Banking tastes better with KYC (Know your client first)

Bank of Mauritius, Financial Intelligence Unit, Financial Services Commission, Independent Commission Against Corruption have all been given a blank cheque to fight against black money. But where do they begin? Anil Fangoo, Head of Compliance at AfrAsia Bank, explains in an interview, their morning mantra should start with "Know your client first" (KYC).

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China: The Emerging Superpower?

AfrAsia Bank is pleased to post the following from Louis Lallia. Louis is International Development Manager at AXYS Group (Mauritius) and outlines in the interview below China's growth story and its attractive area for investment.

Why do you believe China is an attractive area for investment?

Whilst Europe is fighting to avoid economic decline, China is posting GDP growth rates close to 8%. Even Thailand, the new Asian Eldorado, posted rates below this (6.4% in 2012). It is true that these figures are not as impressive as the double digit growth figures experienced in the 2000’s but I believe that’s the sign of a maturing economy. To quote Jim O’Neill (Chairman of Goldman Sachs Asset Management and the man behind the BRIC acronym) “China is going from a period where it was all about the quantity of growth into an era where the focus is on the quality of growth”.

The emergence of a Chinese middle class is the essential component of this phenomenon. Experts predict that over 340 million Chinese will enjoy an annual income ranging from USD 12,000-25,000 by 2016 meaning that the country is changing from an investment-driven economy to a more mature consumer-driven one. 

China’s GDP is expected to grow by 50% by 2017. China is also cheap at the moment. The Hang Seng China Enterprises Index is close to valuations that could only be found back in 2001. And that – coupled with its persisting growth – is what we find really exciting. It is not very often that one has the opportunity to buy at such an attractive price. Chinese companies have been posting healthy results and yet the stock market has failed to properly translate this. 

How does the Hang Seng China Enterprises Index reflect the Chinese growth story?

Well at the moment it doesn’t – and that is exactly why we think it represents such a good buy opportunity: we believe that it should be much higher.

The Hang Seng China Enterprises Index is the main Index tracking the top 40 mainland Chinese companies. Think of the Sem7 for Mauritian Stock Exchange. It is listed on the Hong Kong Stock Exchange (because foreign capital ownership is restricted in China) and accounting rules are in line with IFRS guidelines – an essential element for international investors.

How can one invest in China?

For an investor who knows the Chinese market, I would advise them to invest directly. However, stock picking is both difficult and time consuming and private investors often do not have sufficient resources to carry out in-depth due diligence.

One could also decide to invest by tracking the Hang Seng Index. There are a number of ETF (Exchange Traded Funds) that do just that and can be bought both in USD and in €. 

Like direct ownerships in stocks though, ETF’s do not offer any protection to the investor. It is for that reason that we decided to invest in China through a structured note that offers our clients 100% capital protection whilst enjoying an attractive participation in the rise of the HSCE Index.

Le secteur financier: Le moteur de la croissance économique en 2013

Entretien avec Kamben Padayachy, Deputy CEO, Head of Global Banking, Treasury and Markets d'AfrAsia Bank - 'Le secteur financier sera le moteur de la croissance économique cette année'.

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Source: l'express, Le Journal de l'économie, 20 Février 2013

The Mauritian Banking Sector

Business: AfrAsia Bank CEO James Benoit replies to l'express Weekly (Issue 23-29 August 2012):

1). The Mauritius banking sector has come under a lot of criticism for being dominated by two major banks. How difficult is it for a new bank to make it in the Mauritian market? 

Talk is cheap of course. It is perhaps too easy to make the criticism that the domestic banking sector indeed has two banks which have a substantial market share. Many new banks have now entered the market as we believe that new banks can enter and succeed in the domestic market. I cannot speak for the other newer or smaller banks but for AfrAsia Bank we have chosen specific market niches and have been pleased with customer response. As a result, our investors wish to keep growing the bank.

2). There have been repeated criticisms in the press about abusive and anti-competitive practices by the big banks to preserve their duopoly. How accurate is that assessment and what are some of the problems that small banks face because of that? 

That is a very strong statement. I don’t believe there yet has been any ruling in any court, by a regulator or other body that such abusive or anti-competitive practices exist. Clearly however in a limited market size of 1.3 million people, long established players may come to have well entrenched positions. If for example AfrAsia Bank wants to challenge them in the home loan market, I have to consider how much capital I will need to have to do that and the returns I can make on that after considering that I probably need to give the customer a better rate and better service to make him switch to us.  To date I have come to the conclusion that I cannot compete in that segment with the bigger banks. Now, whether our society, political and business leaders wish to then take other actions to encourage more competition or limit the scale of the bigger banks is a wider social policy question. 

