Category: Blog

FSD Africa partners with PharmAccess to improve healthcare in Ghana

Posted on by Kihingu Inc

We’re proud to announce that FSD Africa has teamed up with the PharmAccess Foundation on a project to improve public health insurance in Ghana.

Together, we’ll work on strengthening the data capabilities of Ghana’s National Health Insurance Authority, to improve healthcare services for Ghanaians. It’s a project fuelled by our belief that healthy populations translate into healthy economies.

The healthcare challenge in Ghana

Ghana’s National Health Insurance Authority (NHIA) provides coverage for around 50% of the country’s population. Its goal is to reach universal health coverage.

To achieve this, the NHIA needs to be financially sustainable over the long term. That means increasing funding, reducing unnecessary costs and improving operational efficiency.

Doing these things requires data, to see where improvements can be made. But right now, only a small portion of NHIA data is digitised and able to be analysed. For example, just 10% of hospitals that provide services to the Authorityr claims digitally.

With more data and better ways of analysing it, the NHIA will be able to expand its membership and be more efficient in servicing the population’s health needs. For instance by identifying the services that are most important for people’s health, particularly vulnerable groups for whom out-of-pocket expenditure to pay for health services often results in financial catastrophe.

Ultimately, this will lead to better quality and more cost-effective healthcare for all.

PharmAccess Foundation

The NHIA is aiming to fully digitalise its data and business processes over the next four years. It has already begun working with the PharmAccess Foundation, an international NGO that works to improve access to quality healthcare for people in sub-Saharan Africa through the use of innovative strategies such as mobile technology, sustainable finance models and data analytics.

PharmAccess is providing technical assistance (e.g., capacity building, advice, and data analytics) to make the NHIA ta-driven insurer and to create value out of its own data.

FSD Africa will provide a grant of just under $200,000 to PharmAccess, as well as technical assistance and communications and advocacy support, to boost its work with the NHIA through the creation of a new, dedicated project. PharmAccess will also be working with the Christian Health Association of Ghana (CHAG) which is the largest private not-for-profit healthcare provider in Ghana with around 344 health clinics.

FSD Africa and healthcare

Healthcare financing in Sub-Saharan Africa is highly fragmented and resources are often not allocated to where they are most needed or will have the most impact. This results in poor facilities, lack of affordable health care options and poor quality care meaning that people are less willing to pre-pay for healthcare through health insurance and end up paying higher out-of-pocket expenses for treatment on demand.

This creates a vicious cycle in which private healthcare providers are unable to predict revenues limiting their ability to invest in more and better services while public insurers face challenges to their financial sustainability.

We believe we can help break that cycle by using data to get a better understanding of a population’s healthcare needs. This will lead to a more efficient allocation of resources, better health outcomes and more trust in the healthcare system which ultimately should lead to more predictable public funding.

Our involvement reflects our aim to promote health inclusion in sub-Saharan Africa through better healthcare financing. And a healthy population ultimately translates into a healthy economy, able to create sustainable growth for future generations.

How the project will work

Over the next 18 months, we will be working with PharmAccess to improve the NHIA’s analytics capabilities, use data to see where efficiency gains can be realised, identify innovations that will improve the relationship between the NHIA and healthcare providers and help identify other fus for the work.

We hope our project in Ghana will demonstrate the power of data to improve healthcare services and will provide a basis for similar projects across sub-Saharan Africa in the future.

Long-term debt financing in Africa is a problem…and an opportunity

Posted on by Kihingu Inc
Long-term debt in Africa

Financial sector assets in Africa are heavily concentrated in banking, according to the latest research by the Africa Long-term Finance Initiative (LTF). Taken together, insurance company and pension fund assets represented less than 40% of GDP on average in 2019 across the continent, against an average of almost 100% of GDP for commercial banks. No surprises, then, that the largest providers of long-term debt in Africa are banks.

Why the lack of diversity in domestic sources of long-term debt? In part, it comes down to the risk aversion of fund trustees: most institutional investors in Africa prefer to invest in government securities and real estate rather than taking on project risks with which they are unfamiliar.

Instead of investing long-term saving commitments in long-term investments, institutional investors hold a significant portion of their assets as term and savings deposits with banks. This upends the maturity transformation role often viewed as the core purpose of financial intermediation – that is, meeting the needs of lenders and borrowers by taking short-term sources of finance and turning them into long-term borrowings.

Where institutional investors have been willing to take on project risk, their investment has been limited to brownfield infrastructure – projects that are already constructed with regular income streams from delivery of services, where the risks are much lower than in the greenfield construction phase. Even here, institutional investors typically lean on Development Finance Institutions (DFI)s to provide first loss-guarantees.

Turning to the role of commercial banks, a disproportionate share of bank lending is allocated to the public sector. The deepest segment of most capital markets in Africa is the market for government securities (mostly short-term): the volume of outstanding government bonds represents, on average, some 20% of GDP across the continent. By contrast, most African countries do not have a market for corporate bonds. Wher exists, the market represents less than 5% of GDP in most cases. This imbalance between deep sovereign debt markets and shallow corporate debt markets is exacerbated by the high concentration of liquidity in just a few capital centres south of the Sahara: Lagos, Nairobi, and Johannesburg.

