Country: Ethiopia

Financial sustainability and regulatory proportionality of African capital market regulators

In Africa, capital market regulators are tasked with a dual mandate – both developing and regulating the market. This raises the difficult question of how a regulator might play a dual role, including determining the right strategic focus, activities and capacity to do so effectively. This is particularly important in resource-constrained economies where the regulator operates with a limited team and budget. Its functions must be delivered with constrained financial resources and managed in a way that is proportional to the market context. The White Paper on Financial Sustainability and Regulatory Proportionality of Capital Market Regulators in Africa proposes an analytical framework to assess the state and stage of a country’s financial market, which guides how the capital market regulator should implement its mandate, focus areas and engage policymakers on appropriate funding models.

In addition, limited resources call for careful identification of regulatory gaps that need to be bridged by capital market regulators to enable them to achieve both their regulatory and developmental mandates. Gleaning from institutional capacity assessments that we have supported in eight regulators in Africa from 2015 to 2022, the Institutional Capacity Assessment Toolkit for Capital Markets Regulators in Africa is a reference guide to equip regulators in systematically identifying their capacity gaps and developing appropriate institutional strengthening programs to address them.

Insurance supervisors’ responses to COVID-19

The importance of insurance has been amplified in the face of the Covid-19 pandemic

The Covid-19 pandemic constitutes one of the largest shocks to the African continent in recent times; in 2020, GDP contracted by 2.1% across Africa, costing the region at least $115 billion and pushing 30 million Africans into extreme poverty (AFDB, 2021; World Bank, 2020). Beyond this negative impact, the pandemic has also amplified the importance of the insurance sector’s role in the development of and support of the resilience of businesses and individuals. Insurance can help manage risks and transfer funds to individuals and businesses when unexpected crises like Covid-19 hit, and it can aid in economic recovery by enabling capital to flow into investments and lending practices.

Covid-19 disrupted and exacerbated weaknesses within the insurance sector

Despite being part of the solution, the insurance sector itself has also been affected by the pandemic. Research conducted by FSD Africa, Cenfri and the Oanisation of Eastern and Southern African Insurers (OESAI) in mid-2020 found that the pandemic affected insurers’ operations, negatively impacting their ability to launch new products, conclude new sales, collect premiums, service existing customers and process and pay claims.

The operations of insurance regulators were also significantly disrupted

In seeking to fulfil their core mandates of market stability, consumer protection and (in some cases) insurance market development, insurance regulators across sub-Saharan Africa (SSA) have had to perform a balancing act between offering regulated entities regulatory relief during a challenging time and monitoring vulnerabilities in the market closely. Research conducted in 2020 by FSD Africa and Cenfri found that different regulators chose to prioritise different sides of this trade-off. Some insurance regulators eased up on their usual regulatory requirements in an attempt to enable regulated entities to enhance their capacity to respond to Covid-19. Oers placed greater emphasis on the set of issues arising from the pandemic, such as the potential for the face-to-face nature of insurance business in their markets to spread the virus. Despite these challenges, the research also found that opportunities emerged for regulators to enhance market efficiency and stability through digitalisation and careful market consolidation, as well as improve the efficiency of their reporting and supervision processes through new solutions, such as regulatory technology (regtech) and supervisory technology (suptech).

Assessment of long-term impacts to identify how to build back better

Covid-19 is far from over. A year on from when the previous study was conducted, our current research takes stock of the ongoing impacts through a future-looking perspective, to assess which regulatory responses have (or have not) been effective and to identify what the imperatives and opportunities for regulators are to support stable, sustainable and growing insurance markets. The aim of this research is to shed light on the actions needed to ensure the resilience and stability of African insurance markets in the medium- to long-term, while also encouraging market development, growth and inclusion. Furthermore, understanding which regulatory responses to the pandemic were most and least effective can provide important guidance for regulatory authorities on how to respond to the next systemic crisis – be it a pandemic, a significant cyber incident, a major natural disaster or widespread political protests or riots.

Ethiopia jobs protection facility learning brief

In 2020, we partnered with FCDO Ethiopia and KfW (on behalf of BMZ) to implement an emergency jobs protection facility for manufacturers in various industrial parks in Ethiopia. The main objective of this intervention was to ensure continuity of employment for workers and the post-Covid sustainability of Ethiopia’s textile and garment manufacturing sector.

Following the conclusion of the Facility, we also undertook a review of the programme’s performance in line with specific objectives on behalf of the funders. This learning brief summarises the findings of the report and highlights the challenges, lessons and impact of the programme.

