Pillar: Financial Markets

Private equity investment guide and market study

In collaboration with the East African Venture Capital Association (EAVCA) and the International Finance Corporation (IFC), we have developed a Private Equity (PE) Investment Guide with the objective to deepen the understanding of private equity structures among pension fund managers and their trustees to unlock more investments into the asset class. The guide mainly covers three key areas – understanding the asset class and where it sits alongside other asset classes, why and how to invest in PE’s and an overview of the benefits and risks of investing in private equity.

The development of the guide was informed by a market study report that sought to investigate the low uptake of investment by pension schemes. The report cites the knowledge gap on both pension fund and regulatory side and the absence of regulatory oversight of the PE Fund Managers by local regulators as some of the key impediments for Pensions seeking to invest in PE Funds. The study surveyed 18 Pension Schemes from Kenya, Rwanda, Tanzania and Uganda alongside 15 PE General Partners from Ethiopia, Kenya and the Ud Kingdom as well as 3 Pension regulators in Kenya, Uganda and Tanzania.

Across developed markets the pension industry is the backbone of investments, supporting asset classes such as private equity with the patient capital to deploy in growing businesses and there is a need to up skill both regulators and pension fund trustees to foster a greater understanding of the benefits of investing in PE Funds.

Payroll lending review – Zambia

This report documents the results of an assessment of the payroll lending sector in Zambia. The study was commissioned by FSD Africa on behalf of the Bank of Zambia and was carried out between July and November 2014. The study forms part of a broader theme of work initiated by FSD Africa on credit markets within the region.

The study aimed to understand and quantify the extent of systemic and operational risks that may have arisen as payroll lending in Zambia has grown in prominence. Based on data collected from the largest payroll lenders, the research estimates that payroll loans now account for one-third of all Zambian banking system loan value, up from 25% at the end of 2008. Personal loans, driven by payroll loans, have been the largest contributor to commercial bank loan portfolio growth every year since 2011, accounting for just under one-third of the total growth of the Zambian credit markets between June 2010 and June 2014.

Yet even though payroll lending is a key driver of Zambian credit market growth, information is scant and oversight and regulation is limited.

Given the growing exposure of banks and micro-finance institutions (MFIs) to payroll lending and the concentration of portfolio growth within particular market segments the assessment raises significant questions about the operational and systemic risks that have already been introduced into the Zambian financial sector, or that could become risks in the future.

Seeking sustainable change in Africa’s financial systems

Launched on 4 June 2015 alongside the World Economic Forum in Cape Town, this report is the result of a research by FSD Africa in conjunction with the Accenture Development Partnerships (ADP).

Despite strong evidence of the potential for large market revenue from low income banking consumers in SSA, most financial sector players are not prioritising this under-served segment. This originates from their strategic positioning as well as internal capacity constraints.

This paper starts by recognising the need for change and capacity building for financial services players to successfully develop new models that would enable them to profitably exploit the revenue potential in under-served segments. It identifies a set of success criteria for organisations seeking to trigger and sustain change necessary to drive business models that would effectively and profitably serve low consumer segments.

Professional services providers also play a critical role in supporting financial institutions with successfully managing the change process. The paper identifies how services providers can be successfully leveraged to support the change process within financial institutions.

Development sector organisations have played a big role in the past supporting the increase in depth and breadth of financial access in SSA, albeit not in a sustainable, market-building manner. The paper identifies how development sector organisations can work more effectively with the financial sectors and professional services providers on inclusive financial sector development and building sustainable financial markets.

A key insight from the paper is that: by working together, the three sectors (financial institutions, services providers and development organisations) can leverage each others’ strengths to de-risk the process of inclusive financial sector development. Specifically:

  • Experienced service providers and development organisations can provide change management support to reduce the risk of financial institutions moving into new, underserved markets.
  • Development organisations can provide support to reduce the selling and engagement risks of professional services providers involved with financial inclusion targeted financial institutions.
  • Experienced services providers can provide guidance to mitigate the risks inherent to development organisation support of financial institution change management processes.

