairman, explains the complexity of this issue, "The capitalisation of the bank is a major discussion area at this point. Capital will need to be raised amongst the BRICS countries. The question as to who will put up the US$50 billion has not been clearly addressed. The countries will either equally contribute US$10 billion or contribute as each is able."

A recurring theme at the forum was the importance of three major factors to sustain economic growth on the continent, namely infrastructure development, relevant and adaptable education, and regional integration.

Nick Chism, KPMG Head of Global Infrastructure, emphasises that overcoming the infrastructure challenges 'can allow Africa to roar'.

"Africa will require the creation of a thousand new cities before 2050. Social infrastructure needs to be created for two billion people, and massive investment into transportation is required to move people, goods and resources. These issues are urgent. At present, poor transport infrastructure adds 40 percent to the cost of doing business on the continent, which is crippling Africa's global competitiveness, and depressing inter-African trade."

Bickersteth adds, "Infrastructure is key. Africa needs massive investment in all aspects of infrastructure. A point was made at WEF Africa that if Nigeria resolves its power issue, it could become a global economic powerhouse by 2025."

"On the subject of education," Bickersteth continues, "Africa must educate its workforce and equip them with the skill sets that will enable them to be productive and competitive. This continent will have the youngest workforce in the world by the year 2030, and this could be a decisive competitive advantage if it is well leveraged."

Regional integration was cited as a key factor in Africa's economic development.

"Economic regional integration is necessary to provide scale and establish centres of excellence in Africa. This means labour mobility, open borders and the unimpeded flow of goods and services. The only serious obstacles to regional integration is political vision and will," says Bickersteth.

Josphat Mwaura, Senior Partner at KPMG in East Africa emphasises this point. "The African Union (AU) has a catalytic role to play in the fast-tracking of infrastructure development and regional integration to deliver even greater gains than those already being achieved in Africa. While some businesses have among their most profitable units on the continent, efficiencies from improved infrastructure and greater market access will transform Africa from a '3 to 5 percent continent' to a respectable 10 to 15 percent in terms of its contribution to global business revenues, trade and GDP. The WEF acknowledged this important role by the AU and noted the transformative leadership being provided by the Chair, Madam Nkosazana Dlamini-Zuma.'

While there is still significant work to be done for Africa to realise its position in the comity of developed nations, there is clearly a very positive endorsement of Africa's rise.

AFRICA: A CONTINENT WHOSE TIME IS HERE

Reflections from WEF on Africa

By Gugu Nxiweni

Africa, A Continent Of Opportunity

The World Economic Forum (WEF) on Africa – in Africa – was a powerful indicator that indeed Africa's time has come. Discussions ranged from the untapped mineral resource wealth to the dormant fertile land, and from the vast urban migration (or 'urban drift') to the one billion potential consumers across the continent. With six African countries already in the world's top 10 fastest growing nations, coupled with the IMF prediction that seven out of 10 of the fastest growing economies are expected to be in Africa by 2015, the continent has already set itself on an economic trajectory.

As expected, the discussions on the Africa opportunity centred on the drivers of the African economic outlook, including:

  • NATURAL ENDOWMENT: African mineral wealth includes 90 percent of global Platinum reserves, 70 percent of cotton, half of gold, and 30 percent of diamonds. From an agrarian reform perspective, studies have shown that Africa holds 60 percent of the world's uncultivated arable land.
  • AFRICAN POPULATION: Africa has around one billion consumers, and a rapidly growing middle class. Coupled with that is the fact that 65 percent of the total population in Africa is under the age of 35 and, according to the Youth and African Union Commission, about 10 million young African youth arrive each year on the labour market. It is predicted that by 2040 Africa's workforce would be bigger than that of China.
  • INFRASTRUCTURE OPPORTUNITY: Current spending is estimated at US$45 billion compared to the US$90-100 billion per annum that is needed to catch up with other major developing countries. This presents significant opportunities for funding, infrastructure and advisory businesses.
  • GROWTH SECTORS: Holding the most promise for growth and diversification in the next decade, these include manufacturing, agriculture and agro-processing, ICT, innovation and the knowledge economy and energy. Critically, realising this potential includes removing barriers to trade and promoting entrepreneurship.

As one of the delegates put it, Africa has to move from "Aid to Trade".

Delivering On The African Promise

Infrastructure is critical to deliver on the Africa promise. Africa needs focused investment in logistics infrastructure (rail, road, ports, airports, etc.), energy, ICT and water infrastructure to fuel and support our growth ambitions. Equally, as Africans, we need to ensure that we focus on building our skills and capabilities. Considering the high levels of unemployment across the continent, it remains important that we deliberately invest in education, innovation and skills development.

Amidst positive sentimental drift – from the "Dark Continent" to the "Continent of Opportunity" – it is critical that we move from words to tangible actions. Paramount to this, is that we focus on addressing Africa's readiness. This includes – amongst others – the need for stability and good governance, driving regional integration and improved pan-African trade, ensuring sustainable and inclusive growth in order to create jobs and reduce poverty, and drive unity and accountability through the recently launched African Union's Africa 2063 project.