Government securities are attractive to banks as they represent ‘risk-free’ assets and do not encumber banks in terms of capital adequacy. Conservative culture or ‘career risk’ also plays a role: as one bank executive in our network observed, “nobody worries about losing their job for buying yet more T-bills”. In some cases, as government spending ballooned in response to COVID-19, and credit risk associated with lending to the private sector increased, top-tier domestic banks have seen the purchase of government securities as a welcome “safe-haven”..

From the perspective of users of debt finance, although traditional banking products are available to most formal enterprises, they often come at a high costernative formal sources of finance only play a marginal role on the continent, access to long term finance is often constrained. Likewise, lending to the housing sector is very modest – the average percentage of adults with loans for home purchase across the continent was around 5% in 2017.

Not only are domestic markets for private debt constrained – we could say “crowded out” – by the borrowing needs of the public sector, foreign borrowing is also limited, and entails foreign exchange risk that increases its cost. This underscores the pressing need to deepen domestic debt markets for the private sector (both enterprises and households) across the continent.

The importance of long-term debt

Long-term debt is essential to sustainable development, in particular because it allows investments to be financed over their active lifetime, thus matching the liquidity needs of the investment project. Debt is also generally less costly than other forms of finance, such as equity, dueniority, its payment structure (regular installments) and (re)financing flexibility.

Depth of the financial system (2016[1], % of GDP)

The depth of the financial systems depicted in the figure below for a selection of African countries is gauged by commercial banks’ assets, government bond market capitalisation, corporate bond market capitalisation, and stock market capitalisation. The figure shows, for each indicator, the average across the continent in 2016 and the percentage for each country in the same year, scaled by GDP.

Sources: World Bank (World Development Indicators) and BIS, supplemented by the LTF Survey

In developed economies, long-term debt finance is used by governments, enterprises, and households alike. For governments, debt is the only alternative to tax revenues when raising capital for investment. Enterprises find debt the most advantageous form of finance because it has a low cost of capital, often provides tax shields, plays a disciplinary role for managers and avoids diluting founders’ control. Households also find debt to be useful in alleviating liquidity constraints and thereby allowing them to smooth their income over the life cycle, opening up possibilities for purposes such as finance of housing, education and retirement.

Lack of data creates higher risk perception

In developed capital markets, the amount of long-term debt provided to the different sectors of the economy is well-balanced. Banks have a broad portfolio of loans that includes both public and privateending, and well-diversified institutional investors allocate their capital to both governments and corporates.

However, when data is not readily available to market participants, lenders tend to restrict their lending due to higher perceived risk. For example, solid and reliable credit history registries reduce these “information asymmetries”, allowing borrowers to have easier access to long-term finance.

Valid data on debt under the Long Term Finance (LTF) scoreboard

By improving market intelligence through data collection, the LTF initiative seeks to deepen markets for long-term finance in Africa by reducing information asymmetries. Governments can use this data not only to benchmark but also to improve their debt management practices, enabling productive financing that yields return better than the cost of debt itself. Likewise, private sector stakeholders stand to benefit from being able to better manage the risks associated with their investment in local African capital markets.

Coordinated efforts need to be made by a range of stakeholders – private investors, public investors, concessionary lenders, and expert providers of technical assistance – to increase the deployment and investment of domestic sources of long-term finance in productive assets, especially those resources available for long-term investment by pension funds and patient capital investors.  As we’ve outlined in this short blog post, the pis information asymmetry made worse by an inertia that comes from traditional over-reliance on government securities. For innovators, it is a status quo replete with opportunity.

Investment in productive assets like infrastructure will create a ripple effect on economic expansion over time. As economies expand, more capital for growth and scale-up is needed, which will attract larger foreign investment flows into Africa. This in turn will create job opportunities, higher disposable incomes and household savings, and – ultimately – inclusive economic growth.

[1] Data on government and corporate bonds are only available until 2016.

Covid lockdowns just another crisis : the resilience of Nairobi s micro-entrepreneurs

Posted on by Kihingu Inc

In March 2020 when the first wave of Covid-19 hit, countries around the world introduced stringent public health measures. Kenya was no exception. Schools were shut, government and office workers were encouraged to work at home, markets were closed, curfews were introduced and movement in and out of Nairobi was banned.

Although these measures reduced the spread of the virus, their economic impact was swift and damaging. Millions of people’s livelihoods disappeared overnight. For those working in the informal sector in Kenya, which accounts for up to 77% of all employment,[1] days without income quickly became days without food. As the lockdown continued, the World Bank and others predicted dire consequences for long-term economic growth and poverty reduction targets.

Today, although the Covid-19 and macro-economic outlooks remain unclear, recent research undertaken by FSD Africa in Mathare, one of Nairobi’s largest slums, indicates that Covid is only the tip of the iceberg. The pandemic is potentially diverting attention away from the underlying drivers that make or break the livelihoods of Mathare’s inhabitants.

The Youth Enterprise Grant project

Over the last two years, FSD Africa has been studying over 1,000 youth living in Mathare as part of the Youth Enterprise Grant project. Starting at the end of 2018, young people aged 18–35 were given a smartphone and an enterprise grant totalling $1,200. Half of the participants received the grant in three lump-sum payments at the beginning of the programme, while the other half received a monthly stif $50 over two years.

