!@#

EYe on AfricaVolume 3 | March 2011

Features

Investment opportunities in Kenya

Review of the Islamic finance industry

World Entrepreneur Awards 2010Winners and Lifetime Achiever

Africa is still golden in the Mining & Metals sector

4. Editor' s note

5. Our African footprint

6. Regional highlights

-Ernst & Young at the Mining Indaba

-2010 World Entrepreneur Award winners

-Ernst & Young East Africa Tax team providessuccessful training to Kenya Commercial Bank

10. Africa is still golden

11. Consumer products in Africa: Hunting big game

13. Why invest in Kenya?

15. Hidden opportunities

17. A review of the Islamic Finance Industry

18. Eye on Africa profile: Q&A with Sugan Palanee

Inside

4

The Africa Business Center™

You have come to the right place

Africa remains at the centre of the global investment stage. 2011 got off to a flying start, with the world literally converging on theCape Town International Convention Centre for the Mining Indaba. Mining economies, including Zimbabwe, Niger and Tanzania,showcased their potential to the rest of the world. We feature highlights from the Indaba and give more perspective in “Africa is still golden”. As we did in our previous issue, we compare the performance of some of Africa’s stock markets with those in the developed economies for the past ten years. For this, see Jonathan Kruger’s piece “Hidden opportunities” on page 15 and thegraph below.

Kruger’s research emphasises the importance of looking beyond the recent uprisings in Egypt and Tunisia in order to identifyAfrica’s true economic potential; especially in 2011 – during which more than ten countries on the continent will conduct elections.Uganda concluded theirs in February, but everyone is keen to see what will happen in Nigeria and Zimbabwe.

Following our past interview with the CEO of consumer products giant Tiger Brands, Derek Engelbrecht, Ernst & Young’s Retail andConsumer Products Africa Leader, shares his insights on the opportunities and challenges of selling to Africa’s billion consumers.We also shed some more light on banking in Africa with our focus on Islamic banking; a fitting tribute to the recognition of Nigeria’sCentral Bank Governor, Sanusi Lamido Sanusi, who received the honour of being named the World’s Central Banker of the Year byThe Banker (a publication of UK-based Financial Times). The award affirmed our decision to feature the Nigerian banking sector inEYe on Africa previously. Add to all these a Q&A with Sugan Palanee on the role of India in the future of the continent’s economicgrowth and our regular “Doing Business in...”, this time the focus is on Kenya, and you have a true African feast.

Enjoy EYe on Africa, Volume 3.

Contact us for more on how you can grow your business in Africa – the new and last economic frontier.

Victor KgomoeswanaAssociate Director, Africa Business Center Tel: +27 11 772 5249 E-mail: victor.kgomoeswana@za.ey.com Web: africabusiness@za.ey.com

Editor's Note

9 Year market performance to 31 January 2011

5

African footprint - at a glance

6

This year's Mining Indaba, described as the"world's largest gathering of investors,financiers and mining professions in Africanmining" , saw the largest number of delegatesattending in the history of this event.Adrian Macartney, Sector Leader for Miningin Africa commented that the mood was verybuoyant and that “there is certainly a buzz inthe air, which we haven't experienced in theindustry over the past 18 months.

Africa remains a huge focus area for manyinvestors across the globe, and we areexpecting the amount of M&A activity tosignificantly increase in the next 12 months.”A few of the key issues discussed at theconference included resource nationalism,mining investments in Africa, resources inAfrica and the role of China and other BRICcountries in terms of investing in Africa.

Victor Kgomoeswana, Adrian Macartney and James Thomas

Regional Highlights

7

World Entrepreneur Award Programme spreads into Africa

As Africa enters a new decade, and joins China and India incrossing the billion-person mark; business and governmentleaders have more reason than ever to be optimistic aboutfuture growth prospects. With plentiful natural resources,sustained improvements in infrastructure and a desire to bepart of the global economy, it is no surprise that Africa is seenby many overseas investors as the land of opportunity. “Theenormous potential of the African market is further enhancedwhen you consider the natural entrepreneurial spirit that existswithin African people and business leaders. As we have seenwithin the BRIC economies, building a stable businessenvironment where entrepreneurs can thrive will be a keyingredient of sustained economic success, we are pleased toannounce another dimension to the competition.Entrepreneurs across Southern, Western and Eastern Africahave, for the first time, been given a global stage from which tocompete and be recognised," announced Zanele Xaba, Directorfor the World Entrepreneur Awards Programme.

The 2010 winners included:Master Category:

Marcel Golding and John Copelyn - HCI

Marcel Golding and John Copelyn became business partners in1995. Prior to that, both held leadership positions in the tradeunions, Marcel was involved in the National Union ofMineworkers in various senior capacities and John was theGeneral Secretary of the SA Clothing and Textile Union.They were both founding members of the Central ExecutiveCommittee of COSATU and were among the twenty unionleaders delegated to form part of the ANC National Parliamentlist contesting the 1994 parliamentary elections. In 1997,having sought and received permission to leave parliament,they reversed their business interests into the JSE-listed shell:Hosken Consolidated Investments Ltd (HCI). The vision of thecompany was to bring the vast majority of the wealth to theworking population of the country. In order to ensure that theywere personally invested, Marcel and John structured theirinvestment into HCI through their own investment companiesby putting their own capital into the businesses in which HCIinvested.