Bank of Industry and FSD Africa Collaborate to Drive Green Finance Initiatives in Nigeria

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Lagos, Nigeria – The Bank of Industry (BOI) is pleased to announce a significant milestone in its commitment to promoting sustainable finance in Nigeria with the formal signing of a Memorandum of Understanding (MOU) with FSD Africa, a leading agency dedicated to strengthening climate financing in financial markets across Africa.

Under this partnership, FSD Africa will deepen BOI’s sustainability finance proposition, providing technical assistance, strategic guidance, and capacity development initiatives. This will involve supporting the bank in strengthening its sustainability strategy, delivering decarbonisation pathways and advancing its adaptation finance initiatives. These resources will better position BOI to offer tailored lending solutions and business support for Nigerian climate-focused projects, further solidifying its position as a key driver of green finance in the country. 

The MOU establishes a robust framework for collaboration, enabling BOI to expand its climate financing portfolio and support enterprises committed to sustainability. This partnership will deepen BOI’s impact in fostering climate-resilient economic growth across Nigeria.

Speaking at the signing ceremony held at BOI’s headquarters in Lagos, BOI Managing Director/CEO Dr. Olasupo Olusi said:

“This partnership with FSD Africa is a critical step in our efforts to promote climate resilience and sustainability as one of our central pillars of our operations. Together, we will pioneer innovative solutions that address the challenges of climate financing while unlocking opportunities for businesses and communities across Nigeria.”

Representing FSD Africa at the event, Dr. Evans Osano, Chief Financial Markets Officer, said:” Our partnership with BOI in advancing sustainable finance is pivotal at this critical time. Nigeria’s annual climate finance gap is estimated at USD27.2 billion. Bridging this gap requires concerted effort including catalysing domestic capital in addition to international investments to drive sustainable investments.  We are excited about the bank’s commitment to promoting climate transition and driving Nigeria’s climate commitments towards net zero, and we are happy to be part of this journey.”

The MOU aligns with BOI’s recently launched three-year strategic plan, which prioritizes climate and green finance as key focus areas.

“With the support of strategic partners like FSD Africa, we are confident that BOI will continue to play a leading role in fostering sustainable development and driving positive change across Nigeria’s economic landscape.”Dr. Olusi added.

This partnership represents the beginning of a transformative journey, creating a framework for innovative and impactful collaboration. BOI and FSD Africa reaffirm their shared commitment to advancing the climate finance agenda in Africa and addressing the pressing challenges of climate change.

Ethiopia’s new securities exchange aims to unlock interbank liquidity

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By Michael Habte is ESX’s chief operating officer and Victor Nkiiri is a senior specialist – capital markets at FSD Africa

Ethiopia, Africa’s second most populous country, is among the fastest-growing economies in the world, with GDP growth projected at 6.5 per cent in 2025. The country has adopted a bold vision to achieve lower-middle-income country status by 2030, underpinned by sweeping economic reforms to transition from a state-controlled to a market-driven economy. 

Among the new economic initiatives recently rolled out is a new securities exchange, the Ethiopian Securities Exchange, or ESX, planned for launch on January 10. For decades, Ethiopia’s financial an interbank trading platform. Simply put, banks could not effectively lend to one another, resulting in high interest rates to borrowers and significant inefficiencies in bank liquidity management. Such inefficiencies have constrained businesses, particularly the small and medium-sized enterprises which are the backbone of Ethiopia’s economy. 

The new exchange is already addressing this challenge. An interbank trading platform which is part of the exchange is optimising liquidity and improving credit flow in the banking system. Since its pilot in late October, the platform has facilitated trades exceeding 135bn birr($1.1bn), demonstrating robust uptake by the banking sector. 

Regulatory reforms

This milestone reflects the effectiveness of reforms such as the Interbank Money Market Directive issued by the National Bank of Ethiopia, which created the necessary regulatory framework. By enhancing price transparency and reducing transaction costs, the platform is already improving credit accessibility for businesses, enabling them to grow, innovate and drive economic activity.

