Technology penetration in the financial markets of Africa has been slower than other parts of the world. But promising developments, particularly in emerging hubs such as Mauritius, are setting an example for the rest of the continent. By Hamad Ali 

Africa has been slowly waking up to the power of fintech. The growth in technologies used in financial exchanges, blockchain and the adoption of cloud technology offer interesting opportunities for investors in Africa. 

Technology providers have also focused on the possibilities offered by the sheer size of the continent, which is home to over 1.2 billion people. Most consider it an important growth area over the next decade—in particular, Western exchange operators. The sheer size of Africa and the potential for scale are key, according to Lorne Chambers, global head of sales for London Stock Exchange Group Technology (LSEG Tech).

“We supply technology for about the same number of trading venues in Africa as we do in Europe,” he says, illustrating the scale of the market.

It’s also a time of change for the continent, which is hungrily embracing the promise of fintech as a means to move its technology base from underbanked mobile users to developed market economies—and, increasingly, it’s a time of change for traditional power centers.

Change at the Top?

In the eyes of most observers, South Africa has traditionally been the most important financial market in Africa because of its size, developed economy and technological sophistication. But now, there may be room for challengers to emerge.

In the World Bank’s Doing Business report for 2018, the country fell to number 82 in the rankings, owing in part to its febrile political climate and continuing economic volatility. South Africa’s currency, the rand, has been going through a difficult period this year, and last year the S&P downgraded the country’s credit rating to “junk” status.

Despite the country’s recent troubles, it should not be overlooked that South Africa has the oldest exchange on the continent in the form of the Johannesburg Stock Exchange (JSE), which was established in 1887. According to Nicky Newton-King, CEO of the JSE, if you trade on the exchange, it is exactly what you would expect from the most sophisticated markets in the world. 

“South Africa really starts out with this advantage of a highly sophisticated financial market infrastructure,” she says. “And of course a very highly sophisticated established technology backbone. So we have a lot of wireless, a lot of fiber, you know all of these things are well established.” 

The JSE licences its equities technology from MillenniumIT, part of the LSEG. The exchange is about to move its derivatives trading onto the same technology. Its clearing technology is being developed by Swedish fintech firm Cinnober. 

Newton-King talks about more than one financial hub on the continent, mentioning that South Africa, Mauritius, Kenya and Nigeria are all looking to be positioned as some form of hub for their region. “All of us bring different benefits to the table,” she says. “So, I think you would expect to see quite a lot of positioning. I don’t think there is going to be one financial center or hub on the continent. I think there are lots of benefits that each of these has. And they will attract different sorts of clients.”

This is a key point to understanding Africa as a whole, says David Strevens, regional manager for the Middle East and Africa at Bloomberg. While South Africa is the most visible market internationally, it is not necessarily representative of the entire continent.

“These are economies that continue to expand,” he says. “An investor would call them frontier markets. They are not the scale of some of the Asian emerging markets. You need to look at Africa in two ways, in the sense that South Africa is a very different financial market to the rest of Africa. I look at South Africa as an immensely developed financial market. Some of the complexity of the things that you see there are akin to what is going on in Europe, whereas the rest of Africa is still going through that stage of a growing capital market.”  

With this in mind, a hub model seems particularly well-suited to Africa’s geographic and political considerations. The island of Mauritius, located off Africa’s east coast, in particular, is pushing to be one such hub.

New Frontiers

With its population of just 1.3 million, and relatively isolated location, Mauritius may not be the first African nation that springs to mind as a haven for fintech. It is looking to change that, and it’s already attracted interest.

Hirander Misra, CEO of GMEX Group, first traveled to Mauritius nearly a decade ago and fell in love with the island. But the attraction for entrepreneurs like him goes beyond the sandy beaches and sun. “Mauritius has always been a gateway for capital out of Africa and into the rest of the world,” says Misra. “Also, capital into Africa from the rest of the world.” 

In June 2018, the company announced plans to launch the Mauritius International Derivatives and Commodities Exchange (Mindex), a venture on which the company worked closely with the British High Commission and Department of International Trade (DIT) Mauritius.   

Another advocate is Bipin Gooriah, CEO at Forward Risk Management (FRM), a Mauritius-based provider of consultancy and implementation services for integrated risk management. He is also a director of Mindex. “At the moment no other country in Africa is as sophisticated as Mauritius in the provision of financial services,” he says. 

He says the country is primed to play a pan-African role, noting the lack of exchange controls in Mauritius. In the same World Bank report that charted South Africa’s slip in the rankings for the best places to start a business, Mauritius was in the ascendant, placing 25th out of 190 nations.

Gooriah mentions the large number of financial services companies serving Africa already operating in Mauritius as advantages of doing business there. The country’s legal system, also, is derived from French civil code and British common law. The political situation is stable with a democratically elected government. In addition, the Prime Minister, Pravind Jugnauth, has also served as the country’s technology minister and actively takes an interest in fintech-related issues—at the start of September, he will be attending an Organisation for Economic Co-operation and Development (OECD) conference on blockchain in Paris. 

“There have been a lot of initiatives,” says Keith Allan, British High Commissioner to Mauritius. “They have been setting up regulatory committees to look at how they can take this forward using advice from overseas. There are two British experts on this financial-services regulatory committee.”   

