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'''Please note that this article was last updated for 2015 and is awaiting an update.'''


==Introduction==
==Introduction==
Corporate treasury has become strategically more important for organisations since the financial crisis, with liquidity and risk at the forefront of investor importance. Corporates have built higher cash reserves in order to deal with volatile markets and to enable themselves to be more flexible. Many have taken advantage of the low interest rate environment and pre-funded their borrowing needs. However, monetary policy and regulations are creating new dilemmas for corporate treasurers when it comes to investing cash.
During the first part of this century, Africa has experienced significant economic growth and this is widely expected to continue for the foreseeable future. For example, pan Africa GDP growth in 2014 is expected to be 4.8% and as much as 5%–6% in 2015. This growth is fuelled by a number of factors including an increasingly educated population, which is expected to exceed 2 billion by 2050, collective GDP of USD 2.4 billion and consumer spending of USD 1.4 trillion, both forecast by 20201.
 
 
This growth has been and will continue to be helped by the gradual liberalisation and relaxation of the regulatory and business regimes which pertain in many African countries as they seek to attract investment. Many countries do, of course, still apply some form of exchange controls, which vary in impact. However, one thing is clear, the differing regulatory regimes across the continent have historically prevented, or made more difficult, the free flow of capital that is available elsewhere in the world, e.g. the European Union.
 
 
This does mean that any business either looking to expand or invest in a country needs to ensure that their legal set-up is in accordance with local regulatory requirements and any contracts signed take account of any exchange control regulations that may be in place. If this is not the case, it is possible that resident to non-resident payments and receipts, including any capital injection or repatriation, may be restricted, or, in some cases, not permitted.
 
 
Throw into the mix that only a few banks have both a local and regional presence, clearing and settlement systems differ in each country and cash is the predominant payment method (currently only about 25% of Africans have a bank account), which all add to the fiscal challenges that already exist. There are positive developments, with some African regions seeking to implement cross border common clearing platforms. Examples include the South African Development Council Integrated Regional Electronic Settlement System (SIRESS) across South Africa, Lesotho, Namibia and Swaziland; and the Regional Payment and Settlement System (REPSS) across the 19 countries that are members of the Common Market for Eastern and Southern Africa (COMESA).
In spite of these issues, corporates are actively seeking to increase their operations across Africa. Currently there are approximately 650 multinational corporates doing business across Africa and many more are looking to take advantage of the opportunities that exist. Clearly, corporates need to select counterparties that have the expertise to help them achieve their objectives; including banks that have both local and pan regional capability to ensure optimal cash management and treasury solutions are put in place.
 
==Banking requirements==
Historically it has been difficult for corporates to manage their operations across Africa both in multiple countries and regionally. Each country has different regulatory regimes and banking practices and this has traditionally led to corporates needing to work with one or more local banks in each country; these banks providing the day to day working capital facilities required.
 
 
As bank account penetration is low, payments to employees and receipts from consumers have predominantly been in cash with the resultant issues around control and security and the need for an extensive local branch network. This is particularly so for those businesses with operations in more remote areas in industries such as agriculture and mineral extraction.
 
 
Cheques are also an important payment method and the processing and issuance of cheques has needed to be managed by the local operation. As each country develops and improves its clearing systems, more and more countries are placing an upper limit on the value of a cheque that can be issued and cleared through the local cheque clearing system. The effect of this has been that there is greater utilisation of electronic payment methods. For example, the upper limit for a cheque to be cleared through the cheque clearing system in Kenya is KES1m and any cheque above this amount is cleared via the local urgent payment clearing system.
 
 
During the first few years of this century, most African countries have invested and developed centrally managed clearing systems including both Real Time Gross Settlement (RTGS) and Net Settlement Systems (NSS). It has been necessary for local banks to join these systems and this has led to the introduction of additional banking services regarding electronic payments and receipts; although multibank direct debit solutions are still not available in each country.
 
 
Whilst bank account penetration is low, mobile phone penetration is high and it is estimated that over 70% of the population have a mobile phone. This is driving the development of mobile payments, which is particularly significant in Kenya through M-Pesa. Currently the majority of payments through mobile payment services are C2C type payments, but solutions are being developed particularly for corporates to make salary and other low value payments. Other developments include both closed and open loop cards which, for example, can be used to pay wages to unbanked employees.
 
 
Local banks have also developed electronic/internet banking services and these are now widely available in most countries, albeit the functionality may differ from country to country. Most such services provide balance and transaction reporting as well as electronic funds transfers (EFT) so corporates can now obtain visibility of account balances and initiate payments from their own offices. In addition, a number of banks have developed bulk file and Host to Host/SWIFT Corporate connectivity channels and this is supporting the development of corporate central or regional treasury structures.


==Challenges cash investors currently face==
Cash management is no longer considered to be low risk. Cash management investments, particularly money market funds, have been subject to increased scrutiny from regulators globally. Cash investments are at the precipice of potentially major regulatory reform in Europe and have already been subject to changes in the United States. Investors have been affected by low interest rates and a shrinking supply of short-term securities. Regulatory change in the broader financial markets could lead to a direct impact in the cash market. For example, banks are increasingly turning away cash balances that adversely impact their Liquidity Coverage Ratio (LCR). This is a required metric introduced by Basel III regulations, in favour of stable balance, and deposit accounts with withdrawal notice.