The project was implemented by cash transfer specialists GiveDirectly, with funding from the MasterCard Foundation, FSD Africa and the Google Impact Challenge Fund. Ongoing research over the period sought to ascertain how the youth used the money and the phone to improve their lives and livelihoods.

Covid-19 strikes

One year into the project, the research showed several promising findings, such as the proportion of youth describing themselves as ‘self-employed’ – running their own business – increasing from 34% to 67%. Data also showed that a third of all transfers were being spent on new or existing business investments, with a further 13% of transfers spent on education. There was practically no evidence that funds were being misused.

But during the second year of the project, the Covid-19 pandemic struck. Researchers feared its impact would undermine the business investments and other gains reported up to that point. It was felt that the lump sum recipients, whose grant payments had finished approximately one year before, would be particularly affected.

The results of the project were therefore awaited with some caution. This included the responses to post-payment telephone surveys with monthly recipients, a final telephone survey of all YEG recipients and several longitudinal case studies.

But these findings, shortly to be releasedAfrica in the project’s final report, provide a more nuanced picture than expected of the economic impact of Covid-19 on micro-business and survival in the Nairobi slums.

The mixed impact of Covid

There is no doubt that lockdown affected the livelihoods of the YEG youth. Teresia, age 29, explained:

“Before Covid, I was working several days a week cleaning in the house of a Chinese businessman. When lockdown came he told me to stay away as he didn’t want people coming into his house. I didn’t get paid when I didn’t work.”

Many others reported similar stories, and in the endline survey, carried out in January 2021, 90% of respondents said their income had decreased substantially during lockdown.

Nonetheless, the broader research findings indicate that the impact of Covid-19 as a whole was temporary, and limited largely to the initial lockdown period. Analysis of other questions posed in the endline survey shows that most respondents, including those that received lump-sum payments nearly a year before pandemic, emerged in a better financial situation than at the beginning of the project.

Micro-entrepreneurs were resilient

All youth reported sustained positive perceptions of their financial situation at the end of the project compared with the start, with a marked increase in those feeling they could meet all their daily needs on most days.

The shift to self-employmalso sustained, with the majority of youth (79%) describing themselves as self-employed and 68% describing self-employment as their main source of income. The figures show little difference between lump sum and monthly payment recipients, indicating that business investments made with transfers at the beginning of the project survived.

Interviews held after lockdown revealed that although most participants experienced reduced or suspended business activity and income, Covid-19 had not caused any participant’s business to fail outright. While five of the nine interviewees said their businesses were directly affected by Covid, they tended to describe them as being ‘on hold’ during lockdown, rather than ‘failed’.

All felt these business ventures were restarting as demand picked up. This was especially true of skills-based businesses, like hairdressing, construction and cleaning, which are relatively easy to restart once demand increases.

A couple of businesses even grew during the lockdown. One yout in a modem to sell wifi connections to households in his area, which increased in demand as more people (including school children) were forced to work at home.

Covid was one issue among many

All of this challenged researchers’ initial concern that the Covid-19 crisis would be such a significant shock it would wipe out any economic gains arising from the project. Instead, the YEG research found that although Covid-19 was a major shock, its impact in Mathare was no greater than that of many other issues affecting micro-business operators.

Four interviewees, for example, reported businesses that had failed for reasons unrelated to Covid. Only one of these was due to poor business skills. The other three reflected the highly precarious nature of operating a business in informal settlements: they were due to livestock disease, police raids and medical expenses.

The challenges of running a micro-business

These issues echo comments made in focus groups when participants were asked about the chlenges of running their businesses. Rather than emphasising lack of skills, they cited a litany of other obstacles in operating in a place like Mathare:

“So I bought hair braids with the money. After that, it’s like thieves realized we have been given the money and they came and stole from me. They took everything.”

“You know we don’t have title deeds here so we are just risking, anytime we can be kicked out and I lose my rentals. Also, because we hear about slum upgrading so we must feel insecure about our business.”

“Personally, I have a small kiosk, there are people who come to me pretending they are city askaris but they just want money, the chief, people just wanting to disturb you and your business.”

In several cases, medical costs and funeral expenses had wiped out participants’ savings or undermined their ability to keep businesses afloat. Other challenges related to the unreliability of basic services:

“Challenges are like: when we don’t havey; you find that no money will come in [to the bio-block] that day. Also, when there is no power our video business suffers.”

Issues around crime, theft and corruption are not easy to resolve. Indeed, some informal income-generating activities are based on illicit operations, such as selling water or electricity by tapping into mains supplies. YEG interviewees described efforts to obtain official meters, permits or licences – to legalise their operations – as being expensive, bureaucratic and ultimately futile. So instead, they continue operating in the knowledge they are running on borrowed time until they are shut down.

Structural problems must be addressed

These findings should challenge policymakers to think about what micro-entrepreneurs really need to run sustainable businesses in informal settlements like Mathare. The YEG project shows that youth were enthusiastic in their use of the capital (and the phones) provided by the programme to start and grow businesses, but long-term stability, and growth, are reliant on a range of wider factors – particularly investment in public goods.

Reliable, affordable basic services, universal healthcare, secure property rights and security are all essential for micro-entrepreneurs to succeed but are hardly ever included as elements of urban livelihood programmes. Instead, there is a fixation on loans and business training, which will have limited impact unless underlying structural factors are re-oriented to support the needs of lower-income households and businesses. Unsurprisingly, the project found YEG participants less concerned about the role of their business skills in their success than the research team were.

