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Doing Business in Africa: Unique Risks, Unique Solutions

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EMIGROUP has successfully helped many investors to develop unique solutions to the various business risks faced by those wanting to establish business in Africa. Africa is a unique continent that presents a unique set of business-related risks. It is precisely because of this fact, that we must seek unique solutions to the various business risks and challenges faced by Africa. A one size fits all approach just will not work for Africa. Just as how different diets work for different body types, similarly, different solutions are needed to overcome the challenges that Africa faces. Managing the risks of business in Africa cannot be approached in the same way that one would approach risk management in any other region or continent for that matter. This is especially true because of the rich and diverse culture of each African country – each unique in its own way. There have been instances where Africa has been compared to the United States of America based on the size similarity. There are 52 statesand territories in the USA and Africa is comprised of 54 different countries. But that is as far as the similarity goes. From the population difference, to the cultural differences, comparing the United States to Africa is like comparing an elephant and an eagle. So why would we ever imagine that we can manage business risks in Africa the same way that we manage risk in the United States?

Some of Africa’s Unique Business Risks

There is a myriad of reasons why Africa presents unique business risks. A few of these are as follows:

  • Countries may differ significantly – Although Africa is one continent, each country is very different from the next in terms of economy, population as well as geography. It is therefore not wise to take a one size fits all approach when seeking to do business in any African country. Research must be done and investors must be aware of the economic conditions in each potential location.
  • Currency Exchange Risk – Currency Exchange risk is becoming a growing concern for many African countries. This is particularly true for Nigeria and South Africa, both of which have experienced increasing currency fluctuations. According to the Commercial Risk Africa 2016 survey, 97% and 95% of Nigerians and South Africans respectively, cited exchange risks among their greatest business risk. The main risks are risk of default, risk of not being able to access hard currency and risk of impact on insurance programs. The survey also cited political risk and added compliance demands among the list of increasing business risks in Africa.
  • Give it time – Huge growth does not usually happen immediately when foreign investors decide to invest in Africa due to the relatively small economies in SSA. The political and regulatory contexts are very complex and time is needed to gain understanding and to adjust to these contexts. Local talent may also need time to develop. Investors are well advised to plan for an additional 2-3 years before expecting any significant growth. Africans by nature move at a slower pace than those in Western cultures. Therefore, the decision making process may take longer in the African context as much importance is given to consultation and collaboration.
  • Local connection is essential – Foreign investors will need help from local advisors in order to effectively understand the bureaucracy and regulations. Without this help, it will be extremely difficult to get things moving due in large part to bureaucracy and misunderstanding of the culture. Direct acquisition of established entrepreneurial ventures is an alternative.
  • Infrastructure challenges – Lack of proper infrastructure is a challenge for many African countries. Services such as electricity, water supply, transportation etc. should not be taken for granted. Extra effort is usually required to get these things in place. Some companies that have established business in Africa, such as Coca Cola, have had to set up their own power-generating facilities or their own sewage systems. Professional services such as marketing or accounting may also fall below expectations. Investors must be prepared to make up for these shortcomings.
  • Be prepared to invest in the development of local talent – Local talent may need extensive training at all levels from entry level to managerial level. The general lack of managerial training means that those with the training often demand huge salaries which may even exceed the salary of a similar position in the USA. Investors should therefore collaborate with NGOs and local universities to develop talent.
  • Be prepared to handle corruption – Corruption is rampant in some parts of Africa. Be very clear and public about your anti-corruption policy and culture . Watch out for corrupt politicians. Get to know and understand the real needs of the communities in which you choose to operate. Always chose the option that is in the people’s best interest.
  • Be aware of the African culture – Culture plays a significant role in the establishment of business in Africa. It may be difficult to establish a successful business if you don’t understand the culture which is usually very different from the Western society culture. For example, whereas in Western cultures, business is not normally mixed with pleasure, in Africa, some amount of socialization and exchange of pleasantries is expected prior to raising any business issues.

The Mobile Money Transfer Initiative –  A Unique Solution to a Unique Problem

Risk management is particularly important in the financial sector. Africa presents a unique opportunity for investment based on its diverse culture and based on the unique way that business is transacted on the continent. Despite the challenges and unique risks of doing business in Africa, many economists predict that the continent is on the verge of a consumer boom that will propel the economy by leaps and bounds. There have been several instances where it has been demonstrated that Africa has the resources and the ideas to make the continent an economic giant despite not being developed like Western countries such as the United States of America. One such initiative is the M-Pesa mobile money transfer initiative.

Mobile phone technology has thrived in Africa ever since its introduction in the early 2000’s. It is expected that the trend will continue to grow in Africa and that it presents a great opportunity for economic success. By 2010, as much as 45% of the African population had mobile phone access. The mobile phone not only facilitates communication and services such as telebanking, but it also gives farmers and traders access to up to date market information as well as internet access. Kenya has led the mobile phone revolution especially in regard to telebanking services. M-Pesa had reached over 12 million subscribers by the year 2012, after being in existence for only 5 years at that time. By 2013, the subscription basehad reached over 17 million! What is astounding about M-Pesa is the fact that as much as 25% of the Gross Domestic Product of Kenya flows through M-Pesa! The system allows for the transfer of funds between parties using mobile phone technology. When the business was first developed, it was simply a means by which borrowers could easily repay their microfinance loans. It has since been developed way beyond that to a more general money transfer and payment system.

The M-Pesa mobile money transfer system was developed out of the unique challenges faced by the citizens of Kenya. It was a way of facilitating the small farmers and other small business owners to transact business in a way that is comfortable and convenient for them. In addition, because of the high costs associated with handling cash, the system was developed to help reduce those costs. Since Africa does not have the sophisticated banking systems and financial infrastructure that the United States and other Western economies are privy to, there had to be a way to realize the huge opportunities that the continent has been sitting on. M-Pesa has proven to be a very successful and unique solution that has been birthed out of the unique risks of doing business in Africa.

Africa’s Cash-Based Economy

Unlike the United States, Africa’s economy is largely cash-based. Unlike in Western societies where informal trade is associated with criminal activities, in Africa, it is seen as a parallel economy that is essential to the carrying on of trade. In fact, up to 41% of GDP is attributable to the informal sector. Because of this, the continent presents unique challenges that make it susceptible to money laundering.

Due to the heavy use of cash in conducting transactions, oftentimes the transactions are not traceable and are often not even documented. In order to combat this, some recommend that cash transactions over a certain threshold be reported. Also, there are recommendations to reduce the use of cash as the economy moves forward. In addition, some recommend that transactions of a certain amount be required to be carried out by other methods apart from with cash.These recommendations are not conducive to societies that are mainly cash-based such as Africa.

Conclusion

EMIGROUP has the experience, the expertise and the knowledge to provide organizations looking to invest in Africa with unique solutions to the unique business risks faced by the continent. It is imperative that Africa finds unique solutions such as M-Pesa, that will help grow the economy in a way that is conducive to Africa’s unique business landscape.

Unless we can appreciate Africa’s unique position, we will not realize the economic success that we have the potential for. For any new business investment to thrive in Africa, it is in their own best interest to seek partnership with an organization that knows how to navigate the system to get the best results. EMIGROUP offers partnership solutions that will help all foreign and local investors to establish thriving businesses on this unique continent.

With EMIGROUP, you give yourself a competitive advantage.

 

Komi Klu.

chief Risk Officer

Komi@eminvestgroup.com.

www.eminvestgroup.com

 

Komi is a former financial services executive and Chief Risk Officer for EMIGROUP.  EMIGROUP is  a global consulting firm located in Accra and operating in all Sub Saharan African countries.

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