Central bank policy has kept interest rates low globally resulting in money market instrument rates trending lower and in some cases, into negative territory. This presents a unique challenge for cash investors, many of whom cite preservation of capital as their primary objective. Many clients are looking for alternative solutions to traditional cash investments as a result of these conditions.
Domestic liquidity management is key. Whilst cash concentration is available in some form in many countries, there are limitations on multi-entity arrangements; particularly in instances where there are minority shareholders. Notional pooling and margin enhancement type facilities are also limited; one reason being that the Central Banks in many countries have not yet given these structures due consideration. One exception is South Africa where the South Africa Reserve Bank has established the parameters for such structures, but even then notional pooling is not allowed between resident and non-resident entities.


Despite these challenges, BlackRock believes there are strategies that cash investors can embrace to succeed in today's environment. These strategies include strong partnerships, more flexible and dynamic strategic cash allocations, enhanced governance and, above all, a comprehensive understanding of risks and opportunities. BlackRock offers insights into these strategies below.  
==Changing corporate treasury needs==
From our own experience, there are three generally accepted models with regard to treasury structures across Africa – fully centralised, centralised but local control, and local operation and control. We are also aware that approximately 75% of corporates have a fully or partly centralised treasury model. Of course local operation and control will still be required where local payment and collection methods continue to be used and where there is an element of “trapped cash” that has to be managed and invested locally.


==So what do I do with my money? Understanding the options available to cash investors==


Since the start of the financial crisis, the need for alternative cash solutions has increased and there is no longer a 'one-size-fits all' approach. Once thought of as a low risk asset class, the cash market may now be considered as multi-faceted, complex and subject to higher risk. The overarching objectives of risk-managed cash investing are still capital preservation and liquidity, but these can be applied differently across cash investment strategies. For all cash investments, BlackRock's approach is to apply rigorous credit and risk analysis. This approach has allowed cash clients to consider diverse investment options to meet their various needs. The following sections detail some of the options available today to cash investors, recognising that each client has unique liquidity needs.  
With the growth of business across Africa, corporates are looking at ways in which they can increase or introduce the level of centralisation across their operations to mirror practices in place elsewhere within the business. Regional treasury hubs and Shared Service Centres are most definitely growing in popularity. In view of its accessibility, established infrastructure and well established fiscal and banking regulations, South Africa continues to be a popular choice for treasury operations. However, other countries, such as Kenya and Ghana, are becoming recognised as treasury hubs for East and West Africa as well as non-African centres, such as the UAE and Singapore.


==Constructing an investment policy==
Many treasurers are evolving their investment policies to be more dynamic and flexible to adapt to changing markets. It is prudent to review these policies regularly in order to embrace new opportunities and the evolving markets. An investment policy should define the overall objectives of the company's investment strategy and within this framework the following should be considered:
* '''Cash flow and liquidity needs'''. Effective forecasting of liquidity needs may help to increase returns over one-dimensional cash investing within a cash portfolio. A diverse investment approach may increase returns and reduce the cost of liquidity.
* '''Risk tolerance'''. It is necessary for an investor to determine their tolerance levels of interest rate and credit risk, and to assess what these mean for return volatility.
* '''Target returns and benchmark'''. Agreeing on a target benchmark will ensure the investment goals are well defined and clearly understood. Benchmarks should reflect the risk tolerance and the nature of the mandate.
* '''Permissible investments'''. An investor should identify the security types the mandate can hold and the rating limits that align with the mandate's risk profile.
* '''Diversification limits'''. Investors should articulate exposure limits to certain asset classes, sectors or individual issuers that are consistent with their risk appetite.


The drive for centralisation across Africa is just as high as elsewhere in the world, despite the differing regulatory regimes that exist in each country. Whilst these may prevent “standard” treasury procedures being established, corporates are becoming more sophisticated in putting practices and procedures in place so that they can manage the financial risks as effectively as possible.


==Cash segmentation policy==
Given the prevailing market environment, liquidity will come at a premium. It is therefore important that cash investors conduct a thorough evaluation of their cash needs and determine their risk profile. Effective forecasting of liquidity needs and assessment of risk tolerance creates the opportunity to achieve higher levels of risk adjusted returns within a cash portfolio. Below is a sample strategy that demonstrates one such approach.


[[File:Cash_investing_in_a_new_world_fig_1.png|823px|center]]
In addition to the number of corporates and NGOs operating across Africa, large regional and domestic companies are becoming more sophisticated with regard to their cash management needs. As a result, domestic and regional banks continue to develop and enhance the range of services available to meet the ongoing and future demands of such organisations.  