Mathare’s micro-entrepreneurs have proved their capacity for survival in the face of so many continuous challenges, and the pandemic was simply seen as one more to tackle. While a significant shock like Covid-19 was an unexpected element oe YEG project, it has helped magnify the underlying factors that make or break the livelihoods of youth living in informal settlements.

————————————

[1] IEA, Informal Sector and Taxation in Kenya, 2012.

Smartphones and micro-entrepreneurs in Nairobi’s informal settlemen

Posted on by Kihingu Inc

In the space of two decades, the smartphone has revolutionised communication and enabled millions to access the internet. This is particularly true in Africa, where it is estimated more households now own a mobile phone than have access to electricity or clean water.

Within Africa, Kenya is one of the most digitally connected countries, with more mobile phone registrations than people.[1] An estimated 96% of internet users gain access via a mobile device,[2] and Kenya also leads the world in the adoption of mobile money services, with over 79% of adults holding a mobile money account.

Nairobi is one of Africa’s most vibrant and connected cities. As the continent urbanises and more young people enter urban job markets, understanding how Nairobi’s micro-entrepreneurs operate in the digital age offers useful insights for cities across Africa.

Much has been written on the digital dividend that internet connectivity can bring in terms of accelerating growth, creating opportunities and delivering financial services. But it is difficult to know whether this dividend pays out to poorer households, who may be the last to own mobile phones and less able to afford access to the internet.

These were the issues explored by FSD Africa as part of the Youth Enterprise Grant, an innovative pilot project that provided smartphones and enterprise grants to 1,000 youth in Mathare, one of Nairobi’s largest slums.

The Youth Enterprise Grant

The YEG project ratwo years, starting at the end of 2018. All participants lived in Mathare, with most aged 18–35. The project provided each participant with a smartphone and an enterprise grant totalling $1,200. Some received the money in three lump-sum payments at the start of the programme, while others received a monthly stipend of $50 over two years.

The project was implemented by cash transfer specialists GiveDirectly, who helped FSD Africa assess if and how young people used the money and the phone to improve their livelihoods. The research sought to ascertain the value of digital technology in building business skills and knowledge, money management and financial literacy.

The smartphones were pre-loaded with several apps. These included Facebook and M-PESA, the mobile money service via which the grants were paid. The phones were also loaded with Touch Doh, a money management app that uses animated characters, speaking in Sheng (Swahili street slang), to help users with budgeting. On Facebook, participants were held to set up a profile (if they did not already have one) and become a member of the Hustle Fiti page, a business advice and chat group operated by Shujaaz Inc.

—————-

[1] https://data.worldbank.org/indicator/IT.CEL.SETS.P2?locations=KE

[2] https://datareportal.com/reports/digital-2021-kenya

Insurtechs will reshape the insurance sector

Posted on by Kihingu Inc

Needed but not prioritised, relied upon but not trusted – these are just some of the perceptions that have characterised interactions with the insurance sector. The sector has been grappling with the challenge of delivering relevant products for a long time, especially to customers at the base of the economic pyramid.

Only 3% of Africa’s GDP is driven by insurance, which is less than half the world average of 7%. Yet, insurance provides a safety net from many external threats like natural disasters, health threats and economic disruptions.

This brings the question: why is there such a discrepancy, especially given Africa is no less exposed to many of the risks that insurance buffers against compared to the rest of the world? Remote locations, lower education levels and a lack of trust or experience with formal institutions have been key contributors to low insurance uptake in Africa.

According to McKinsey, Africa’s insurance industry is valued at about $68 billion in Gross Written Premium (GWP) whichbehind other emerging markets such as Latin America and the Caribbean. Uptake across the continent is also inconsistent with 91% of premiums concentrated in just ten countries; South Africa has the largest and most established insurance market and accounts for 70% of Africa’s premiums.

In Kenya, a 2019 report by the Insurance Regulatory Authority (IRA) showed that insurance penetration dropped from 3.44% to 2.34% over the last 9 years, an indication that the sector has not been successful at capturing the opportunities presented by the expanding economy.

These statistics clearly depict the protection gap that has left households and businesses vulnerable to shocks triggered by various risks.

Covid-19 has and is still placing significant pressure on the way the insurance business is conducted. The pandemic disrupted providers’ engagement with both regulators and consumers. A study by FSD Africa conducted in 2020 that took stock of the effect of COVID-19 across sub-Saharan Africa, showed that the sector ed to enhance digitalisation as the virus reduced mobility and social interaction amidst government-imposed restrictions. Digitising the sector would also improve access and efficiency of insurance products and services. Furthermore, the study showed that regulators also needed to adjust their service delivery processes of licensing, registration, data collection and product approvals by embracing new solutions.

The pandemic has without a doubt amplified the need to adopt regulatory technology (regtech) and supervisory technology (suptech) in enhancing the efficiency of reporting and supervision processes. There have been notable uptake in online distribution of products, customer-centric services such as the use of chatbots, mapping out trends, assessing risks, managing claims and even marketing. Bold start-up companies are behind some of these most ingenious innovations, with support from the sector’s long-standing players. For example, Lami, in partnership with more than 25 Kenyan underwriters, released its flagship mobile application in early 2020, enabling Kenyans to pay for insurance in instalments and pause coverage if they travel abroad. In addition, Bluewave and APA insurance recently launched an affordable digitally distributed health cover for low-income populations, costing less than USD 2 each month for a hospitalisation cash benefit and funeral expenses benefit of up to USD 500.