The impact of the ESX extends far beyond the banking sector. A functional interbank market itself is the foundation for developing critical financial instruments such as treasury bills, corporate bonds and commercial papers. These instruments rely on liquid money markets for effective pricing and execution. With its state-of-the-art electronic trading platform that is integrated with the central securities depository, the ESX is well-positioned to facilitate the efficient issuance and trading of these instruments.

The exchange is also a critical enabler of economic diversification. By reducing borrowing costs and expanding access to finance, it empowers businesses to invest in new projects, expand operations and create jobs. These outcomes align with Ethiopia’s ambitions to achieve middle-income status and build a globally competitive economy. 

Establishing the new securities exchange has been a challenging yet rewarding endeavour. To succeed it needed support from a wide spectrum of actors. The public-private partnership model facilitated this, tapping the power of collaboration to drive financial innovation. Ethiopian Investment Holdings, in partnership with FSDAfrica and the Ministry of Finance, worked hand in hand to develop the exchange, in an approach that prioritised market development initiatives that addressed local challenges while adopting global best practices. This ensures that the ESX is not only tailored to Ethiopia’sunique needs but also equipped to compete on the global stage.

Blueprint for innovation
As Ethiopia integrates into global financial markets, the ESX has the potential to position the country as a regional hub for capital market activity. This integration will strengthen Ethiopia’s appeal to foreign investors, unlocking new opportunities for economic growth. Beyond its immediate economic impact, the ESX also serves as a powerful symbol of Ethiopia’s ambition and potential. It exemplifies the transformative role that well-structured capital markets can play in fostering inclusive growth and economic resilience.

The new bourse is also anticipated to inspire other African nations to pursue similar reforms, unlocking the continent’s immense economic potential. Institutions like FSD Africa, which has been instrumental in supporting the ESX, are poised to replicate these lessons in countries that lack functional capital markets. Such efforts are vital for modernising Africa’s financial systems and driving sustainable development.

The launch of the ESX is not just a win for Ethiopia but a blueprint for capital market innovation across the continent.

UK Invests USD $5.2 Million in USD $240 Million SME Listed Fund Sponsored by FSD Africa, Targeting Institutional Investors.

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Tuesday, 5 November – The British High Commission Nairobi has announced a USD $5.2 million fund (KSH 667 million) to support Micro, Small, and Medium Enterprises (SMEs) in Kenya. This initiative exemplifies the UK’s commitment as a long-term partner, providing investment solutions that foster growth and job creation.

British High Commissioner to Kenya, Neil Wigan, said:

“We must lower the cost of borrowing for Kenyans. This fund further bolsters the UK’s financial toolkit in Kenya, which has supported long-term job creation and economic growth over many years. It will deliver for all the hardworking hustlers of this country—especially women, young people, and persons with disabilities—who are often pushed to the margins of the Kenyan economy. The UK’s economic relationship with Kenya is the cornerstone of the UK-Kenya strategic partnership, and we look forward to delivering this together.”

The ‘Listed SME Debt Fund,’ sponsored by FSD Africa, aims to mobilize up to USD $300 million (KSH 38.85 billion) of sustainable finance to provide affordable credit to micro, small, and medium-sized enterprises. Of this amount, the fund targets to raise USD $240 million from domestic institutional investors, with the remainder sourced from foreign investors. It is expected to support at least 10,000 MSMEs, benefiting 50,000 households, creating, protecting, and supporting over 89,000 jobs, and improving access to basic services for over 200,000 people.

The fund is not sector-specific and will cater to the diverse needs of Kenyan business owners, ranging from artisans to financiers and farmers, by lowering the cost of borrowing. It will be listed and managed in Kenya, aiming to provide an attractive investment opportunity for Kenyan investors by de-risking investments in MSMEs while still offering attractive returns.

Currently, SMEs in Kenya face interest rates of up to 40%, making it challenging for businesses to grow and create jobs. This fund will also encourage pension funds to invest in sectors that support the flow of goods, services, and labor in Kenya.