==Investment options==


AAA rated money market funds (MMFs)
With regard to minimising the risk and overcoming banking challenges in each country of operation, procedures and practices need to be established for the following areas:
MMFs are mutual funds that invest in short-term debt instruments. They provide the benefits of pooled investment, allowing clients to invest in a diverse and high quality portfolio. Like other mutual funds, each investor in a money market fund is considered a shareholder of the investment pool. MMFs are managed within rigid and transparent guidelines to seek preservation of capital, liquidity and competitive yields and may have the following benefits.
* Payables
* '''Diversification'''
* Receivables
MMFs invest in a wide range of issuers and money market instruments, adhering to the basic principles of portfolio management.
* Visibility and control of cash
* '''Credit risk'''
* Risk management
AAA rated MMFs are required to adhere to rigid credit standards to ensure the portfolio is invested in high quality assets and represents an acceptable level of risk. Assets are ring-fenced from the investment manager and the investor's exposure is to the diversified underlying holdings.
* '''Liquidity'''
MMFs are designed to provide investors with daily liquidity, offering a flexible investment solution that requires no minimum commitment period or penalties for redemptions.
Within the AAA rated MMFs space, there are funds that offer exposure to governments by investing in government paper and government backed repurchase agreements. There are also funds that invest in highly rated short-term money market instruments, often termed Prime Funds.


===Unrated money market funds===
==Payables==
Unrated MMFs provide investors with the opportunity to invest in a portfolio of, including but not limited to, similar high quality assets that are held in an externally rated MMF without the constraints of credit rating agency guidelines. Corporate treasurers typically look to the rating agencies for investment quality guidance. The rigid rating constraints placed on rated MMF portfolios may prevent managers from utilising the full MMF guidelines at their disposal. By simply removing the rating, a MMF is able to invest in the same securities but with a slightly longer duration or higher concentration. In a supply-constrained environment, this flexibility may translate into an increase in yield for investors.
From our own discussions with our clients, we know there is a move to introduce electronic payments where possible as corporates believe there is significant room for improvement in existing processes. However, it may be difficult to introduce these changes because of local payment practices. Most large clients are planning to move to electronic payment methods in the future, but they recognise that cash and paper payments will still be required to ensure they have a complete range of local payment options.
Credit analysis and review is not absent in unrated funds. BlackRock's approach is to consider external ratings as a preliminary screen in our own independent credit review. BlackRock uses the ratings as a starting point in its assessment of an investment and they help BlackRock formulate its own independent credit opinion about an issuer or a specific investment instrument. Just as each rating agency may upgrade or downgrade issues, BlackRock's credit analysts apply an independent assessment of each security throughout the period that it is held.


===Ultra Short Bond Funds===
As part of the European Securities and Markets Authority (ESMA) guidelines, the most commonly used liquidity funds are referred to as 'Short-term Money Market Funds'. ESMA has also defined a set of guidelines for 'Money Market Funds' with a slightly longer duration. These funds are often known as Ultra Short Bond Funds and typically include the following features:


* Longer investment horizon than short-term money market funds (6-12 months)
This has led to many corporates developing payment factory type operations. This gives them the ability to submit a single file of payments from its chosen location anywhere in the world to its bank, appropriately authorised by the company. Such files can be single or multi country specific, including both high value and low value payments.
* Fluctuating Net Asset Value (NAV)
* Maturity limits (fixed): 397 days
* Maturity limits (floating): 2 years


These funds may have the potential for higher returns as compared to short-term MMFs and often have a total return objective.


Separate accounts
In addition to centralising electronic payments, benefits include lower costs, better security, control and cash flow forecasting together with transaction status feedback so that any return or rejected items can be managed immediately.  
Separate account strategies represent a unique way to achieve investment objectives for all types of cash. A separate account is a segregated portfolio of short duration assets managed by an investment manager on behalf of a client. A separate account differs from a MMF in that the investor directly owns the portfolio of assets rather than owning a share in a pool of assets. Separate account investors have the ability to customise the portfolio to their needs and investment guidelines while leveraging the trading, portfolio management and credit analysis of a professional investment manager.


Separate accounts are appealing to investors for a number of reasons, one being the possibility of obtaining a higher yield compared to that of a money market fund, but without a significant increase in risk. Working with an external investment manager offers significant benefits, most notably access to specialised credit, risk and portfolio management resources. It is the combination of these resources working to achieve a client's specific investment policy needs that represents the true value of investing in a separate account.


Comparing options: MMFs vs. Separate Accounts
Cross border and resident to non-resident payments must be in accordance with Exchange Control and Central Bank Reporting requirements in each country. Banks can perform this reporting on behalf of clients providing that the payment file from the corporate has the correct details regarding the relevant transactions.  




{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%;"
Whilst cheque usage is declining in most countries as electronic payments become more acceptable, they are still important in many countries. Banks have also developed bulk cheque printing solutions so that a file of cheques can be included which can be printed and distributed by the bank supporting the centralisation of the payment process.
|-
| '''Money Market Funds'''
| '''Separate Accounts'''
|-
| style="background:#f2ebef; vertical-align:top"|
* Commingled, regulated mutual funds
* Daily liquidity with stable NAV
* Professionally managed, diverse funds benefit from economies of scale
* Competitive yield
* Late day trading deadlines
* Expenses – all inclusive


| style="background:#f2ebef; vertical-align:top"|
* Custom portfolios with dedicated portfolio and client service teams
* Client-specific guidelines and investment constraints
* Liquidity requirements based on customer’s cash flow projections
* Flexibility within a risk controlled context
* Custom reporting provided
|}


Not all payments can be centralised. Cash payments continue to be important, particularly to non-banked employees and small suppliers and of course these services do have to be provided locally. Domestic banks have developed “doorstep banking” services, which can be used to deliver bulk cash to the corporate and paid to workers in individual pay envelopes. However, bank services now exist in some countries, e.g. South Africa, where non-banked payees can receive a SMS message on their mobile phone including a security code. The recipient can then either use an ATM to collect the cash or, where they have a mobile banking account, use their phone to buy goods and services.