Marcel became the Executive Chairperson and John the ChiefExecutive Officer of HCI from January 1997. HCI was the thirdcompany on the Johannesburg Stock Exchange to be regardedas black empowered and the first to have a significant portionof its shares owned by broad based black economicempowerment. Over the last 14 years, Marcel and John havebuilt HCI into a prominent JSE-listed company with majorityshareholdings in a number of industries including buses,casinos and hotels, television, clothing and textiles, mining,renewable gas, property and motor component manufacturing.

Emerging entrepreneur category:

Wally and Debbie Fry - Fry Group Foods

Seeking alternatives for meat products that provide similarlevels of protein, and that have the same taste as their meatcounterparts, Fry’s Vegetarian was started in 1991 by Wallyand Debbie Fry in their own kitchen and a small office that theyowned from a previous business. What was a hobby pursuedmore for personal satisfaction than for business ideals – theFry’s began experimenting with food types in 1989 looking forvegetarian alternatives that were tasty, nutritious and easy tomake. In September 2010, Fry’s launched the Meat FreeMondays campaign in South Africa as a global initiative to inviteSouth Africans to pledge their support and declare Mondays ameat free day in their households. Meat Free Mondays hasbegun as an environmental initiative aimed at raisingawareness of the environmental impact of meat farming andproduction, and the impact a reduction in consumption couldhave on the environment as a whole.

Social entrepreneur category:

Olivia van Rooyen - The Kuyasa Fund

The Kuyasa Fund (Kuyasa)is a non-profit social developmentorganisation that provides microfinance as a tool to improvethe housing conditions of South Africa’s poorer communities.Olivia van Rooyen started Kuyasa to support community groupsto save towards housing, and grant loans to individuals whoqualify for the state housing subsidy-within their belief that thepoorer of the poor are still credit worthy and that throughmobilising savings they are able to build financial and socialcapital – specifically housing. To meet their vision of enablingthese marginalised communities the ability to own and financetheir dwellings, Kuyasa provides microfinance services to thosewith secure occupational rights but who are traditionallyexcluded by the South African banking fraternity.The underlying belief behind the business of Kuyasa is that byimproving the quality of housing of these people – the moraland social fibre of the community is enhanced by pride felt inbeing a home owner, and the stabilization it gives to families.

Regional Highlights

8

This year’s Lifetime Achievement award went to:Dr. Bertie Lubner – MaAfrika TIkkun

Bertie Lubner grew up in an entrepreneurial family – his father,Morrie Lubner, was one of the founders of the Plate GlassGroup. After school, he completed a B Comm at the Universityof Witwatersrand and then joined the Plate Glass Group in 1951as a trainee. In 1953 he moved to Rhodesia (now Zimbabwe)to develop the company’s interests in what was then the CentralAfrican Federation

After 14 years, having developed the Group’s interest in sevendifferent countries of the region, he returned to South Africa atthe end of 1967. On his return, he assumed responsibility forexpanding the Group’s interests in the wood industry andsuccessfully launched this area of the business both nationallyand internationally. By the early 1990s the Group wasoperating in 19 countries, employing 23,000 people, with aturnover of over US $1 billion. Bertie and his brother Ronniewere joint Chief Executives of the Group, and in 1982 Bertiewas appointed as Chairman, a role he held for the next eightyears. In 1992 the Lubner family sold control to SA Breweries;however the family bought back, together with Management,all its glass interests in South Africa, and continued with itsinvestment in the international glass arena.

After 41 years with the Plate Glass Group, Bertie changed hisfocus to allow him to undertake a number of new initiatives,such as getting involved in major business organisations,government bodies and his family’s philanthropic initiatives.

This led him to initiate and become the founder of a significantnumber of outreach programmes, such as:

• MaAfrika Tikkun – a Jewish-led community organisation toassist previously disadvantaged children, ex-PresidentMandela is the Patron-in-Chief of this organisation.

• The Field Band Foundation – an organisation which, over thelast few years, has developed 31 college style bands,bringing not only musical skills, but lifestyle skills to over4000 children from the most deprived areas;

• Trustee for the Worcester Home for the deaf and blind;• Patron of the Lubner “Kibbutz” – a farming project in South

Africa, incorporating people with Downs Syndrome.

Regional Highlights

Nicole Sykes, Bertie Lubner and Lauren Patlansky

Zanele XabaLead Director: World Entrepreneur Awards - AfricaTel: +27 11 502 0261E-mail: zanele.xaba@za.ey.com

9

Regional Highlights

Ernst & Young East Africa Tax Team trainsKenya Commercial Bank Regional Finance Team

November 24th and 25th saw the Ernst & Young East regionaltax team come together at the beautiful Karen LeadershipCentre in Nairobi to train the regional finance team of KenjaCommercial Bank, including representatives from the financedepartments in Kenya, Uganda, Tanzania, Rwanda andSouthern Sudan - all countries where the bank has a presence.Facilitators for the session were carefully selected from ourKenya, Uganda, Tanzania and Rwanda offices.