Mark Napier, CEO of FSD Africa, stated:

“The SME sector holds tremendous potential for Kenya’s socio-economic transformation, comprising approximately 98% of all businesses and creating a significant number of jobs. FSD Africa is thrilled to launch this innovative fund dedicated to supporting small and medium enterprises in Kenya. This fund will provide affordable credit to businesses that have historically faced challenges in accessing financing. Moreover, it will offer MSMEs a route to growth across borders and support local employment rates and the growth of the Kenyan economy.”

The first close of the fund is targeting USD $100 million. Kenyan institutional investors, including pension funds, have assets under management exceeding USD $30 billion. Despite regulatory approval allowing investment of up to 30% in alternative assets, many have yet to capitalize on this opportunity. The SME listed fund introduces a new asset class, aiding in portfolio diversification and stabilization. This aligns with FSD Africa’s mission to deepen and diversify capital markets through innovation.

SMEs are vital to Kenya’s economic growth, accounting for 98% of businesses and approximately 24% of the country’s gross domestic product. Beyond their economic impact, SMEs serve as essential engines of employment generation, particularly for marginalized groups such as youth, women, and persons with disabilities, providing around 14 million (30%) of jobs.

The announcement was made at a major pan-African Capital Markets conference organized by FSD Africa, a specialist development finance institution fully funded by the UK Government.

Landscape of Climate Finance in Africa 2024

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The Landscape of Climate Finance 2024 Report, conducted by the Climate Policy Initiative (CPI) and commissioned by FSD Africa, reveals significant trends in climate finance across the continent. Notably, climate finance flows in Africa grew by 48%, reaching US$44 billion in 2021/2022, up from US$30 billion in 2019/2020. However, this amount still represents only a quarter of the funding necessary to implement Africa’s Nationally Determined Contributions (NDCs) and achieve its climate goals for 2030.

Key Findings of the Report:

  • Domestic Finance: Only 10% of Africa’s total climate finance, equivalent to USD 4.2 billion, originated from domestic actors. Of this, a substantial 75% came from private finance. Given that private domestic assets under management (AUM) were estimated at USD 2.4 trillion in 2020, there is significant potential for growth in this area.
  • Regional Disparities: Climate finance distribution is highly uneven across the continent. The top ten countries account for 50% of total climate finance, while the bottom thirty countries receive just 10%.
  • Investment Trends: Despite climate investments in Africa reaching an all-time high, public finance remains the predominant source of funding. Private finance constitutes only 18% of Africa’s total climate flows, which is markedly lower than in other global regions. This discrepancy is particularly evident in private finance flows, where just ten countries received 76% of the total private climate finance, leaving the remaining countries with only 16%.
  • Concentration of Funding: Half of all private climate finance is directed towards South Africa, Egypt, and Nigeria.
  • Impact of Debt: Countries experiencing debt distress receive significant grants; however, debt still constitutes 36%-43% of their climate finance.

New report finds that climate financing to Africa grew by 48% to US$44 bn in 2021/2022 but still only a quarter of what is required to realise its 2030 goals.

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Washington, USA, 23rd October: A new report on Africa’s climate finance landscape, conducted by Climate Policy Initiative (CPI) and commissioned by FSD Africa, reveals that climate finance flows to Africa grew by 48% to US$44 billion in 2021/2022, up from US$30 billion in 2019/2020. Private sector finance doubled to reach US$8 billion in the same period. Despite this significant growth, current climate finance flows fall far short of what is needed to meet Africa’s climate adaptation and mitigation targets, with potentially serious social and economic consequences.

The report, titled Landscape of Climate Finance in Africa 2024, was launched during a meeting at the Brookings Institution, on the sidelines of the Annual Meetings of the International Monetary Fund and the World Bank Group. It follows CPI and FSD Africa’s first-of-its-kind assessment of climate finance in Africa, released in 2022, which has become a crucial resource for policy, advocacy, and investment decisions across the continent.