===Treasury outsource===
Recognising that treasury teams are often relatively small and resource constrained, there is sometimes an argument to outsource certain treasury functions, one of those being the day-to-day investment activity. Outsourcing physical investment may provide the advantage of constant dialogue between a cash portfolio management team and issuers and brokers as well as the unique market access available to them.


===Exchange traded funds (ETF)===
Mobile banking and card services are rapidly evolving and are becoming a common payment form across many countries on the continent. This will provide a relatively inexpensive and simple way for companies to pay small amounts to non-banked beneficiaries whilst supporting the continuing centralisation of payments across Africa.
As the market evolves, investors are increasingly forced to look outside the conventional treasury 'box' of investment products. Exchange traded funds (ETFs) are pooled funds which track an index and trade on an exchange, offering treasury investors a suite of investment opportunities.


ETFs provide investors with the opportunity to gain access and exposure to specific parts of the market, in a manner that is fully transparent and well diversified. Indices are constructed with clear and transparent parameters to represent the risk and return characteristics of a given sector or credit profile. In tracking a fixed income index, an ETF seeks to provide a more liquid and cost-efficient alternative to directly purchasing the bonds, which would achieve the same risk adjusted return. Treasury investors can utilise ETFs to gain specific market exposure to government or corporate bonds in the 0-5 year space, at a competitive price, whilst still maintaining attractive T+2 or T+3 liquidity.  
==Receivables==
With a high percentage of collections being made in cash and cheques, many of these directly into a corporate bank account by the end customer, there are significant issues regarding data quality and reconciliation. In addition collection costs can be substantially higher than in other regions; for example, the European Union. Despite these issues, electronic collection methods are only seen as marginally better than cash and paper due to little difference in value dating practices and the development of sophisticated and secure cash solutions.


==Understanding the risks in cash investing==
In today's complex and fast-changing markets, prudent risk management is more important than ever. Understanding the risks associated with an investment can help to ensure it is appropriate for each portfolio. A summary of the main risks inherent in cash investing is included below:


********************
The issues are two-fold. Firstly, if a corporate receives cash directly, it has to ensure sufficient security and cash handling procedures are in place to get the cash to the bank and credited to their account. Secondly, if the end customer is paying cash over a bank’s counters, the corporate requires early notification of the sum deposited. In both cases, not only is it vital that all cash collections are accounted for but they have to be reconciled against the original order, so reconciliation is key.


{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
|-
| '''Primary risks'''
| '''Definition'''
| '''Factors'''
|-
| style="background:#e9d7e0"|Credit Risk
| style="background:#e9d7e0"|Risk that a security’s value will change due to a ratings downgrade or, in a distressed case, default of the security
| style="background:#e9d7e0"|
* Rating downgrade
* Default
|-
| style="background:#f2ebef"|Interest Rate Risk
| style="background:#f2ebef"|Risk that a security’s value will change due to a change in interest rates or the shape of the yield curve
| style="background:#f2ebef"|
* Change in the level of interest rates
* Change in shape of the yield curve


|-
Cash in Transit (CIT) services are common across Africa and they can be outsourced to a bank or third party provider who will arrange to collect cash on behalf of its client and provide near real time value of funds deposited into its accounts. Intelligent Tills have also been developed which can count, verify and store cash and, in some cases, receive immediate value even though the cash has not physically reached the bank.
| style="background:#e9d7e0"|Liquidity Risk
| style="background:#e9d7e0"|Risk that arises from the difficulty of selling an asset; security cannot be bought or sold quickly enough to prevent or minimise a loss
| style="background:#e9d7e0"|
* Secondary market availability
* Provide liquidity for securities


|-
| style="background:#f2ebef"|Spread Risk
| style="background:#f2ebef"|Risk of change in value of a security due to a change in the relative spreads in the market
| style="background:#f2ebef"|
* Hybrid of credit and liquidity risk
|}


With such a low proportion of the population having a bank account, coupled with developing banking systems across the region, direct debit does not offer the same benefits as it would in other regions of the world. Alternative banking services are being rolled out that allow those who do not have a bank account (non-banked) to pay using mobile phones and ATMs, which will enable utility type operations to be able to collect payments more efficiently.
Many banks will be able to provide pre-printed credit slips to assist the reconciliation process. For example in South Africa, immediate notification can be sent to a corporate for each payment across a bank’s counters. This is very important, particularly where the payor requires delivery of goods but has to pay before these can be delivered.