The bank has had a long relationship with Ernst & Young whichwas taken to a higher level when minds were brought togetherto discuss tax issues affecting the bank in all jurisdictions ofoperation.

Discussions were very interactive and focused more on the taxexposures the bank has had in earlier years and whether therecommendations given have been implemented, transferpricing and the need for the bank to have it in place, customsand trade and how the bank can plan on a tax efficient supplychain, tax exposures in each of the jurisdictions, as well as areview of tax litigation cases related to the banking sectoraround the region.

The Business Development team from our Johannesburg office,Zanele Xaba and Victor Kgomoeswana, also offered theirsupport by enlightening the client about our Africa Interactivetool as well as the upcoming Entrepreneur of the Year awards.

From the client’s side the Kenyan Finance Manager Mr YusufIdarus confessed, that when they heard the training was to takeplace they thought it would simply be about the usual generaltax matters that they have always heard of. " Little did weknow," he said, " that the training was more focused on whatpractically goes on in the business including live issues likeexposures we have earlier had and how we can mitigate them."They were specifically blown away by the “extras” they receivedlike case law about banking sector, Africa Interactive tool andCustoms & Trade, which they thought was not much of aconcern to the banking sector.

10

When it was suggested a year ago that Africa’s economicrecovery was on track, many thought this premature. However,a quick look at current figures shows that there can be littledoubt that the continent is definitely ‘open for business’. In early January 2011, the International Monetary Fund (IMF)forecast that Africa will take seven of the top ten places for theWorld's ten fastest-growing economies over the next five years.And with Africa once again presenting good value to investors,its mining economies are once more in the spotlight.

As far as mining goes, Africa's share of global deal-flow tripledfrom 5% in 2009 to 15% in 2010. The bulk of these deals wasinbound and showed a significant growth in volume, signifyingthe increased interest of the rest of the world in Africa.

“In one major deal, Rio Tinto offered US$3.9b to buyMozambican coal miner Riversdale, while Xstrata is payingUS$513m for Sphere Minerals, with the goal of gaining threeiron ore projects in Mauritania. When one takes into accountthe increasing interest in Africa’s mining sector from companiesin China, India, Brazil and Russia, it is easy to see why thefuture looks rosy,” says Adrian Macartney, Mining SectorLeader: Africa.

“Taking South Africa as an example, some 31 mining andmetals transactions were completed during 2010, either inSouth Africa or by South African-based firms abroad, with thetotal value of these transactions amounting to US$2.9b. Ofcourse, the local industry was negatively affected by theongoing nationalisation debate, as well as concerns overlicensing and the availability of energy.” However, saysMacartney, by early 2011, a note of positive sentiment hasbeen underlined by the news of increased mining output for2010, coupled to expected announcements on licensing, aswell as the commitment of organised labour, corporations andgovernment to ensure that the country capitalises on thecurrent high demand for minerals.

Tanzania continues to be a rising star in East Africa, withgeophysical surveys finding more gold and coal reserves inareas where these were not expected. In addition to thesereserves, Tanzania’s ability to attract investments in miningequipment manufacturing has been highlighted by the signingof a large deal.

“Zambia has long been viewed as a low risk investmentdestination, and its copper-based mining sector has thusattracted high levels of foreign investment in recent years. Withcopper demand set to outstrip supply from next year until atleast 2013, things are looking up for the country. Further goodnews is that the Zambian government has confirmed that it willnot reintroduce its proposed 25% mining windfall tax, providedfor in the 2008 Mining Act,” he says.

“Perhaps the biggest clue to how well Africa’s mining industryis doing is the fact that even Zimbabwe’s economy is stabilising.Official figures indicate that after a contraction of 17.1% in2008 in its mining industry - the largest decline in fivesuccessive years of negative figures - the sector grew by 8.5%in 2009. Furthermore, it was expected to grow by an additional31% in 2010. The government has also issued more licenses fordiamond mining and has completely liberalised its gold market.”

“Of course, it is still facing a number of issues, notably the needto overcome the gulf between electricity demand and supply.Another major cause for concern among investors is thegovernment’s drive towards Indigenisation.” However, this isjust part of a more widespread continental sentiment. It is notonly indigenisation in Zimbabwe or Black EconomicEmpowerment in South Africa, states Macartney, Africa as awhole is moving toward providing more benefits for the localpeople. Moving forward, mining companies will have to havelocal partners or will have to undertake various forms of localparticipation. In addition, he points out that environmentalsustainability is increasingly gaining importance and will surelyaffect the cost structure of mines in the future.

“Ultimately, the abundance of mineral resources on thecontinent, coupled with the lack of local capital and capacity,opens the door to mutually beneficial opportunities for localand foreign firms to work together in identifying and realisingthe enormous mineral potential of Africa,” concludesMacartney.