To leverage such innovations, Kenya’s Insurance Regulatory Authority, together with its partners, launched BimaLab, a pilot accelerator programme in 2020. The move is meant to enhance visibility and push for resources for talented insurtech founders of early to mid-stage start-ups. The programme will harness innovation for inclusion and enhanced access to insurance products and services with an aim of increasing insurance penetration in Kenya. The programme, now in its second phase and with FSD Africa’s involvement, has seen an increasing contribution of technology to insurance inclusivity through companies such as AiC Chamasure and Sprout.

AiCare is enabling motor insurers to conduct accurate motor insurance risk assessments. This is improving underwriting efficiency and reducing costs of insurance premiums. Chamasure has created a peer-to-peer microinsurance and savings platform which enables those who save through informal social groups to purchase insurance through the groups in case of death or accidents. Sprout Insure developed a faster claim processing solution for crop insurance making it easier for farmers to buy policies and receive timely pay-outs.

It is vital for regulators to balance the need to facilitate and promote innovation with the protection of consumers and the adequate management of the risks that may arise. In this regard, there are seven regulators across sub-Saharan Africa that are also shadowing the second phase of BimaLab programme with an aim of building an enabling regulatory environment. The programme will enable insurance regulators from Nigeria, Ghana, Rwanda, Uganda, Malawi, Zimbabwe and Kenya to adapt and evolve their supervisory processes to be more flexible and responsive to new innovations, technologies, and risks as and when they arise.

As technology advances in the insurance sector, it is important that regulators balance the need to promote innovation with the protection of consumers and the adequate management of the risks that may arise. In this regard, there are seven regulators across sub-Saharan Africa that are also shadowing the second phase of the BimaLab programme with the aim of building a regulatory environment that facilitates and welcomes innovation. The programme will enable insurance regulators from Nigeria, Ghana, Rwanda, Uganda, Malawi, Zimbabwe, and Kenya to adapt and evolve their supervisory processes to be more flexible and responsive to new innovations, technologies, and risks.

Insurtech is revolutionising an almost century-old insurance industry in Kenya, leading to its financial system becoming more accessible to low-income populations. With the trend being recorded across the globe, technology is reshaping the competitive landscape, challenging traditional structures to significantly improving access to insurance.

FSD Africa recognises the role Insurtech plays in increasing insurance penetration and coverage. Thus, we are exploring a pipeline of Digital innovation projects to support this Insurtech revolution and the reshaping of the African Insurance Industry.

Why long-term finance is vital to Africa – and how data can unlock

Posted on by Kihingu Inc

Africa badly needs long-term finance. But to properly develop, long-term finance markets need data and in-depth data analysis. For years, this sort of market intelligence barely existed. But the work of the Africa Long-Term Finance Initiative gives hope that things are changing.

Why is long-term finance important?

The simple answer: sustainable growth. Longer-term investments support growth and development by reducing costs. That increases productivity and competitiveness and creates jobs – particularly for the 12 million young Africans joining the workforce every year.

But there are significant long-term finance gaps across African economies, especially in the infrastructure, housing and enterprise sectors. These industries are crucial to the continent’s economic recovery from Covid, but businesses in these sectors often find they’re asked to repay loans before the investment has had a chance to yield a return.

Long-term finance is also necessary to accelerate Africa’s green transition, asies and governments seek to reconcile economic development with climate change mitigation and adaptation.

How can data help?

One of the main reasons for the dearth of long-term finance in Africa is a lack of investor confidence. Investors feel exposed to liquidity and interest rate risks, and thus lack the appetite to provide anything more than short-term money.

This is largely due to a lack of market intelligence. Historically, there have been few – if any – benchmarks or indicators to go on when it comes to the performance of long-term finance in Africa. Without this knowledge, investors are reluctant to provide the necessary finance, for the necessary length of time for many businesses and projects to grow.

The deepening of domestic financial markets, with increased provision of financial products and services for all levels of society, is crucial to increase the availability of finance and deploy it more efficiently, and also to reduce exposure to foreign exchange risk – and this process es accurate data, too.

What is the Africa Long-Term Finance Initiative?

In 2017, a number of institutions, including FSD Africa, came together to fix this lack of market intelligence by launching the Africa Long-Term Finance Initiative.

The initiative’s objective is to close the financing gaps in the infrastructure, housing and SME sectors. The ways it does this is by improving market intelligence through collecting data, operating a country-comparison LTF Scoreboard, summarizing the data in regular reports on key findings, and providing in-depth country diagnostics

These products enhance transparency and provide benchmarks to assess the comparative levels of long-term finance markets across the continent. The Africa Long-term Finance Initiative Scoreboard presents data using different benchmarking techniques, providing a more detailed picture than a simple comparison of country averages. The country diagnostics provide additional country-specific quantitative and qualitative analysis, complementing the data presented in the Scoreboard.