==The role of an asset manager in cash investing==
Banks are increasingly offering services to enable collection directly from a mobile wallet into a bank account, thus capturing C2B or even B2B payments, with real time notification, and eliminating the security risk and reconciliation issues associated with cash.
The term “asset manager” is often misunderstood. Asset managers act as fiduciaries to their clients by investing assets on their behalf. Asset managers invest within the guidelines specified by their clients for a given mandate. This will take into consideration the risk appetite of the client. As part of the financial services sector, asset managers are characterised by a business model that is fundamentally different than that of other financial institutions, such as commercial banks, investment banks, and insurance companies.
Asset managers do:
* invest on behalf of clients
* generally rely on a stable fee-based income stream
* have oversight and regulation at both the manager and mandate levels (in the US and EU regulatory regimes and elsewhere)
Asset managers do not:
* invest with their own balance sheets (other than seed capital or small co-investments)
* employ balance sheet leverage
* guarantee investor principal, and there is no government guarantee or backing


==Visibility and control of cash==
Of equal, if not more importance, is the management of working capital. Corporates will be able to manage their terms of trade, but will need to ensure that payment cycles are managed effectively, particularly where cash payments and receipts are involved.


==Why BlackRock for cash management?==
BlackRock was founded as a stand-alone investment management company and is focused on providing asset management and risk management services to clients. The firm brings together expertise across capital market sectors, asset allocation, portfolio management, financial modelling, and risk management disciplines. BlackRock's fiduciary culture differentiates it from sell-side firms.


An integral part of BlackRock's fiduciary culture is its core belief that rigorous risk management is critical to the delivery of high-quality asset management services. Today, portfolio managers throughout BlackRock have access to proprietary technology which enables them to make more informed decisions. These tools can analyse individual securities, aggregate a portfolio of securities, and analyse and compare that portfolio and its risk characteristics to an index or another relevant benchmark.
Managing cash positions across Africa may result in trapped cash in a particular country and, along with mobilising hard currency and counterparty risk, these are some of the major difficulties a corporate with African operations has to overcome.


BlackRock's cash management capabilities have been built around our clients' greatest needs and BlackRock strives to deliver these investment capabilities to help clients meet the challenges of today. In a cash environment that grows ever more complex, this is a responsibility that has never been more important.


Most multinational and large local corporates are now seeking sophisticated liquidity management solutions for Africa. This is a challenge in view of the exchange control and local regulatory regime.




Of utmost importance is visibility of cash positions in each country of operation. This can be achieved through the use of the developing electronic banking channels across the region. In addition, most banks can initiate a SWIFT MT940 statement so the overall regional cash position can be monitored centrally.
Managing cash in a single country in a single currency is relatively simple, but managing cash in different countries in different currencies is more challenging. This is particularly so across Africa where cross border cash concentration is difficult as the regulatory environment and cash pooling solutions have not been developed as in other parts of the world. Despite the absence of regional solutions, liquidity management solutions are available in individual countries which will assist a company in maximising interest income and minimising interest expense on local cash positions.




Where cross border cash concentration is possible, it must be undertaken with a full understanding of the tax and legal effect this may have on the company. For example, intercompany loans may be created, transfers may be seen as a repatriation of capital or a dividend and there may be minority shareholders to consider. Regional liquidity structures are in place, for example in an offshore centre such as Mauritius, but these should only be used where all tax, regulatory and legal issues can be overcome. Exchange risk must be taken into account if local currencies need to be converted to, say, USD, for overall group liquidity purposes and are subsequently returned to the participating subsidiary in each country if a shortfall occurs.
As already described above, notional pooling is not widely offered across Africa as this type of arrangement is normally provided subject to central bank legislation and a legal right of set-off.


==Risk management==
Across Africa, there are additional risks associated with cash management compared with some other regions across the world. This section is not intended to be all encompassing, but focuses on several key risks relating to managing cash holdings and payments on the continent.




Political and economic stability on the African continent has improved substantially over time, and the risk of international corporations being unable to remit funds out of Africa has reduced. However, there is still a requirement to comply with local regulations, so this risk has not been eliminated. Any subsequent regulatory changes may alter the rules governing such transfers and treasurers need to consider this risk when putting any structure in place. Careful planning and forecasting on the part of treasurers is required to minimise funds held in certain countries, taking into account local exchange controls and keeping abreast of local developments to consider any changes or amendments to these regimes that may be introduced in the future and the effect on existing structures and practices.




Given the multi-currency nature of the African continent, combined with the weakness of some local currencies in comparison with international currencies, exchange rate risk is significant. For example, the ZAR/USD exchange rate has moved from a period average of 8.2612 in 2008 to 10.8735 in Q1 20142. Various tools are available to mitigate a degree of this risk, from holding foreign currency accounts, through to forward exchange rate contracts and hedging where local regulations permit.




In many African countries, it is standard practice to be billed in foreign currency. This practice in itself can create a form of counterparty risk in countries which experience foreign currency shortages, and at a bare minimum can negatively impact the working capital cycle. Treasurers must work closely with both their counterparties and their banks to manage this risk as far as possible.