Africa is still golden

Adrian MacartneyLead Director: Transaction Advisory Services and Mining & Metals SectorTel: +27 11 772 3052E-mail: adrian.macartney@za.ey.com

11

Consumer products in Africa:

Hunting big game

With over a billion people, 53 countries and some of the bestGross Domestic Product growth rates in the world, Africapresents a tantalising prospect as a significant growth marketfor consumer products companies. However, tapping thatmarket is not without its challenges; far from homogenous,beset with issues relating to geography and climate, politicaland social unrest, African markets present that most prosaic ofinvestment equations: weighing increased risk against thepromise of great reward.

Africa’s vital statistics are becoming progressively morecompelling. Gross national income is already greater than thatof China or India in 14 of the continent’s countries. GDP iscomparable to that of Brazil and is rising at around 6% perannum. With consumer spending rising at 16% compound perannum, Africa is, and looks set to remain, one of the fastestgrowing economies in the world.

At a more granular level, GDP per household across thecontinent has more than doubled in the last 15 years. Furtherimpetus is added in the fact that foreign direct investmentnearly quadrupled from 1998-2008; today, around 85 millionAfrican households earn at least US$5,000 a year. Thisdevelopment comes off a low base and with many millions morehouseholds aspiring to own, acquire and use consumerproducts, the stage is set for continued substantial growth.Consumer products companies are taking note of thesechanges and making bold moves to get established, or toaccelerate expansion in what is a collection of the world’s pre-eminent emerging markets.

Weighing the challenges

But while the opportunities may be without parallel, so too arethe challenges. Africa is seen by many companies as the finalfrontier for a reason. Over 1,000 different languages arespoken by multiple ethnic and religious groups. And Africasuffers more wars, civil commotion, corruption and economicand political instability than any other continental, though thesituation is improving. While Africa is making great strides tocombat poverty, up to half the population is at or below thepoverty line. Cash flow is irregular, there is little access to creditand many live in informal settlements on the edge of cities or inremote villages. Economic growth and business prospects aremarkedly different from country to country and region toregion, making many traditional routes to market ineffective –particularly for consumer products companies keen to targetthe working and emergent middle class. This means globalbusinesses have constantly to recalibrate the balance betweenrisk and reward, in order to ensure that Africa makes a positivecontribution to business growth and ultimately, the bottom line.

The million-mile view: A blueprint

While the investment case and approach for each organisationwill differ, there are some commonalities which should informthe macro-view of entering or accelerating participation in theAfrican consumer products market.

As companies develop their presence, the challenges they facewill tend to fall into four categories:1. Resource prioritisation – where and how to prioritise for

greatest return and lower risk2. Brand and product portfolio – how to determine what is right

for each market3. Organisation – how to structure for success4. Sustainability – how to protect growth and performance

1. Resource prioritisation: Where and how to prioritise

Considering potential markets for entry or expansion in Africais a complex exercise which requires a kaleidoscope analysis.This should enable companies to assess the strengths andweaknesses of each potential market through a variety oflenses, depending on their strategic priorities. Simply put,analysis of multiple indicators is essential to develop a moresophisticated view of how different markets might perform fortheir business.

Conventional macro-economic indicators are where most starttheir market analysis. On this basis, South Africa, Tunisia,Egypt and Morocco are all reasonably mature, diverse and openeconomies, with relatively positive growth prospects.

Some of the less developed economies that stand out as havinggood prospects in an exercise of this nature also includeAngola, Ghana, Kenya, Tanzania and Mozambique – populationsare rising, growth is strong and political stability is improving inall these markets so ease of doing business is starting toimprove. Other, less geographically-based analyses can alsoshed some light. Cultural analysis reveals that Africa is home toone third of the world’s Muslim population, living not just inNorth Africa as many suppose, but also in sub-Saharancountries like Nigeria, and in East Africa. This insight enables amore meaningful perspective of African consumers that standsapart from historic, colonial boundaries.

2. Brand and product portfolioThere are a number of very strong messages coming out ofAfrica in terms of brand preferences and the drivers ofconsumer purchasing behavior. Companies which canunderstand what is different about African consumers are ableto target priority consumer segments with a tailored brand andprice proposition; if they can do this and overcome thedifficulties of poor local infrastructure and lack of moderntrade, they are most likely to perform well.

African consumers are a complex and varied group, but thereare a number of common themes, irrespective of earningpower. In general, African consumers are pro-Africa and have astrong sense of national identity. When SABMiller tried to enterKenya with its Castle (traditionally South African) brand, it wasblocked by East African Breweries’ (Diageo) Tusker beer.

12

With its black and yellow elephant branding, and the slogan‘My country, my beer’, Tusker appealed to the fiercenationalism in Kenya. Africans demonstrate status throughwealth. Trading up is a common trend, so the concept of the‘third party’ observing choices is very important in thepurchase and use of products. Many consumers are alsostrongly influenced by religious practices (particularly incountries with a strong Muslim or variable ethnic contingent) —affecting everything from clothing, through personal grooming,to eating and drinking practices. Clothing requirements are alsobehind some key sales trends. For example, the volume ofshampoo sold in Egypt (population 70 million) is the same asin Lebanon (4 million) due to the fact that 87% of women inEgypt wear headscarves. Because wearing veils can lead torashes, odour and hair loss, the perceived need for particularbeauty products is increasing. Price also remains a key issue;single use or low-cost products are also seeing increasinglysolid demand.