3). Big banks dominate sectors such as the credit market. Does the offshore sector provide some breathing room for smaller banks to emerge?

I am not sure they will dominate the credit market for much longer, and I am not sure they dominate other than for the biggest companies that obviously need big banks. We already bank 75% of Top 100 companies, a clear example that we CAN compete in domestic credit.  I can say that AfrAsia Bank and many other newer banks can compete well for small medium enterprises.

Competing for credit however is a matter of having shareholders put enough capital into their banks and I do see that trend increasing here. We are growing our capital base steadily each year to ensure we can compete for the largest credit and loan deals in the country. And yes, the offshore market is also opening up amazing opportunities. In the case of AfrAsia, nearly 50% of our total business is already for offshore or global business. That is really a very exciting opportunity for all banks and for the country.

4). What can the government do further to allow smaller banks to emerge?

Well, as always, let me be the outspoken person on this matter. I really think we need customized policies and legislation. One size fits all regulations and governance just makes all banks look and act the same. We need regulations that encourage banks to play in niches or if they want to come in large size to do new things they probably need incentives or less restriction to do so. A microfinance business or a credit union serve very distinct roles and regulating them just like banks then takes away the customer benefits of their business model.  I was just in Alberta, Canada and had lunch with the senior executive of a credit union. They don’t want to become a bank and they hope they won’t be forced to. As I mentioned earlier why would I enter the home loan market in Mauritius? I also know other banks would like to do more treasury and foreign exchange business here but we have some considerable government intervention and control in that market again which constrains the size of that market now. At the end of the day, I have to convince shareholders to invest in AfrAsia and they need to see minimum returns on that investment. They need to see growing, dynamic market opportunities and we need to ensure policies are driving growth not just making things, apparently, safe.

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Basel III: Issues & Ramifications

Basel III is a crisis driven job that is still being hotly debated and implemented in pieces without proper integration.

- What is Basel III and its implications?

BASEL III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed by the members of the Basel Committee on Banking Supervision in 2010-12 This, the third of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III strengthens bank capital requirements introduces new regulatory requirements on liquidity and leverage.

Hidden in that very serious and prudent definition are many fundamental assumptions on what kind of assets are on bank balance sheets. The nature of these assets is what drives the capital and liquidity requirements. Some of these assets are deemed to be lower risk, that is have lower risk weightings, and hence have lower requirements in terms of capital and liquidity. The problem with that is that such risk weightings are backward looking and hence no guarantee of the future performance. Sovereign bonds and home loans are a case in point in that being rated as risk free or lower risk weighted than other assets historically many of these assets are what has caused the current crisis. Because these were perceived as risk free, banks loaded their balance sheets with them to getter better returns using less capital. Second, many assets such as trade finance loans which have rarely ever caused wide spread financial stress, are now being re-weighted or lumped together in new measurements which will make banks want to hold less of those assets. 

- What will it change in Mauritius if we adopt it in local context?

Our challenge will be to get Basel 3 amended in some form that indeed suits our local context! If we cut and paste enacts it straight up, it will hurt. Trade finance business for importers and exporters for example could become restricted by banks or cost such borrowers much more in future. This could hit our economy quite a bit.

Also, even there is another ratio called a liquidity coverage ratio which requires banks to hold assets that are easy to sell in the event of a market crisis. The LCR calls for banks to hold high-quality corporate and government bonds which are in short supply in countries with fledgling capital markets and nonexistent in much of Africa. This could put our ability to compete as an African regional financial centre as our banks would need to adjust our liquidity to this demand. Perhaps we even have to send our excess liquidity out of this region! Does that make sense?

- In what ways will it really be damaging to Mauritius as developing country?

There is nothing wrong with Mauritius banking sector in terms of taking on excessive risk. I have nothing but praise for how Mauritius always manages through crisis and has never had any industry or company bring us to our knees. Our skill and track record mean we have the potential to be the leading regional banking and finance centre. Indeed some of us have set up our banks to do just that! But the ever increasing capital and liquidity requirements may mean we just miss taking smart, calculated investment risks in our region as the rules make it prohibitively costly to do so. Nothing is ever risk free, not even sovereigns, and much of Basel 3 assumes the mix of assets and counterparties especially in our region are riskier than others. This region will scale up dramatically I believe in the future and Mauritius institutions will need to scale up to participate in that. We already are well ahead of Basel 3 minimums in many respects so we have been a force of good regulation to now. But some of the new requirements are very problematic and short term safety does not guarantee long term success.