==Summary==
The cash and liquidity management needs of a corporate operating in Africa are becoming more sophisticated. However, as explained in this article, there are a number of reasons why these disciplines are more complex across Africa and it will take time to change.




Certainly banking systems across Africa are becoming more sophisticated, which is supporting the ever-growing needs of a corporate treasury. However, whilst electronic transactions are increasing and liquidity management solutions are being developed, there will still be a large proportion of cash payments. The development of mobile banking and payment card solutions will certainly assist in bringing efficiencies and cost savings to banking in many countries.


This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons.


Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.
In view of this complexity it is vital that corporates partner with a bank with a good knowledge of local markets to ensure they can access the most effective solutions for their needs. Using such a trusted partner will assist in managing risk, improve liquidity management, enhance working capital and increase efficiency whilst reducing costs.  


Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.


This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.
<sup>1 Source: Africa in 50 years’ time – Africa Development Bank; Growing in Africa – Ernst & Young</sup>


© 2014 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
<sup>2 Source: International Financial Statistics, IMF 2014 Yearbook</sup>


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[[Category:Book_Export]]

Revision as of 17:57, 10 November 2015

Cash management
Treasurers Handbook
Author
Phil Boyall Principal, Global Cash Management Africa, Head, Cash Origination, Barclays Africa

Please note that this article was last updated for 2015 and is awaiting an update.


Introduction

During the first part of this century, Africa has experienced significant economic growth and this is widely expected to continue for the foreseeable future. For example, pan Africa GDP growth in 2014 is expected to be 4.8% and as much as 5%–6% in 2015. This growth is fuelled by a number of factors including an increasingly educated population, which is expected to exceed 2 billion by 2050, collective GDP of USD 2.4 billion and consumer spending of USD 1.4 trillion, both forecast by 20201.


This growth has been and will continue to be helped by the gradual liberalisation and relaxation of the regulatory and business regimes which pertain in many African countries as they seek to attract investment. Many countries do, of course, still apply some form of exchange controls, which vary in impact. However, one thing is clear, the differing regulatory regimes across the continent have historically prevented, or made more difficult, the free flow of capital that is available elsewhere in the world, e.g. the European Union.


This does mean that any business either looking to expand or invest in a country needs to ensure that their legal set-up is in accordance with local regulatory requirements and any contracts signed take account of any exchange control regulations that may be in place. If this is not the case, it is possible that resident to non-resident payments and receipts, including any capital injection or repatriation, may be restricted, or, in some cases, not permitted.


Throw into the mix that only a few banks have both a local and regional presence, clearing and settlement systems differ in each country and cash is the predominant payment method (currently only about 25% of Africans have a bank account), which all add to the fiscal challenges that already exist. There are positive developments, with some African regions seeking to implement cross border common clearing platforms. Examples include the South African Development Council Integrated Regional Electronic Settlement System (SIRESS) across South Africa, Lesotho, Namibia and Swaziland; and the Regional Payment and Settlement System (REPSS) across the 19 countries that are members of the Common Market for Eastern and Southern Africa (COMESA). In spite of these issues, corporates are actively seeking to increase their operations across Africa. Currently there are approximately 650 multinational corporates doing business across Africa and many more are looking to take advantage of the opportunities that exist. Clearly, corporates need to select counterparties that have the expertise to help them achieve their objectives; including banks that have both local and pan regional capability to ensure optimal cash management and treasury solutions are put in place.

Banking requirements

Historically it has been difficult for corporates to manage their operations across Africa both in multiple countries and regionally. Each country has different regulatory regimes and banking practices and this has traditionally led to corporates needing to work with one or more local banks in each country; these banks providing the day to day working capital facilities required.


As bank account penetration is low, payments to employees and receipts from consumers have predominantly been in cash with the resultant issues around control and security and the need for an extensive local branch network. This is particularly so for those businesses with operations in more remote areas in industries such as agriculture and mineral extraction.


Cheques are also an important payment method and the processing and issuance of cheques has needed to be managed by the local operation. As each country develops and improves its clearing systems, more and more countries are placing an upper limit on the value of a cheque that can be issued and cleared through the local cheque clearing system. The effect of this has been that there is greater utilisation of electronic payment methods. For example, the upper limit for a cheque to be cleared through the cheque clearing system in Kenya is KES1m and any cheque above this amount is cleared via the local urgent payment clearing system.


During the first few years of this century, most African countries have invested and developed centrally managed clearing systems including both Real Time Gross Settlement (RTGS) and Net Settlement Systems (NSS). It has been necessary for local banks to join these systems and this has led to the introduction of additional banking services regarding electronic payments and receipts; although multibank direct debit solutions are still not available in each country.


Whilst bank account penetration is low, mobile phone penetration is high and it is estimated that over 70% of the population have a mobile phone. This is driving the development of mobile payments, which is particularly significant in Kenya through M-Pesa. Currently the majority of payments through mobile payment services are C2C type payments, but solutions are being developed particularly for corporates to make salary and other low value payments. Other developments include both closed and open loop cards which, for example, can be used to pay wages to unbanked employees.