3. Organisation: Structuring for successCompanies that can execute consistently across all markets todeliver reliably to customers and consumers, drive down costsand reduce risks are more likely to achieve long term operatingsuccess. Efficiency is pivotal to allow consumer products toreach mass markets at low cost. The paradox, however, is thatthe heterogeneity and massive complexity of African marketsdictate that there is no one-size-fits-all solution. While manycompanies want to leverage their size and scale and establishsome consistency with their global operating model, it is notalways possible in Africa. The principles on which companieshave built a US or Europe operating model very often simply donot apply. The informal economy is a key feature of life in Africa— estimated to account for around 42% of GDP in 2000 with thehighest figures in Zimbabwe (59.4%), Tanzania (58.3%) andNigeria (57.9%). South Africa is the least informal market –only 28.4% of GDP.

Distribution is a central issue across Africa; when local marketsare too small for a multinational to offer just the core range, itis commonplace to extend distribution facilities to otherbusinesses to bulk out ranges and cooperate with others toreduce transportation costs. Poor infrastructure, remote areasand a highly fragmented retail base make distribution one ofthe major challenges for consumer products companies —which are tackling the issue in a variety of inventive ways.

4. Sustainability: Building for the futureLaying strong foundations for long-term profitable growth isperhaps one of the toughest African challenges, given thediversity of market conditions, the speed of consumer changeand the unpredictability of legislation and regulation. Decidingwhere and how management should focus to protect growthand drive performance is critical for ongoing success.

Four key areas warrant attention to safeguard the future ofAfrican operations in:• Implementing an effective controls and compliance

environment• Retaining local talent • Fostering strong relationships with local regulators; and • Ensuring that the principles of corporate social responsibility

are properly embedded. To engender sustained adherence to good control standardsand build an environment with greater focus on continuousimprovement, it is particularly important that global consumerproducts businesses operating in Africa focus on winning thehearts and minds of local staff to demonstrate why internalcontrol performance drives better business performance.

A complex challenge with potentially enormous rewardWhile early entrants have had the opportunity to influenceconsumer preferences, build brand loyalty, shape industrystructure and establish long term relationships, new entrantsare actively assessing the marketplace and looking foropportunities to leapfrog the competition.

In such a complex, competitive and fast-changing environment,critical factors for success will always include consumer insight,execution excellence and strategic improvisation. The ability totranslate learning from other sectors and even geographies intogame-changing market approaches are likely to be the keyqualities that will set winning companies apart. Businesses thatpossess these qualities will be able to navigate the challenges ofpoor infrastructure and low penetration of formal retailing.They will prioritise their resources to effectively target theburgeoning middle and top of the African consumer pyramidand organise themselves in an efficient and flexible manner.

And more than that, companies seeking to do business on thecontinent have to decide whether they are African companies,or merely companies headquartered elsewhere which are doingbusiness in Africa. It is those which show the greatercommitment which are likely to prosper.

Derek EngelbrechtLead Director: Retail and Consumer ProductsTel: +27 11 772 3567E-mail: derek.engelbrecht@za.ey.com

Consumer products in Africa:

Hunting big game

13

Why invest in

Kenya?

Kenya is an attractive destination because of its growinginfrastructure: roads and rail, airlines hub for major regionaland international routes. The Port of Mombasa is a majorgateway to all surrounding countries and a major tea andcoffee auction market. Nairobi is the headquarters for UNEP,UNESCO, WFP, USAID, World Bank and IMF regional offices.The country is an agricultural bread basket for the region.

Kenya’s Vision 2030

The government’s blueprint for the year 2008 to 2030 aimsto transform Kenya into a newly industrializing “middle-income country providing a high quality of life to all citizensby the year 2030”. The plan also aspires to achieve thecountry’s MDG by 2015. Anchored on economic, social andpolitical governance, it seeks to achieve and sustain annualeconomic growth rate of 10 percent until 2030. Growth iswidely distributed, covering all economic and social sectors,resulting in the reduction of poverty from 56% in 2002 to46% in 2006. The plan identifies six key sectors under theeconomic pillar: tourism; agriculture; manufacturing;wholesale and retail trade; financial services and businessprocess outsourcing.

What is the key to successful investment inKenya?

Firstly, lessons learnt over the years show that potentialinvestors and traders must have a country engagement strategyand invest in gaining insight about Kenya’s business landscape.Success in investment and trading goes beyond text books,qualifications, out-of-country corporate skill-sets, and aninjection of resources. A successful investment strategy willrequire a matrix of country-insight, innovation, product/serviceadoption and fit-for-use that is normally a result of relevantresearch, trial-runs, investment in proof-of-concept projects,local partnerships and alliances. Even more vitally important isan understanding of the need to support a sustainablebeneficiation of the entire value-chain in the selected sector.