Market Failure Analysis: IPO’s in selected African stock exchanges (2014-2019)

We undertook a study with RisCura to identify, explain and address the root causes of “market failure” relating to Initial Public Offerings (“IPOs”) on African stock exchanges.

The study takes a robustly comparative approach, drawing out common challenges and recommended solutions from deep individual analysis of seven stock exchanges, ranging from West Africa to East and Southern Africa and some Francophone countries.

Challenges

The study identified multiple causes for the ‘market failure’ witnessed to date, with responses differing according to geography as well as to the respondents’ role, or vantage point, within the ecosystem and wider economy.

These factors can be grouped into three broad categories:

Solutions

The study uncovered positive and proactive recommendations for cross-cutting solutions which, taken together, have the potential to transform the performance of IPOs on African exchanges.

Three high-priority changes were identified as important and necessary:

Beyond these structural and ‘infrastructural’ solutions, there is also a clear need for ‘softer’ reforms and initiatives in the form of enhanced advocacy, awareness-raising and information-sharing.

Download the summary of this study to read more about ‘market building’ challenges and recommended actions for consideration.

How “Sustainable Futures” apply to FSD Africa’s projects and how FSD Africa seeks to measure change

The future of Africa is highly dependent on the use and allocation of resources. Economies and livelihoods in Africa are linked to the environment and natural resource use, and how benefits are distributed.

Enabling a sustainable future requires that interventions designed to meet the current needs of one group of people do not adversely affect the ability of other people to meet their own needs, now and in the future. Equally, enabling a sustainable future requires that interventions designed to achieve critical environmental outcomes (such as net-zero carbon emissions or halting biodiversity loss) take account of the people who will be most affected: a just transition. It also requires interventions to build, protect or improve critical networks and institutions that promote economic justice and environmental protection, including advocating for others to do the same.

This means respecting and valuing natural capital, social capital and human capital in the drive to grow economies and understanding and mnaging any trade-offs. It means also recognising that financial capital can and must play a role in supporting people and the environment as economies grow, but has no value in itself.

In 2020, FSD Africa, explored how the concept of ‘sustainable futures’ applies to the way FSD Africa selects and designs its projects. Firstly, FSD Africa targets investments in natural, social and human capital that enable a sustainable future. This includes providing finance for climate mitigation or adaptation or for biodiversity; supporting interventions that address corruption; and training men and women with skills for the future. Secondly, FSD Africa applies a sustainable futures lens to all its projects to identify and mitigate social and environmental risks and to support those left behind.

FSD Africa’s ‘sustainable futures’ efforts are designed to support the entire enabling environment for financial systems in order to reduce inequality and to drive greater equity and fairness for future generations. By pursuing inclusive and sustainable economic growth and access to basic services for all, FSD Africa intends to reduce inequality, enhance social systems and preserve natural care that no-one is left behind.

Financing Africa’s urban opportunity – the why, what and how of financing Africa’s green cities

Africa’s urban challenges are complex. Cities need tailored, endogenous solutions which work for their residents. It also means that the scale of projected investments to drive compact, connected and clean urban development is varied and depends on country-specific characteristics, as are the challenges of financing these investments.

This report addresses financing Africa’s green urban transition; highlights urban opportunities; makes the economic case for sustainable urban infrastructure investment; and outlines financing solutions for low-carbon urban development applicable to the whole region.

With case studies from three African countries, this report shows how investment in compact, clean and connected, urban development could accelerate growth across the continent and secure more resilient and prosperous lives for their residents.

Journey to a new Digital Finance Professional

The development of digital finance tools and systems is a key pillar of inclusive finance. One of the key challenges facing the penetration of digital finance in Africa is digital finance capacity and knowledge gaps among professionals and policymakers in financial institutions and governments across the continent.

In 2016, FSD Africa partnered with the Digital Finance Institute (DFI) to address this challenge. Through this five-year partnership, we supported the pilot and scale of the institution’s flagship professional program – Certified Digital Finance Professional (CDFP).

Since then, we have been able to achieve some of the below milestones:

As a result of this work:

Capacity in digital finance professionals and services providers has increased.
Institutional capacity for digital finance regulation has increased in both regulators and digital finance providers.
Digital finance policies, regulations and directives have been developed or adapted by DFI alumni.
Cross-Sector collaboration has increased resulting in new country-based initiatives on policy, product, customer needs and inclusion.