Kingdom Financial Holdings rebrands to AfrAsia Kingdom Zimbabwe Limited

Following the recent investment of $9,5 million by AfrAsia Bank, shareholders of Kingdom Financial Holdings Limited (KFHL) have agreed to rename the group to AfrAsia-Kingdom Zimbabwe Limited. This name change has culminated in a re-branding exercise to reflect the co-existence of the AfrAsia and the Kingdom brand into the future.

“AfrAsia Bank Limited's investment - together with the financial support from other shareholders - have enhanced the future of the Group, and also further strengthened its capability to fund new business growth initiatives. There is evidence that the Zimbabwean economy is poised for growth and our strategy remains to be a leading diversified financial services group in the country by working together with AfrAsia Bank to implement growth strategies for the Group,” said Lynn Mukonoweshuro, Group CEO of KFHL.

On the other hand, AfrAsia Bank CEO James Benoit points out: “AfrAsia Kingdom Zimbabwe Limited will form a core part of our regional expansion drive and growth potential of the country’s banking sector. Using our investment in Zimbabwe as a regional launch pad will also provide us with a unique opportunity to expand our franchise in the Southern African Development Community (SADC) region through an established operation and with highly credible local partners.”

Investing in Zimbabwe

AfrAsia Bank is pleased to post the following from guest blogger Nigel Chanakira. Nigel is the founder and anchor shareholder of AfrAsia Kingdom Zimbabwe Limited and here outlines Zimbabwe as the emerging market dynamo and the potential investment opportunities in the country.

Zimbabwe is being recognised largely as a re-bounding economy after a decade of lacklustre performance and the country still has some fundamental structural issues which need to be addressed from a policy perspective. Sub-Sahara Africa inevitably is a new and possibly, the remaining fast-growth frontier given the current global landscape and, Zimbabwe will be at the heart of growth within SADC.

Zimbabwe has for the past three years been churning out annual GDP growth rates of 5,7%, 8,1% and 9,3% respectively in a time of the global recession. The country may currently fit into a classic high risk, high return profile but without the exchange rate risks associated with an African developing country due to its multi-currency regime. Foreign investors who want to invest in Zimbabwe will find at least US$9,2 billion worth of opportunities over the next couple of years as identified by the 2011-2015 Medium Term Plan of government  in the following sectors. Click here to view the table.

As a matter of fact, many investors are concerned with the political upheavals in Zimbabwe. On the economic front the adoption of the multiple currency system in 2009 by Zimbabwe coupled with the cash budgeting policy by the government has brought the much needed macroeconomic stability. Although many new investors have entered into the mining, telecommunications and banking arenas, many others continue to watch from the sidelines anticipating to move in as soon as the signals are more position. Emphasis should now be placed on reducing Zimbabwe’s sovereign risk through working towards more stabilisation of the political environment so that we can harness international resources to augment domestic ones.

Following the direct involvement of SADC and the African Union, we expect that fresh elections will take place within the next year or so under a new constitution and these should be free and fair. This will foster a more conducive economic environment which creates space for significant infrastructural and private sector investments will drive sustainable economic growth allowing Zimbabwe to once again take its place as an African economic dynamo under a new dispensation. Interestingly, the appetite for investment by the Chinese in Zimbabwe remains very high and it is a strategic moment in time where global investors should focus more on Zimbabwe sifting between reality and the negative media frenzy because returns are very attractive.

Zimbabwe is undergoing some reforms by promoting local and foreign joint venture investments, tourism from the East, and exploiting its huge mass of a variety of valuable minerals (spanning 60 in number). Foreign savings and investment is now seen as a mechanism to compliment the domestic savings pool which was decimated by hyperinflation and dollarization of the economy. The ideal situation is for Zimbabwe to do business with all countries of the world especially the European countries that it had traditionally been doing business with like United Kingdom, etc. This is what will put Zimbabwe’s economy back on its feet.

Read more about 'Investing in Zimbabwe' in our Newsletter (page 8-9).