14

Sector investment

opportunities in Kenya

Sector and description Potential projects/opportunities

Agriculture and Agro processing Horticulture

• Livestock industry• Food processing• Agro- processing• Aquaculture, marine & freshwater

Investments by – Steers, Debonair’s, KFC, Nando’s,Starbucks, Java cafés, Spur Restaurants, Holiday Inn,Engagement of foreign and local partnerships thatfacilitate optimal productivity and value-chain growth andsustainability Joint venture opportunities for short andmedium-term objectives

Manufacturing

• Consumer products • Building and infrastructure materials • Pharmaceutical and cosmetic products• Packaging products • Agricultural inputs and equipment • Wood based products• Animal and leather-based products

Investment by – Tiger Brands, Nampak, Metro Cash &Carry Enhancing productivity in all sectors throughtechnology, innovation, beneficiation and partnershipsLeveraging cost-effective domestic labour for delivery oflocal value and regional trade Innovative adoption ofproduct and services for selected markets and countries,recognizing differing levels of maturity, acceptance andadoption with consumers

Financial services in the telecommunications and banking sectors

• Mobile money transfer• Mobile Banking • Inbound remittances• Micro-finance Industry and cross-industry integration,

shared-services, data and communication• Consultancy and professional services

Investments by – Stanbic Africa, Old Mutual, AlexanderForbes, AON, Didata Telecommunication companies –Safaricom, Bharti Airtel, Yu, Orange Professional servicesby – KPMG, Deloitte, Ernst & Young,PricewaterhouseCoopers

Investors can leverage Kenya as a hub for the export of goods and services to the DRC, and to countries in the East AfricanCommunity (EAC) and the Common Market for Eastern & Southern Africa regions(COMESA).

As the largest economy in the region, Kenya’s economic development, superior infrastructure, export processing zones, status as acentral hub, gateway to Uganda’s new oil discovery in Lake Albert area and to the newly forming resource-rich South Sudan,position the country as the springboard to the rest of Africa. There is much room for improvement in establishing and growing intra-regional trade in all forms of product, services, enabling platforms and infrastructures. The domestic partnership route is nowan ideal strategy for any continental investor or trader.

Export trade opportunities to EAC, DRC and COMESA countries

John Ndinguri | Business Development ManagerExecutives’ Global Network (South Africa) Tel: +27 (0)11 791 4229Mobile: +27 (0)82 511 0173Website: www.za.egnnet.com

EGN South Africa provides a local and international platform that facilitates interactions and sparring between senior executiveleadership, exchange of ideas, perspectives, opinions, challenges, common issues, etc., across all sectors of business, governmentand professional services, through electronic and physical networks in functional groups such as CEO’s, CFOs, CIOs, CSROs,CHROs and special focus groups such as Business Development in Africa, Water and Energy, Professional Services, etc.

15

Hidden

opportunities

Recent political unrest in Egypt and Tunisia has caused investors to look very carefully at their African investments. Fear gripped theEgyptian market causing investors to flee and drive the market down over 20%. However if an African investor had been holding adiversified portfolio across various African stock markets, the numbers tell a different story. It would be myopic to paint all Africanmarkets with the same brush. Although Egypt and Tunisia have had negative returns, the other African markets have producedexceptionally good returns over the past year. Kenya and Nigeria performed particularly well. In fact a diversified equally weightedAfrican portfolio* would have produced a 9,57% return over the last year. The important thing to remember is you reduce the risk ofa portfolio by diversifying across countries and stocks. Even political risk can be diversified because political risk is often localised aseach country has different political dynamics. A sharp downturn in a particular market, possibly from irrational panic selling, mayalso provide an opportunity to enter the market at lower prices.

*Equally weighted portfolio invested in Morocco, Tunisia, Egypt, Kenya, Nigeria and Mauritius. Source Bloomberg

Figure 1: African Market Performance. Source Bloomberg

If we look at the long term performanceof African markets we can see theyhave outperformed developed,emerging and the South Africanmarkets. The MSCI Africa excludingSouth Africa index, covering investibleAfrican markets, produced the highestreturn of 15.32% over the past nineyears.

The graph(right) shows indexperformance. However investmentmanagers are always trying to beat theindex through active management.In the South African context the indexcould be the All Share Index and in theAfrican context, the MSCI Africaexcluding South Africa Index.Performance above the index is calledalpha. When markets become moreefficient the alpha opportunitiesdecrease i.e. shares trade closer totheir true value making it hard tooutperform the index.A few reasons causing markets tobecome more efficient are electronictrading, improved financial reportingand wider research.

Figure 2: Market Performance. Source Bloomberg

16

South Africa quant modelAfrica quant model

Rolling 3 year Alpha

0.00%

40.00%

30.00%

10.00%

May

- 05

Aug

- 05

Nov

- 05

Feb

- 06

May

- 06

Aug

- 06

Nov

- 06

Feb

- 07

May

- 07

Aug

- 07

Nov

- 07

Feb

- 08

May

- 08

Aug

- 08

Nov

- 08

Feb

- 09

May

- 09

Aug

- 09

Nov

- 09

Feb

- 10

May

- 10

Aug

- 10

Nov

- 10

The graph (left) shows how aquantitative process can systematicallygenerate excess returns above theAfrican benchmark.