He notes that Mauritius is quite different from most of Africa in terms of economic development. “They already see themselves as more of a hub for business in the region, for Africa, but also into Asia,” he says. “The financial services sector has been growing and so they now want to move deep into that, into fintech, and that sort of area. So they have made it a sort of top priority for them. [In addition] you already had some financial sector infrastructure. A lot of the banks are here—HSBC, Barclays, most of the key banks—and you have fund managers here.”

Some of those initiatives are already bearing fruit, in contrast to some regional neighbors, who have yet to move beyond planning stages. 

“In 2016, Mauritius introduced a Sandbox Licensing Scheme that enables ventures to operate in a compliant manner even where regulation doesn’t yet address the underlying activity,” says James Duchenne, honorary representative in the US for the Board of Investment of Mauritius. “In addition, the government has set up several incentive schemes, including the National SME Incubator Scheme, the Innovator Occupation Permit, and a fintech association.” 

Duchenne adds that in the recent national budget it was announced that Mauritius will also soon unveil a regulatory framework for cryptocurrency custody and exchanges. “This will bring a further boost to the evolution of fintech in Mauritius as it meshes with the world of blockchain,” he says.

Historically, the country has benefited from being an early mover in the technology space. In the late 1990s and the early 2000s, when a lot of exchanges were starting to go electronic on a global scale, Mauritius was one of the trend leaders from an African perspective. 

For example, LSEG Tech’s Chambers recalls that Mauritius was one of the company’s first partners in Africa. “We were proud to supply the exchange with both a trading system and a depository system in 2001,” he says. “Our solutions then became understood widely throughout the rest of Africa. The connection with the Stock Exchange of Mauritius was in many ways the catalyst for our technology now being used in a number of countries across Africa.”

Tech Base

More widely in Africa, the continent actually has some advantages over more developed economies through fintech. Whereas the US and parts of Europe have typically been slow to embrace mobile technology, for instance, Africa has been a fertile ground for payments technology for some time.

Bloomberg’s Strevens, for instance, recalls being fascinated by the use of cellphones and a platform called M-Pesa while on a trip to Kenya in 2010. “When one looks at what was going on in Kenya and the use of M-Pesa in 2010, and how sophisticated they were from a mobile banking perspective, that gives some interesting examples of how technology has led banking disruption in Africa,” he says. “It was to me an early example of mobile banking, which was well ahead of some of the markets in Europe or America.”

With a billion-strong population, and large, urbanized centres like Lagos, Cairo, and Johannesburg, technology is a necessity, says Michele Carlsson, managing director, Middle East and Africa, at Nasdaq. She talks about making technology accessible to the majority, especially when many in Africa are still unbanked. “Fintech can make it easier for both providers and users to meet. For example, when I travel to Nigeria, I see how techy people are with their phones, and they often prefer an Android [device] to be able to use the extra apps required to utilize the smartphone as much as possible,” she says. 

Still, Carlsson adds, that doesn’t always translate into enterprise-grade technology. At the risk of generalization, she says, Africa is “slightly behind when it comes to technology spending, at least from a capital-markets perspective.”

One technology that holds a great deal of promise in terms of bringing African nations up to code quickly, though, is cloud. As traditional on-premises installations require vast funds to undertake for most major software implementations, the possibility of deploying services on a hosted or managed basis becomes particularly attractive. Then it becomes a simple matter of connectivity rather than building expensive, large datacenters or server farms.

LSEG Tech’s Chambers says the company is putting a lot of thought into multi-tenant cloud-based exchange systems for clients. “So rather than each country buying its own exchange hardware, setting up datacenters and employing staff to run it all, what if sometime in the future they could just rent an exchange in the cloud? This option may make it more viable to operate a national exchange, but you would still need the same regulatory approval and supervision, legal framework, and post-trade processing and settlement.”

The JSE, too, by far the most technically sophisticated market on the continent, is exploring the use of cloud. Newton-King says that while it is not “looking at putting execution technology in the cloud,” the possibilities are ripe for “storage, and some of our less latency-sensitive stuff.”

Perhaps the most encouraging signs, however, are in the numbers and the enthusiasm for growth. Initial public offerings in Africa rose to around 30 last year, says Nasdaq’s Carlsson, which might seem like small fry to the number run in New York, London or the European mainland, but which are a steady improvement from years past. 

The would-be hubs are also forging international links—in July 2018, the Chinese Premier, Xi Jinping, visited Mauritius to discuss its participation in the Belt and Road initiative, and the country has strong historic ties to India, which is expected to become an economic powerhouse in the future.

The appetite is there, the academic links are forming, and with the emergence of fintech as a priority for many governments, the impetus is building. What many feel would help kickstart the continent’s technology revolution is the involvement of big technology companies.

“I wish we could see the global tech players like Google and Amazon more active in Africa,” says Nasdaq’s Carlsson. “Africa is far behind when it comes to cloud technology, compared to the rest of the world. It is a shame really, as cloud computing, besides the initial investment, lowers cost and improves productivity and info security. There’s really great opportunity for this in Africa,” she says.