Indeed, if carefully managed, Africa possesses the essential ingredients to make the 21st century the century of Africa's economic transformation.

WHY MOBILE BANKING REMAINS IMPORTANT FOR FINANCIAL INCLUSION IN AFRICA

By Olebogeng Mogale

Business Monitor International, an independent information provider, estimates that the value of transactions will increase from US$12 billion in 2011 to US$85 billion in 2016. According to the African Development Bank, annual consumer expenditure will reach US$2.2 trillion by 2030. Viable growth in commercial activity will be crucially dependent on similar growth in payments infrastructure to support the volumes of transactions associated with projected levels of consumer expenditure. Therefore, a case exists for mobile banking and mobile payment to play a greater role in commerce.

Mobile banking refers to the provision of banking services to customers through mobile devices. Mobile payments, meanwhile, refers to the transfer of funds or any other form of value through mobile devices in return for goods and services. These payments can be executed either in proximity or remotely. Together with mobile retail, they are known as M-Commerce.

In M-Commerce, there are a number of regulatory frameworks governing banks, telecommunications operators, technology companies, merchants and other players involved in the mobile money ecosystem. These frameworks primarily seek to uphold the safety and security of financial transactions as well as to protect personal information. Even though some countries have clear frameworks, there are markets where the regulatory frameworks are not established enough to clarify the market turfs, such as for telecommunications operators versus banks.

Mobile banking is set to grow in Africa for a number of reasons. Firstly, Africa has a low base of physical banking infrastructure. A 2011 World Bank research paper suggested that the number of ATMs per 100,000 adults was 59.58 in South Africa, compared to neighbouring countries like Lesotho (7.3), Mozambique (5.7) and Namibia (30). The same ratio in the European Union stood at 70.

In addition to lack of physical infrastructure, the continent's internet penetration rate remains the lowest in the world. However, with the high cell phone penetration rates across the continent, Africa may not need to catch up with respect to traditional banking and payments infrastructure.

Secondly, the pricing regimes for existing infrastructure such as ATMs and cards are not responsive to the economic realities of most African markets. Exacerbated by the local currency's performance, this affordability challenge is even greater in the international money transfer domain. Most African economies are dependent on international money transfers due to the large number of African expats all over the world.

According to the African Focus, remittance flows to Sub- Saharan Africa were estimated at US$21 billion a year from 2008 to 2010, and increased to US$24 billion in 2012. The transfer cost, according to the World Bank, was 11.57 percent per US$200 in the third quarter of 2011 – the highest average cost compared to other parts of the world. This certainly positions mobile payments as an alternative channel that is real time cost effective.

Lastly, one of the major social imperatives that cut across the continent is the challenge of financial inclusion. There are varying statistics around the number on unbanked adults in the continent. What remains clear is that access to financial services, and not just bank accounts, is a major issue. The economies of Africa will not reach their potential if access to financial services does not reach the broader sections of the populace.

Perhaps the world's greatest success story in leveraging mobile technology to overcome these challenges can be found, close to home, in Kenya. According to the Communications Commission of Kenya, by June 2012, Kenya boasted more than 19.5 million subscribers in mobile money subscriptions, more than 66 percent of the total mobile subscriber base.

African countries will need to endeavour to replicate their own versions of the Kenyan success story. It will, however, not be an easy feat as a number of regulatory issues will need to be addressed. The main hurdles in the mobile payments and banking landscape revolve around security, interoperability of technologies, and standardisation of issues like consumer data storage.

Our global survey in 2012 showed that consumers believed that mobile payments systems must be accessible and functional across a wide range of mobile devices, meaning that banks will need to develop and deploy 'device-agnostic' platforms if they expect to maximise their reach and capability. To this extent regulators need to not only engage with industries but to also have dialogues amongst themselves with a view of developing Pan-African frameworks so as to enable M-Commerce activities across the continent. For banks, in particular, mobile banking provides an opportunity to develop value propositions that are consummate with the needs of the previously unbanked segments and to develop business processes that reflect the nuances of field-based banking. Mobile devices provides a low-cost platform for acquiring and servicing customers, and also provides a platform for innovation which allows for differentiation in the market. This makes mobile channels an integral part of any bank's future business model and operating model.

Three major factors are driving banks globally to review their operating models. These are the economic environment, the changing customers and the march of technology. Amongst the key business imperatives underpinning the future operating models is cost reduction. Banks globally have responded in many ways but the there is no doubt that Straight Through Processing (STP), greater use of self-service channels, and an increase in First Contact Resolution of service requests are increasingly gaining prominence. An added benefit to this strategy is that, apart from decreasing the cost-to-serve, they also enhance customer experience.

Mobile banking and mobile payments certainly have a key role to play in the future of banking in the continent because they support the social imperatives while at the same time presenting a commercially viable business model for banking institutions. The opportunity for banks is to use mobile banking as a lever for transaction-led customer acquisitions by taking banking to communities. This strategy will support impending regulatory requirements around liquidity, as increasing the number of transaction accounts will then strengthen banks' liability bases.

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