In turn, these outputs are helpful to inform policymakers, the private sector and donors about the availability of long-term finance, boosting investor knowledge and confidence – and thereby catalysing new partnerships that strengthen focus on what’s needed to increase the availability of long-term finance.

In addition, by enabling comparison between countries, the LTF scoreboard is creating positive competition among national stakeholders, and further driving the availability of long-term finance.

The green finance opportunity

Long-term finance is closely linked to the green transition in Africa. Countries like Kenya, Nigeria and South Africa have taken the leadcreating programmes for green bonds, which tap into domestic and international capital markets to finance green projects.

The success of these initiatives and the increasing global demand for green investments have led other countries – like Ghana – to follow suit in considering green instruments as a way of attracting long-term finance.

Driving recovery through data

The economic impact of Covid-19 means it’s more urgent than ever to respond to the investment needs of African businesses. The progress made on market intelligence by the Africa Long-Term Finance Initiative is therefore particularly timely. By equipping and emboldening investors, it’s hoped that the initiative’s work will be the first building block in the development of a strong long-term finance market to power sustainable growth

The role of insurance in climate change and sustainable development

Posted on by Kihingu Inc

Climate change is increasing extreme weather events, and Africa is greatly exposed. Drought, flooding, extreme heat and tropical cyclones are all major risks with the consequence that 30 of the world’s 40 most climate-vulnerable countries are in sub-Saharan Africa1. Given Africa’s high dependence on its natural resources, with agriculture contributing 16% of the continent’s GDP and employing roughly 60% of the population, these climate extremes pose a very high risk in the continents’ economies and household livelihoods. In Kenya, for example, in the three drought years in 2009, 2010 and 2011, the drought cost the country 11%, 7% and 9% of its entire GDP.

At the same time, only 3% of global climate finance2 finds its way to Africa to drive mitigation and adaptation. There is also a large protection gap with a very low percentage of African weather-related losses currently being insured. A specific example is Cyclone Idai which in 2019 affected Mozambique, Malawi and Zimbabwe. Of t0bn losses, only 7% were covered by insurance3. As the frequency and severity of weather events increases, if more is not done to change this situation and increase resilience, then the cost of climate disasters will render sustainable development virtually impossible in Africa.

We thus face a major sustainable development crisis for which urgent action is required. The insurance industry has a vital role to play in responding to help drive both mitigation and adaptation.

Mitigation

Insurers are underwriters and asset managers of long-term capital and, in both capacities, can meaningfully contribute towards reaching net-zero carbon emissions.

As underwriters, insurers play an essential role in facilitating the flow of capital to mitigation projects through providing de-risking solutions to investors. For example, in the geothermal energy sector in East Africa, where capital intensive early-stage development drilling has a low probability/high severity risk profile, investors need risk transfer solutions to make the risk-return profile attractive. To address this barrier, FSD Africa is working on setting up a local underwiring pool that will provide de-risking solutions to enable the crowding-in of private capital to this important renewable energy source.

On the flip side, insurers can leverage their underwriting to reduce capital flows to the fossil fuel industry by making underwriting decisions using an ESG lens and not purely based on short-term commercial factors.

As managers of significant pools of long-term capital, insurers also have a critical role to play in the transition to a net-zero emissions economy through green investing.

The recently convened UN Net-Zero Insurance Alliance demonstrates the growing global momentum towards this.

Adaptation

The insurance industry is expert at managing complex long-term risks, and so when it comes to managing the unavoidable long-term consequences of a warming planet, the industry has much to contribute.

The starting point in managing risk is understanding it and having the right data and models to make informed decisions on how to respond. In simple terms, you need to know the likelihood of a hazard occurring, the direct financial losses it will cause and the indirect impacts (e.g. services disruption) that will result. Catastrophe models have been used for many years by insurers to model these types of impacts and price the risk. By incorporating climate risk modelling into these projections, insurers can help businesses and governments make informed decisions on what resilience initiatives to pursue.

Once risk is understood and evaluated, it needs to be managed. Investing in physical risk reduction measures (e.g. irrigation systems or flood defences) and pre-arranging risk finance are two important management options. The insurance industry is a key player in enabling both. For the necessary private finance to flow to resilient infrastructure, as with mitigation projects, risk transfer solutions underwritten by insurance companies are often required. And when it comes to pre-arranging risk finance, this is obviously the core of what the insurance industry offers. So, insurers making the necessary solutions available to individuals, businesses and governments is vital to ensuring climate resilience.

The way forward

One of the key global initiatives developed explicitly for the insurance industry is UNEP’s Principles for Sustainable Insurance (PSI). It focuses on sustainable insurance that reduces risk, develops innovative solutions, improves business performance, and contributes to environmental, social, and social-economic sustainability[1].

Given FSD Africa’s increasing focus on the role of finance in climate mitigation and adaptation, we have joined the UN Environment’s PSI initiative and will be directly supporting the implementation of the PSI global programme in Africa. FSD Africa was also a founding signatory to the recent Nairobi Declaration, which commits African insurance organisations to play the sustainability roles described in this article. We strongly appeal to all African insurance industry leaders is to also sign the Nairobi Declaration.  Let’s work together to leverage the collective financial might of the insurance industry towards a sustainable future.