Local banks have also developed electronic/internet banking services and these are now widely available in most countries, albeit the functionality may differ from country to country. Most such services provide balance and transaction reporting as well as electronic funds transfers (EFT) so corporates can now obtain visibility of account balances and initiate payments from their own offices. In addition, a number of banks have developed bulk file and Host to Host/SWIFT Corporate connectivity channels and this is supporting the development of corporate central or regional treasury structures.


Domestic liquidity management is key. Whilst cash concentration is available in some form in many countries, there are limitations on multi-entity arrangements; particularly in instances where there are minority shareholders. Notional pooling and margin enhancement type facilities are also limited; one reason being that the Central Banks in many countries have not yet given these structures due consideration. One exception is South Africa where the South Africa Reserve Bank has established the parameters for such structures, but even then notional pooling is not allowed between resident and non-resident entities.

Changing corporate treasury needs

From our own experience, there are three generally accepted models with regard to treasury structures across Africa – fully centralised, centralised but local control, and local operation and control. We are also aware that approximately 75% of corporates have a fully or partly centralised treasury model. Of course local operation and control will still be required where local payment and collection methods continue to be used and where there is an element of “trapped cash” that has to be managed and invested locally.


With the growth of business across Africa, corporates are looking at ways in which they can increase or introduce the level of centralisation across their operations to mirror practices in place elsewhere within the business. Regional treasury hubs and Shared Service Centres are most definitely growing in popularity. In view of its accessibility, established infrastructure and well established fiscal and banking regulations, South Africa continues to be a popular choice for treasury operations. However, other countries, such as Kenya and Ghana, are becoming recognised as treasury hubs for East and West Africa as well as non-African centres, such as the UAE and Singapore.


The drive for centralisation across Africa is just as high as elsewhere in the world, despite the differing regulatory regimes that exist in each country. Whilst these may prevent “standard” treasury procedures being established, corporates are becoming more sophisticated in putting practices and procedures in place so that they can manage the financial risks as effectively as possible.


In addition to the number of corporates and NGOs operating across Africa, large regional and domestic companies are becoming more sophisticated with regard to their cash management needs. As a result, domestic and regional banks continue to develop and enhance the range of services available to meet the ongoing and future demands of such organisations.


With regard to minimising the risk and overcoming banking challenges in each country of operation, procedures and practices need to be established for the following areas:

  • Payables
  • Receivables
  • Visibility and control of cash
  • Risk management

Payables

From our own discussions with our clients, we know there is a move to introduce electronic payments where possible as corporates believe there is significant room for improvement in existing processes. However, it may be difficult to introduce these changes because of local payment practices. Most large clients are planning to move to electronic payment methods in the future, but they recognise that cash and paper payments will still be required to ensure they have a complete range of local payment options.


This has led to many corporates developing payment factory type operations. This gives them the ability to submit a single file of payments from its chosen location anywhere in the world to its bank, appropriately authorised by the company. Such files can be single or multi country specific, including both high value and low value payments.


In addition to centralising electronic payments, benefits include lower costs, better security, control and cash flow forecasting together with transaction status feedback so that any return or rejected items can be managed immediately.


Cross border and resident to non-resident payments must be in accordance with Exchange Control and Central Bank Reporting requirements in each country. Banks can perform this reporting on behalf of clients providing that the payment file from the corporate has the correct details regarding the relevant transactions.


Whilst cheque usage is declining in most countries as electronic payments become more acceptable, they are still important in many countries. Banks have also developed bulk cheque printing solutions so that a file of cheques can be included which can be printed and distributed by the bank supporting the centralisation of the payment process.


Not all payments can be centralised. Cash payments continue to be important, particularly to non-banked employees and small suppliers and of course these services do have to be provided locally. Domestic banks have developed “doorstep banking” services, which can be used to deliver bulk cash to the corporate and paid to workers in individual pay envelopes. However, bank services now exist in some countries, e.g. South Africa, where non-banked payees can receive a SMS message on their mobile phone including a security code. The recipient can then either use an ATM to collect the cash or, where they have a mobile banking account, use their phone to buy goods and services.


Mobile banking and card services are rapidly evolving and are becoming a common payment form across many countries on the continent. This will provide a relatively inexpensive and simple way for companies to pay small amounts to non-banked beneficiaries whilst supporting the continuing centralisation of payments across Africa.

Receivables

With a high percentage of collections being made in cash and cheques, many of these directly into a corporate bank account by the end customer, there are significant issues regarding data quality and reconciliation. In addition collection costs can be substantially higher than in other regions; for example, the European Union. Despite these issues, electronic collection methods are only seen as marginally better than cash and paper due to little difference in value dating practices and the development of sophisticated and secure cash solutions.


The issues are two-fold. Firstly, if a corporate receives cash directly, it has to ensure sufficient security and cash handling procedures are in place to get the cash to the bank and credited to their account. Secondly, if the end customer is paying cash over a bank’s counters, the corporate requires early notification of the sum deposited. In both cases, not only is it vital that all cash collections are accounted for but they have to be reconciled against the original order, so reconciliation is key.