This partnership leaves the sector with a specialised capacity building utility company (Digital Frontiers), an e-learning school focused on building capabilities and skills aligned to the SDGs (Digital Frontiers Institute), a services business (Gateway), and the formation of a new global Alliance that represents the Inclusive Digital Finance Profession.

Impact Report: what we’ve learned and what we’ve achieved

FSD Africa was created in 2012 by the UK government’s Foreign, Commonwealth & Development Office with a mission to reduce poverty by strengthening Africa’s financial markets. This Impact Report, our first, charts our progress in fulfilling that mission.

It explains what we do, and how we do it. It highlights some of our most important work, demonstrating the impact we’ve had on the lives of millions of Africans. And it also outlines our plan for the future, as we look to new challenges.

Access to financial services

Between 2012 and early 2020, we reached millions of people and small businesses with financial services and products.

Access to capital

As of March 2020, we’ve helped to raise over £1 billion in capital to aid the growth of businesses and infrastructure.

Strengthening institutions

Since 2012, we’ve supported training for thousands of market actors, building the capacity of more than 50 companies providing vital financial services.

Success story: growing affordable housing with Sofala

Across sub-Saharan Africa, there’s an urgent need for affordable housing – not only to provide shelter and security, but to boost economic development.

To help tackle the issue, we invested in Sofala Capital, a housing finance business that provides funding and services for building projects, as well as mortgages.

Thanks to our help, Sofala has been able to attract new investors, increase its loan portfolios and extend its work in some of South Africa’s poorest neighbourhoods. And encouragingly, 48% of new borrowers with Sofala have been women.

To read more, and to take a look at other case studies, download our Impact Report.

Our next step: FSD 2.0

So far, we’ve focused on ‘finance for the poor’ – improving underlying market fundamentals in Africa to allow financial services to reach the people who need them most.

Now, as Covid-19 has demonstrated, we face new challenges. We need to redouble our efforts to ensure financial inclusion delivers tangible benefits – jobs, basic goods, green futures – with a direct impact on people’s day-to-day lives.

That’s why a £320 million package of UK aid has been announced, to support the next phase of financial sector development in Africa: FSD 2.0.

How are insurance regulators in sub-Saharan Africa being affected by, and responding to, COVID-19?

COVID-19 has had – and continues to have – a major effect on all parts of society.

The insurance sector has been placed under the spotlight as providers and regulators grapple with finding a balance between stepping up and providing respite to policyholders through claims and the need to maintain prudential soundness.

This note outlines our key learnings on the impact of COVID-19 on insurance markets across sub-Saharan Africa (SSA) as it relates specifically to insurance regulators. We focused on the following pertinent questions:

And engaged with:

Never waste a crisis – how sub-Saharan African insurers are being affected by, and are responding to, COVID-19

COVID-19 containment and mitigation measures in sub-Saharan Africa (SSA) have restricted the movement of people, goods and services. This has affected insurers’ operations, which, to a large extent, have traditionally required physical engagement. It is also affecting insurers’ ability to launch new products, conclude new sales, collect premiums, service existing customers and process and pay claims.

Moreover, the economic crisis triggered by the pandemic is affecting premium and investment income, and balance sheets are put under strain. 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.

This note takes stock of the impacts of the pandemic on insurers, based on interviews with 34 insurers, insurtechs, reinsurers and insurance and broker associations across 18 markets, looking at the impacts on operations, impacts across the insurance product cycle, balance sheet impacts and the regulatory engagements and responses. The report identifies key opportunities for insurance and regulators.

The pandemic and the accompanying safety measures have affected the way insurers operate, the insurance product cycle, the potential reputation of insurers due to COVID-19 exclusions, as well impacting balance sheets that will likely result in liquidity constraints. There has been varied engagement from regulators; with some being very proactive in their communication surrounding the pandemic while others have been slow to respond and have created feelings of uncertainty in the insurance sector.

While the pandemic has exacerbated pre-existing weaknesses of the insurance sector in SSA, the consultations for this study indicate that it also provides an opportunity for insurers and regulators to become better equipped to embrace and adopt innovation and develop their insurance markets. Some of the opportunities identified in the report are that the forced digitisation of insurers can help them enhance their efficiency as well adopt the remote on-boarding of customers, and COVID-19 has created an imperative for regulators to address the barriers to digitisation as well as proactively encouraging innovation in the sector.

To read about the other opportunities identified, please download the full report.