Nicola Mawson
South Africa has emerged as a beacon for other African nations, showcasing its potential as a jurisdiction for the domiciliation of investment vehicles (IVs).
This study, commissioned by the Mastercard Foundation and conducted by Momentus Global, Stafford Law, and Samawati Capital, was done in response to an observed gap in domiciliation that limits the availability of capital for micro, small, and medium enterprises (MSMEs) that could drive economic growth and opportunity across Africa.
“African countries with substantial local capital pools can direct investment toward MSMEs by following the lead of Kenya and South Africa in creating platforms for pension fund managers to pool capital for infrastructure investment,” it stated.
As of January 2023, South African retirement funds were enabled to invest up to 45% of their assets in infrastructure projects.
The report said that currently, African businesses battle an availability of capital, hindering their “potential to drive growth and employment on the continent”.
It also noted that MSMEs were an important driver of private sector development and economic opportunity, especially for young people. Such funding, it said, was vital to drive growth.
“Attracting investment vehicles to domicile in African jurisdictions can draw greater international investment and catalyse the mobilisation of local capital for African enterprises,” it said.
“African or local domiciled IVs are best placed to source and channel capital into local businesses while contributing to the development of financial services ecosystems.”
The report said there was an “urgent need for African jurisdictions to enhance their regulatory environments, oversight, and enforcement to attract more investment” given that about 60% of African-focused IVs were housed outside the continent.
The report ranks countries in terms of favourable environments. South Africa, which was determined to be green, came third behind Mauritius and Rwanda in terms of the regulatory environment, and second behind Mauritius in the other three categories of judiciary framework, operational efficiency, and enabling environment.
Ethiopia, Kenya, Morocco, Nigeria, and South Africa, it said, hold significant promise for local capital mobilisation.
“These nations possess substantial pools of local capital, positioning them to drive domiciliation initiatives from within,” it said.
“Their focus should lie on harnessing local resources to fuel economic growth and create self-sufficient ecosystems for fund domiciliation. Differentiation through niche approaches, such as building investment around tourism or green finance, can also drive domiciliation.”
Moreover, it stated that larger markets such as Nigeria, Kenya and South Africa could be favoured as a preferred domicile, because of their large local capital pools, “even if they are FATF [Financial Action Task Force] greylisted for the moment”.
Yet, South Africa will have to “prioritise efforts for compliance with global standard to build investor confidence,” it stated about South Africa’s status as having been greylisted by the FATF for insufficient controls relating to, among other things, to combat money laundering.
Areas of improvement as recommended by the report for South Africa included a need for stakeholders to actively advocate “for the government to implement a robust strategy aimed at positioning the country as a leading fund domicile”.
It said such an aggressive approach can the country’s standing in the international market by leveraging its well-established ecosystem and robust financial sector.
Moreover, is said there was a need to allocate the “nation’s substantial pension assets into emerging funds focused on technology, green initiatives, or climate resilience”.
“This strategic deployment will catalyse the formation of a new ecosystem and incentivise international investors to establish similar funds, thereby fostering growth and innovation in these sectors and creating new demand.”
Yet, the report emphasised that operational efficiency and an enabling environment are crucial for fund domiciliation. Mobilising domestic capital, it stated, is essential for the growth of local investment vehicles.
BUSINESS REPORT