Cash in Transit (CIT) services are common across Africa and they can be outsourced to a bank or third party provider who will arrange to collect cash on behalf of its client and provide near real time value of funds deposited into its accounts. Intelligent Tills have also been developed which can count, verify and store cash and, in some cases, receive immediate value even though the cash has not physically reached the bank.


With such a low proportion of the population having a bank account, coupled with developing banking systems across the region, direct debit does not offer the same benefits as it would in other regions of the world. Alternative banking services are being rolled out that allow those who do not have a bank account (non-banked) to pay using mobile phones and ATMs, which will enable utility type operations to be able to collect payments more efficiently. Many banks will be able to provide pre-printed credit slips to assist the reconciliation process. For example in South Africa, immediate notification can be sent to a corporate for each payment across a bank’s counters. This is very important, particularly where the payor requires delivery of goods but has to pay before these can be delivered.


Banks are increasingly offering services to enable collection directly from a mobile wallet into a bank account, thus capturing C2B or even B2B payments, with real time notification, and eliminating the security risk and reconciliation issues associated with cash.

Visibility and control of cash

Of equal, if not more importance, is the management of working capital. Corporates will be able to manage their terms of trade, but will need to ensure that payment cycles are managed effectively, particularly where cash payments and receipts are involved.


Managing cash positions across Africa may result in trapped cash in a particular country and, along with mobilising hard currency and counterparty risk, these are some of the major difficulties a corporate with African operations has to overcome.


Most multinational and large local corporates are now seeking sophisticated liquidity management solutions for Africa. This is a challenge in view of the exchange control and local regulatory regime.


Of utmost importance is visibility of cash positions in each country of operation. This can be achieved through the use of the developing electronic banking channels across the region. In addition, most banks can initiate a SWIFT MT940 statement so the overall regional cash position can be monitored centrally. Managing cash in a single country in a single currency is relatively simple, but managing cash in different countries in different currencies is more challenging. This is particularly so across Africa where cross border cash concentration is difficult as the regulatory environment and cash pooling solutions have not been developed as in other parts of the world. Despite the absence of regional solutions, liquidity management solutions are available in individual countries which will assist a company in maximising interest income and minimising interest expense on local cash positions.


Where cross border cash concentration is possible, it must be undertaken with a full understanding of the tax and legal effect this may have on the company. For example, intercompany loans may be created, transfers may be seen as a repatriation of capital or a dividend and there may be minority shareholders to consider. Regional liquidity structures are in place, for example in an offshore centre such as Mauritius, but these should only be used where all tax, regulatory and legal issues can be overcome. Exchange risk must be taken into account if local currencies need to be converted to, say, USD, for overall group liquidity purposes and are subsequently returned to the participating subsidiary in each country if a shortfall occurs. As already described above, notional pooling is not widely offered across Africa as this type of arrangement is normally provided subject to central bank legislation and a legal right of set-off.

Risk management

Across Africa, there are additional risks associated with cash management compared with some other regions across the world. This section is not intended to be all encompassing, but focuses on several key risks relating to managing cash holdings and payments on the continent.


Political and economic stability on the African continent has improved substantially over time, and the risk of international corporations being unable to remit funds out of Africa has reduced. However, there is still a requirement to comply with local regulations, so this risk has not been eliminated. Any subsequent regulatory changes may alter the rules governing such transfers and treasurers need to consider this risk when putting any structure in place. Careful planning and forecasting on the part of treasurers is required to minimise funds held in certain countries, taking into account local exchange controls and keeping abreast of local developments to consider any changes or amendments to these regimes that may be introduced in the future and the effect on existing structures and practices.


Given the multi-currency nature of the African continent, combined with the weakness of some local currencies in comparison with international currencies, exchange rate risk is significant. For example, the ZAR/USD exchange rate has moved from a period average of 8.2612 in 2008 to 10.8735 in Q1 20142. Various tools are available to mitigate a degree of this risk, from holding foreign currency accounts, through to forward exchange rate contracts and hedging where local regulations permit.


In many African countries, it is standard practice to be billed in foreign currency. This practice in itself can create a form of counterparty risk in countries which experience foreign currency shortages, and at a bare minimum can negatively impact the working capital cycle. Treasurers must work closely with both their counterparties and their banks to manage this risk as far as possible.

Summary

The cash and liquidity management needs of a corporate operating in Africa are becoming more sophisticated. However, as explained in this article, there are a number of reasons why these disciplines are more complex across Africa and it will take time to change.


Certainly banking systems across Africa are becoming more sophisticated, which is supporting the ever-growing needs of a corporate treasury. However, whilst electronic transactions are increasing and liquidity management solutions are being developed, there will still be a large proportion of cash payments. The development of mobile banking and payment card solutions will certainly assist in bringing efficiencies and cost savings to banking in many countries.


In view of this complexity it is vital that corporates partner with a bank with a good knowledge of local markets to ensure they can access the most effective solutions for their needs. Using such a trusted partner will assist in managing risk, improve liquidity management, enhance working capital and increase efficiency whilst reducing costs.


1 Source: Africa in 50 years’ time – Africa Development Bank; Growing in Africa – Ernst & Young

2 Source: International Financial Statistics, IMF 2014 Yearbook

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