 

<"#_ftnref1" name="_ftn1">[1] UNEP FI: PSI – Principles for Sustainable Insurance – a global sustainability framework and initiative of the UNEP Finance Initiative (2012)

1 Notre Dame Research
2 CPI, 2019
3 Swiss Re Institute,

Linking refugees in Uganda to formal financial services

Posted on by Kihingu Inc

The Financial Inclusion for Refugees (FI4R) project which was jointly supported by FSD Uganda and BFA Global, and other partners (Equity Bank Uganda, VisionFund Uganda and Rural Finance Initiative) worked to offer financial services to refugees in Uganda.

In a world dealing with unprecedented crises, over 100 million people – equivalent to the population of the world’s 14th largest country – find themselves forcibly displaced. On May 23, 2022, the UNHCR unveiled a staggering reality: 1% of humanity is on the move, struggling for survival away from their homes. Beyond the distressing stories of human suffering, there lies a lesser-known struggle – the battle for financial inclusion and dignity. In this video, we uncover the profound journey of resilience and hope in the face of adversity of refugees in Uganda.

Through the lens of the financial diaries methodology, this animation offers a unique glimpse into the financial lives of refugees, revealing challenges, opportunities, and the relentless spirit of those fighting to rebuild their lives. The project, in partnership with a spectrum of financial service providers, including banks, MFIs, mobile network operators, and SACCOs, showcases practical insights and hopeful stories of empowerment and resilience.

 

Why institutional investors in Africa must increase their investment in private markets

Posted on by TIMOTHYRADIER

This article was originally published by the East African on 16 March 2021.

Despite a total of US$ 22.6 bn in private equity and early stage venture capital having been raised for Africa between 2014 and 2019, investments in private equity today account for less than 1 percent of total pension assets for most countries in sub-Saharan Africa.

In contrast, globally, allocations to private assets such as private equity (PE), private debt (PD), real estate and infrastructure now make up around 26% of global pension fund assets, up from 19% in 2008. In the US for example, the number of publicly listed companies has dropped by about half, over the past two decades from 8,090 in 1996 to 4,397 in 2018.¹ The increasing ability of entrepreneurs to access private capital has encouraged a shift from public market capital-raising. Firms are also staying private for longer. If the trend witnessed globally where listings in public markets is anything to go by, then private capital markets are yet to reach their ull potential in Africa.

In Africa, private equity and private debt markets have hitherto been dominated by development finance institutions with very limited participation by domestic institutional investors. Although this may be sustainable in the short to medium term, it is imperative for long term sustainability to mobilize domestic institutional capital into the space. On aggregate pension funds remain the single largest institutional investors in Africa, the assets under management by pension funds currently stands at approximately USD 420 billion with total institutional investor assets standing at approximately USD 1 trillion.² A large chunk of these pension assets is however invested in traditional asset classes.

In 2019, FSD Africa in partnership with The East African Venture Capital Association (EAVCA) and the International Finance Corporation (IFC) commissioned a market study to investigate the low uptake of PE investment by pension schemes in East Africa. The market study report cited knowledge gap on both pension fund and regulatory side and absence of regulatory oversight on the PE Fund Managers by local regulators as some of the key impediments for pensions seeking to invest in PE Funds. Although the scope of the study was limited to East Africa, these challenges are cross cutting across Africa.

In addition to these challenges noted by the study, the lack of appropriately designed structures or avenues for investment that address certain issues that may be unattractive for institutional investors such as the J-Curve effect, is also a key impediment to investment by institutional investors.

Despite the existence of provisions allowing pension funds to invest in private equity, the appetite by pension funds to invest in private equity has remained low and there is a case to be made for African institutional investors to gradually increase allocation to private markets. By making capital for ownership in or as credit to unlisted, privately owned companies, these markets can complement public markets in providing long-term financing for the transformation of African economies and the attainment of sustainable development goals.

African institutional investors and the continent stand to benefit greatly from increasing their investment in private capital markets. The benefits of investment in private capital markets are diverse, ranging from diversification benefits to participation in the social and real sectors. Such investments may provide investors (specifically institutional investors) with exposure to markets and investment strategies that cannot be accessed through traditional asset classes.

In addition to potential attractive risk-adjusted returns, private market investments allow clients to diversify their portfolios by investment strategy, portfolio manager, industry sector, geography and liquidity needs. Furthermore, private market investments facilitate active participation in the growth sectors of the real economy by investors thereby generating returns while contributing to broader economic development goals such as creation of jobs and improving access to basic services. This is because the link between private markets and social impact can be much more direct, more so because in most cases these are direct investments in companies that operate in the real sector.

Furthermore, the COVID-19 pandemic has presented a fresh set of challenges especially for MSMEs. MSMEs have been exposed to significant stress leading not only to job losses but also balance sheet stress due to lack of long-term capital. In normal times, access to long-term finance for MSME sector is typically constrained, this has now been exacerbated by the pandemic. Expected volatility in public markets over the next few years will potentially impede the tapping of these markets by companies to raise money. This coupled with expected increased risk averseness by banks and other lending institutions is likely to create a greater challenge for MSMEs to access long-term finance. The private equity and debt markets are therefore expected to play an even greater role in financing COVID-19 recovery in support of these companies. In particular, private debt markets may provide greater flexibility in structuring solutions that meet the needs of both investors (institutional) and borrowers.