African quant model performance to 31 January 2011100%

60%

20%

-20%

-60%

African quant model MSCI Africa ex ZA Index

30.8

%

21.3

%

7.6%

3.0%

-10.

3%

-13.

8%

2.6%

-1.3

%

0.1%

-2.1

%

Full period 5 year 3 year 1 year 6 ymonth

The graph (left) illustrates how alphain the South African market andAfrican markets have diminished overtime. However alpha in the Africanmarkets is still substantially higher. The alpha difference is illustrated onthe chart below. Africa markets are lessefficient allowing professional assetmanagers to exploit theseopportunities and generate higherreturns for their clients.

Jonathan Kruger | Portfolio Manager, AfricaPrescient Investment Management

Hidden

opportunities

Prescient Investment Management uses a quantitative, systematic and objective method to consistently generate excess returnsabove an index. After many years of research Prescient launched their African Equity Fund building on the company’s previoussuccesses.

A review of the

Islamic Finance Industry

Despite being at the height of the global financial crisis, whenmost of the bastions of the conventional banking world falteredand collapsed under the strain of weak and undercapitalisedbalance sheets, growth in the global Islamic Banking sectorcontinued well in 2009 and in 2010 albeit at a slower rate.A survey conducted by “The Banker” of financial institutionspractising Islamic finance indicates that “Shari’ah-compliantassets rose by 8.85% from US$822b in 2009 to US$895b in2010. It further indicates that Islamic finance has held acompound annual growth rate (CAGR) of 23.46% from 2006to 2010” compared with more modest growth rates of theirconventional counterparts in the same period.

So what makes Islamic Banks different toconventional banks?

The ability of Islamic banks to remain fairly incubated from thecontagion caused by the global financial crisis, is for the mostpart attributed to the principles of Shari’ah (Islamic Law) uponwhich Islamic finance is founded.

Islamic finance embodies the following key Shari’ah principles:• The law of contract:

Under Shari’ah, contracts constitute a fundamentalcomponent of financial transactions and contracts areconsidered to be invalid and unenforceable unless the termsof the contract are clear, unambiguous and all parties to thecontract agree on all terms eg. The asset, its price and thedelivery date etc.

• The prohibition of interest:Parties to financial transactions and contracts are notallowed to charge or receive interest or pay interest in termsof these transactions.

• Prohibition of impermissable activities:Islamic law prohibits participation in gambling, activities of aspeculative nature, alcohol related activity among others.Investment in or the financing of prohibited activities isconsidered impermissible.

• Asset backing principle:Under Shari’ah, money is not a commodity in itself and thegeneration of wealth should be from entrepreneurshipthrough trade and investment. Accordingly, every financialtransaction should be supported by an underlying tangibleasset or enterprise that requires financing.

Although the function of Islamic banks is similar to that ofconventional banks viz. to serve as financial intermediariesbetween borrowers of funds and lenders of funds and toprovide investment expertise to clients, the implications of theabove mentioned prohibitions on Islamic banking means thatthe Islamic banks have to fulfil their roles by providingalternative forms of financing compared to those offered byconventional banks.

Key to the continued growth of the Shari’ah industry will be itsability to develop financial products that provide Shari’ahcompliant substitute product solutions that match conventionalfinancial products and financial instruments. Conventionalbanks generate returns from “maturity transformation” ie. thedifference between short term interest rates paid to depositorsand long term interest rates earned from loans and receivables.In comparison, Islamic banks generate their returns throughprofit sharing related products whereby depositors share in therisk of the banks’ lending. Depositors earn a return instead ofinterest and borrowers repay loans based on profits generatedfrom the projects on which the loan is lent.

A review of the

Islamic Finance Industry

18

Africa, with its Muslim population of approximately 500 millionpeople, represents a huge untapped market for global banksand insurance companies to grow their markets. South Africawith its sophisticated economy and sound regulatory andlegislative framework is seen as a portal to the rest of Africaand a perfect platform for global banks to launch Shari’ahbanking to the rest of the continent. Currently, in South Africathe number of fully Shari’ah compliant banks is limited.Conventional banks that recognise the potential within themarket are operating through Shari’ah windows offeringspecific tailored financial products.

The National Treasury recognises the need to place theburgeoning Islamic banking industry on an equal footing withthe conventional banking industry in this country, and hasengaged with relevant stakeholders on this matter.Consequently, certain amendments have been proposed to thecurrent income tax and VAT legislation. When effective theseamendments will provide equal tax treatment between certainShari’ah transactions and those of western banks benefiting theShari’ah investor (who has up to now not enjoyed the sameexemptions as his/her counterpart in the conventional banks).