The research reveals a significant climate finance gap that threatens Africa’s sustainable development trajectory, with only 23% of the estimated annual funding required to implement Africa’s Nationally Determined Contributions (NDCs) and meet 2030 climate goals being tracked. Key findings include:

  • 90% of total climate finance came from international sources, with only 10% generated domestically.
    • Public sector funding from African governments decreased from US$1.6 billion in 2019/2020 to US$1 billion in 2021/2022.
  • Multilateral Development Finance Institutions (MDBs) provided 43% (US$19 billion) of the total, up from US$11 billion two years earlier.
    • MDBs are the largest providers of climate finance in Africa.
  • Private sector finance, while doubling from US$4 billion to US$8 billion, still accounted for only 18% of the total, a much lower share than in other global regions.
    • Private sector capital mobilized by MDBs declined in Africa, despite increasing in Asia and the Americas.
  • Clean energy finance accounted for US$14 billion, almost a third of the total climate finance, keeping pace with overall growth.
    • However, this rate of growth is insufficient considering Africa’s need for US$200 billion annually to transition to clean energy, as estimated by the International Energy Agency.
  • Multilateral Climate Funds (MCFs) contributed only 2% of the total climate finance in 2021/2022, though these funds are generally more concessional and targeted toward Least Developed Countries (LDCs).

The report also highlights regional disparities, with 10 countries accounting for 50% of Africa’s total climate finance flows. South Africa, Egypt, and Nigeria received more than half of the private flows. The top ten recipients in 2023 were: Egypt, South Africa, Nigeria, Morocco, Ethiopia, Tanzania, Kenya, Côte d’Ivoire, the Democratic Republic of Congo, and Mozambique.

 

Mark Napier, CEO of FSD Africa, stated:

“Climate change poses major risks of unprecedented economic disruption in Africa. To counter this, all actors must invest in a more sustainable future. Climate finance is critical for Africa’s ability to adapt to, mitigate, and develop through a changing climate. This report provides policymakers with a detailed view of the current climate finance landscape and a vision for future development.”

Recommendations for Africa’s Climate Finance Future

The report emphasizes the need to develop domestic capital markets to reduce dependence on international flows, which expose African countries to exchange rate risks. Africa has significant pools of domestic private capital—estimated at over US$2 trillion—in pension funds, insurance companies, and other institutional investment vehicles. Mobilizing this capital could provide African nations with more control over their economic development than relying solely on international finance.

Additionally, the report calls on the private sector and regional, national, and subnational development banks to view climate adaptation as a valuable commercial opportunity. It also highlights the potential of Africa’s green bond markets to mobilize capital for climate-resilient infrastructure projects.

Barbara Buchner, Global Managing Director of CPI, remarked:

“While it’s encouraging to see increased climate finance flows to Africa, the rate of growth is too slow. Public policy and investments must be more effective, and both domestic and international private capital must no longer remain on the sidelines. Otherwise, Africa’s economic opportunities will be overshadowed by significant economic losses and social consequences.”

Click here to download the full report.

Local currency solution for Multilateral Development Bank Portfolio Transfer: Feasibility Study

In June 2023, FSD Africa was awarded funding from the MDB Challenge Fund to develop a project focused on a ‘Local Currency Solution for Multilateral Development Bank (MDB) Portfolio Transfer’ (the project). FSD Africa’s proposed solution aims to empower MDBs and Development Finance Institutions (DFIs) to provide more financing to developing and emerging economies. This is aligned with the recommendations of the G20 Independent Review of MDBs’ Capital Adequacy Framework (CAF) report. The focus area is on promoting financial innovation and development of new instruments to catalyse private investment.

The purpose of this study is to explore the potential for transferring asset portfolios funded by multilateral development banks (MDBs) to domestic institutional investors in Africa through a local currency solution.

The primary aim is to expand the scope of MDBs’ investments by freeing up capital while benefiting local institutional investors and capital market development and reducing the foreign exchange risk of those benefiting from the investments funded by MDBs.

The study focuses on markets in East and West Africa with relatively deep institutional investor bases, including Kenya, Tanzania, Uganda, Ghana, Nigeria, Cote d’Ivoire, and Senegal.