By: Udaibir Das
This article originally appeared in the OMFIF on April 5, 2024.
The role of a shared financial services architecture
Africa stands on the precipice of a financial renaissance, poised to redefine its influence in the global investment sphere. The continent’s quest for additional financing is substantial, yet its capacity to emerge as a powerful magnet for domestic and international investment flows is unmistakable. The annual sustainable financing shortfall is projected to be around 7% of Africa’s gross domestic product.
Despite strides made, including establishing continental financial institutions such as the African Central Bank, African Monetary Fund, African Investment Bank and Pan-African Stock Exchange, the journey towards providing efficient, inclusive and competitively priced financial services across the continent is far from complete. Political predicaments must be set aside and finance viewed as an essential public-private service. Otherwise, Africa risks being a narrative of an unfinished and incomplete financial and economic development renaissance.
The key to unlocking this potential lies in a unified, continental strategy and a swift progression towards a more comprehensive and legally established financial architecture of the African Economic Community instituted in 1991. Considering the region’s distinctive circumstances, the enhancement of Africa’s existing financial centres and Pan-African finance could serve as a pivotal force in advancing African finance and cultivating partnerships with the global financial community.
AU’s NEPAD and nonprofit organisations such as South Africa’s Cenfri and FSDAfrica (supported by UKAid) have supported this notion, suggesting methods to identify suitable locations that could become financial centres and see their role in a continental way.
Africa has financial location centres in Johannesburg, Cape Town, Nairobi, Mauritius, Casablanca, Lagos, Gaborone, Abidjan and Kigali. These centres serve as pivotal conduits, facilitating investment and Pan-African financial services. By leveraging these centres more effectively, Africa can enhance its investment attractiveness, unlock opportunities for inclusive growth, stimulate job creation and drive poverty reduction.
One of the options for Africa is to build an architecture based on the ‘hubs and spokes’ model. In this approach, a financial centre (hub) collaborates with institutions in other countries (spokes) on large funding projects, asset management, ratings, and financial advisory services. It helps implement long-term financial systems and capital market development programmes. This model could facilitate robust, collaborative financial services environments within Africa, networking opportunities for finance and technology professionals, provide access to pooled resources and synergise operating costs.
A modified approach could be to build them as shared financial services centres. These centres can provide high-quality payments, transfers, procurement data and information technology transactions to offices and other entities across the continent. These centres could consolidate and standardise processes, improve service delivery reduce the usage of state resources and lessen redundancies across countries on back-office type operations. Thanks to robotic process automation, artificial intelligence and cloud computing, such shared service centres can take on entire end-to-end processes continent-wide. These can expand beyond transactional tasks to provide policy makers with higher-level support across the continent and help maintain business continuity against global shocks.
For the hubs or shared services approach to work, apart from a solid political convergence and readiness to undertake necessary legal reforms, continental platforms for financial services in Africa would need to ,streamline, and strengthen economic institutions to precede or parallel the anticipated influx of cross-border investment flows (including support from the multilateral development banks). Sound and professionally run financial and monetary institutions and regulatory agencies will be needed for necessary governance structures, market integrity and an enabling investment environment. The large numbers of financial oversight agencies could also be rationalised or integrated to ensure the effectiveness and adequacy of resources.
In terms of human capital, investing in a workforce with the capabilities needed for emerging industries and technologies will be vital for a shared centre approach to work. Collaborative initiatives in skills development, education and labour mobility can facilitate the movement of finance and technology talent and expertise across the continent. Upgrading financial literacy across African businesses will also play a role. pivotal in Africa’s financial and economic empowerment. It will build an informed base needed for structuring various funding and savings vehicles to support trade and economic hubs in Africa.
Moreover, regional co-operation frameworks for risk sharing, crisis management and financial stability mechanisms will be essential to enhance resilience to external shocks and promote macroeconomic and financial stability. More robust and collaborative efforts in monitoring and addressing financial risks, including currency volatility, debt sustainability and financial sector and capital markets stability, could strengthen regional financial systems.
Hubs or centres could also encourage and enable unbiased risk assessments, thus making available Africa-specific risk mitigation strategies unknown to investors. While much lip service is being given to evidence-based risk assessments, the acute shortage, gaps in data series and those needed to provide shared services will require innovative approaches and new methodologies of appraising risks in investable projects and African locations.
By addressing the barriers, leveraging strengths and coming together, Africa can better partner with global finance and unlock its full potential as a dynamic, competitive global investment destination. African-led partnerships can optimise the impacts of sustainable finance on development and better catalyse investments into local, sustainable activities. They could also see Africa attract and retain its wealthy individuals (African billionaires), pension and development funds, and other institutional investors who are primarily investing outside.
As hubs and service centres develop, they will become network aggregation points. Africa can see a faster confluence of trade lines, information and communication infrastructure as well as financial and data networks. A continental Africa could become more integrated into global value chains, and its economies of scale and attractiveness will become hard to ignore by international finance.
Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, a Senior Non-Resident Adviser at the Bank of England, a Senior Adviser of the International Forum for Sovereign Wealth Funds, and a Distinguished Fellow at the Observer Research Foundation America.