So what are the future prospects for the Islamic BankingIndustry? The increasing levels of awareness and the growingpopularity of Shari’ah finance in Africa and globally togetherwith the acknowledgment by regulators and legislators of theneed to accommodate the requirements of Shari’ah financewithin the regulatory and legislative frameworks both bode wellfor continued growth of this sector. The Ernst and Young SouthAfrican practice has established a specialist Islamic FinanceCentre of Excellence which works in conjunction with The Ernstand Young Islamic Financial Services Group (IFSG group) in theMiddle East. The aim of the Centre of Excellence is to cater tothe specific needs of both Islamic and conventional financialinstitutions requiring Islamic financial assurance and advisoryservices in South Africa and the rest of the African Continent.These solutions include strategy development, operationalframework and product development, policies & procedures,structured finance advisory, market and feasibility studies.The Centre of Excellence has been involved in providingassurance and advisory services to conventional and IslamicBanks in South Africa and in the African Continent.

Emilio PeraLead Director: Banking & Capital MarketsTel: +27 11 772 3491 E-mail: emilio.pera@za.ey.com

19

Sugan PalaneeRegional Senior Partner - Advisory ServicesTel: 031 576 8077E-mail: sugan.palanee@za.ey.com

EYe on Africa profile: Q&A with Sugan Palanee,

Regional Senior Partner, Advisory Services

Q. Are Indian multinational companies with long term growth ambitions factoring

Africa into their strategies?

A. India multi-nationals are following China into the African continent. As botheconomies grow at pace, they need to sustain through resources. Africa offers this.In fact, the continent provides for 25% of China’s oil and 15% of India’s. The Africancontinent offers land mass, resource reserve and close to a billion consumers. It isvirtually untouched in comparison to Europe and other continents. The commontheme at DAVOS recently was the focus on emerging economies.

Q. How many of these businesses are looking at acquisitions as a means to strategic

growth vs survival? How does this compare to deals to Africa from other markets?

A. Africa has been the preserved jewel across continents with growth rates in energyeconomies significantly higher than established economies, India, China, Brazil andRussia would lead the investment into Africa followed by more strategies andmeasured investments by the US and rest of Europe.

Q. To what extent are they looking at acquiring established African brands?

A. India multi-nationals will aggressively target brands that have potential e.g. Godrej Group’s recent acquisition of the Kinky brand. Further into the continent, Bharti’s acquisition of Zain in the telecoms space.

Q. Which sectors is deal activity to Africa from India being seen the most?

A. The sectors of interest appear to be oil and gas, mining and metals,infrastructure and telecoms - specifically around data.

20

Country Name Email

Angola Val Davies val.davies@za.ey.com

Botswana Bakani Ndwapi bakani.ndwapi@za.ey.com

Congo and DRC Ludovic Ngatse ludovic.ngatse@cg.ey.com

Cote d’Ivoire Jean-François Albrecht jean-francois.albrecht@ci.ey.com

Gabon and Equatorial Guinea Erik Watremez erik.watremez@ga.ey.com

Ethiopia Zemedeneh Negatu zemedeneh.negatu@et.ey.com

Ghana Ferdinand Gunn ferdinand.gunn@gh.ey.com

Guinea René-Marie Kadouno rene-marie.kadouno@gn.ey.com

Kenya Gitahi Gachahi gitahi.gachahi@ke.ey.com

Malawi Shiraz Yusuf shiraz.yusuf@mw.ey.com

Madagascar, Mauritius and Seychelles Gerald Lincoln gerald.lincoln@mu.ey.com

Mozambique Ismael Faquir ismael.faquir @mz.ey.com

Namibia Gerhard Fourie gerhard.fourie@za.ey.com

Nigeria Henry Egbiki henry.egbiki@ng.ey.com

Rwanda Geoffrey Byamugisha geoffrey.byamugisha@rw.ey.com

Senegal Makha Sy makha.sy@sn.ey.com

South Africa Ajen Sita, CEO, Africa ajen.sita@za.ey.com

Tanzania Joseph Sheffu joseph.sheffu@tz.ey.com

Uganda John Muhaise-Bikalemesa john.muhaise-bikalemesa@ug.ey.com

Zambia, Zimbabwe Joe Cosma joe.cosma@zw.ey.com

General enquiries africabusiness@za.ey.com

Africa InteractiveErnst & Young offers you a one-stop shop if growing your business in Africa is yourpriority. The Africa Business CenterTM connects your business to our team across thecontinent to help you navigate the opportunities and challenges of doing business inwhat has been called the next frontier of business growth. Now, let the Africa BusinessCenterTM broaden your business perspective of Africa and deepen your insights with ournew software, Africa Interactive. Featuring country information, some sector-specificdata and trends to help you better understand Africa as an investment destination, a15-minute demonstration of our Africa Interactive software will make sure you neverlook at Africa the same way again.

Contact Kim du Plessis on +27 11 502 0788 for further information.

Contacts in Africa

You have come to the right place

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax,transaction and advisory services. Worldwide, our141,000 people are united by our shared valuesand an unwavering commitment to quality.We make a difference by helping our people, ourclients and our wider communities achieve theirpotential.

For more information, please visitwww.ey.com/za

Ernst & Young refers to the global organisation of member firmsof Ernst & Young Global Limited, each of which is a separate legalentity. Ernst & Young Global Limited, a UK company limited byguarantee, does not provide services to clients.

© Ernst & Young South Africa 2011.All rights reserved.

Studio ref. 110228. Artwork by Kweyama.