One of FSD Africa’s strategic imperative is to mobilize long term finance in local currency to fund Africa’s developmental priorities. As part of this imperative, FSD Africa is launching a multi-year, multi-country programme to support the development of private capital markets in Africa. The 4-year technical assistance programme will be implemented across Africa in partnership with regulators, policy makers, industry associations and other market operators. The objective of the programme is to support the development of private capital markets as a complement to the public capital markets in Africa.

Table: Low investment by African institutional investors in private equity

Country Pension AUM (USD Bn) Current % investment in PE Maximum allowable investment (%).
South Africa 302.09 0.30 10%
Nigeria 30.17 0.30 10% for higher risk sub-funds
Kenya 12.19 0.09 10%
Ghana 4.61 0.34 10%
Uganda 4.27 2.40 15%

Source: Various regulatory agencies.

 

¹ Willis Towers Watson
² FSD Afric

The effect of COVID-19 on a sustainable future for Africa

Posted on by TIMOTHYRADIER

To achieve sustainable development, every economy must create and sustain equal opportunities for individuals to meet their current and future needs. COVID-19 presents a risk in realising this goal. The World Bank estimates that the pandemic will push between 88m and 115m into extreme poverty by the end of 2021, 80% of these “new poor” will be in middle-income countries, such as Kenya.

WHY COVID-19 PANDEMIC WILL HIT THE POOREST HARDEST

Impact of COVID-19 on employment

The role of employment in achieving a sustainable future is highlighted in Sustainable Development Goal 8, which aims to “promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all”. COVID-19 sets sub-Saharan Africa (SSA) further back in realising this goal.

The African Union estimates that the continent could lose 20 million jobs both in the formal and informal sectors due to the pandemic. According to the World Bank, only 6% of countries in SSA have some form of unemployment protection programme which means there is no support to retain workers during economic downturns or to provide income security to unemployed workers. And it is expected that women will be affected disproportionately as 70% of women in developing countries are employed in the informal economy.

Figure 1: Availability of unemployment protection varies widely by income and region

Impact of COVID-19 on Poverty in SSA

As African economies are plummeting into economic difficulties in the wake of COVID-19, extreme poverty rates are expected to increase as African economies struggle to finance and manage the pandemic. The World Bank’s Poverty and Shared Prosperity 2020 report shows that pandemic-related deprivation worldwide is hitting poor and vulnerable people hard and the World Food Programme is warning of an upcoming hunger pandemic¹.

Figure 2: The Impact of COVID-19 on Global Poverty

As the figure below illustrates, aid experts have issued a cloudy forecast on official development assistance which could see a global drop of US$25 billion by 2021.

Figure 3: Economic recession in donor countries may sharply reduce ODA levels, especially if donors reduce the share of national income spent on aid.

Effect of COVID-19 on building more equal, inclusive and sustainable economies

Due to the pandemic, vulnerabilities in social systems have been exposed. Gender-based violence has increased due to economic and social distress coupled with restricted movement and social isolation measures. These impacts have been amplified more in contexts of fragility, conflict and emergencies. Social protection programmes help to mitigate the economic fallout of lockdown measures, especially for those without the luxury to work from home and self-isolate. As of June 2020, 49 African countries had introduced social assistance which accounts for 84% COVID related response.

COVID-19 has worsened credit and liquidity constraints among micro, small and medium enterprises (MSMEs)². FSD Africa has responded to this by making five investments to support business liquidity, for example, FSD Investments has invested in Blue Orchard to enable Tier 2 and 3 MFIs to access immediate liquidity. As a result, the MFIs will be able to manage their deteriorating portfolios and have access to the longer-term finance to avert insolvency and further job losses.

What can we do to prepare for future pandemics?

COVID-19 is unlikely to be our last pandemic, and it might not be the worst. To build resilience in the society, an introduction of pandemic insurance policies will be on the rise and a vital part of the planning and preparing for the next pandemic. Providing affordable insurance policies for SMEs, MSMEs and workers in the informal sector will help mitigate the economic effects of future pandemics. In a new FSD Africa publication “Never waste a crisis – how sub-Saharan African insurers are being affected by, and are responding to, COVID-19” we find that while the pandemic has exacerbated pre-existing weaknesses of the insurance sector in SSA, it also provides an opportunity for insurers and regulators to become better equipped to embrace and adopt innovation and develop their insurance markets. COVID-19 has created an imperative for regulators to address the barriers to digitisation as well as proactively encouraging innovation in the sector.

Another approach that FSD Africa is exploring is a COVID-19 development impact bond, an outcome-based investment instrument with a goal to mobilise £11m. In partnership with UK aid, AMREF, and APHRC, this impact bond would be the first of its kind, aimed at meeting social outcomes relating to the prevention of the spread of COVID-19 in informal settlements in Kenya (Nairobi, Mombasa and Kisumu). This is a pilot project which could in future be replicated in other countries, not only rgency responses but also to support governments in meeting other healthcare priorities.

To find out more about FSD Africa’s response to the pandemic, and how we’re contributing to efforts to build back better, you can read the latest CEO’s updates and explore our Impact Report.

 

¹ Global report on food crisis 2020
² Economic impact of Covid-19 on micro, small and medium enterprises (MSMEs) in Africa and policy options for mitigation, COMESA special report

,