Newsletter - Horizon Africa · Newsletter | Quarter 3 ... annually and its sister company M-Shwari...

Newsletter

Quarter 3 I 2017

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Newsletter | Quarter 3 | 2017

Economic Roundup

Economic Outlook

Newsletter Feature: The growth of microfinance in Kenya

Worth Noting

Transaction Highlights in East Africa

News from Horizon

IN THIS ISSUE…

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ECONOMICRoundup

* Source: World Bank data

SUB-SAHARAN AFRICA

According to the World Bank, growth in Sub-Saharan Africa (SSA) is projected to pick up

from 1.5% in 2016 to 2.6% and 3.2% in 2017 and 2018 respectively. This growth will largely

be attributed to modestly rising commodity prices, strengthening external demand, and

the end of drought in a number of countries. However, the World Bank projects per capita

output to shrink by 0.1% in 2017 before rising to a modest 0.7% growth pace over 2018-19.

A number of factors are preventing a more robust recovery in SSA states. For example, in

Angola and Nigeria, the non-oil sector has witnessed some constrained activity as a result

of tight foreign exchange liquidity conditions indicative of distortions in the foreign

exchange market. In South Africa, political uncertainty and low business confidence are

negatively impacting investment. Within East Africa, the drought has continued into 2017,

adversely affecting economic activity in Kenya, and contributing to famine in Somalia and

South Sudan.

Looking forward, the regional outlook is subject to significant internal and external risks.

The World Bank forecasts that a sharp increase in global interest rates could discourage

sovereign bond issuance, which has been a key financing strategy for governments.

Additionally, weaker-than-expected growth in advanced economies or major emerging

markets could reduce demand for exports, depress commodity prices and curtail direct

foreign investment in mining and infrastructure within the region. Lastly, the proposed

cutbacks to U.S. official development assistance will be a concern to some of the region’s

smaller economies and fragile states.

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Economic Outlook

Kenya Tanzania Uganda Rwanda

Macro-economicIndicators

2016 2017 2016 2017 2016 2017 2016 2017

GDP (Avg.) 5.8% 5.5% 7.2% 7.1% 4.8% 4.5% 5.9% 6.0%

Inflation Rate (Avg.) 6.4% 7.5% 5.1% 5.2% 5.2% 5.7% 6.9% 8.1%

Exchange Rate –(Avg.) per USD

101.5 103.5 2,186.0 2,232.4 3,418.6 3602.9 775.2 833.1

Interest Rates

Current Rate (CBR)

Previous Rate (CBR)

Kenya 10.0% 10.5%

Tanzania 12.0% 17.7%

Uganda 10.0% 11.5%

Rwanda 6.0% 6.5%

GDP per Capita –USD (2015 to 2016)

1,455 – Increased by 7.8% in 2016

879 – Increased by 0.8% in 2016

615 – Decreasedby 11.3% in 2016

703 – Decreasedby 1.1% in 2016

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NEWSLETTER FEATURE1 OF 4

The growth of Microfinance in Kenya

Introduction

The microfinance sector has undergone rapid growth over the past 20 years, reaching more than500M active clients today. Experts forecasted the global microfinance sector to grow by 10-15%in 2016 led by a solid 30% growth in Asia Pacific, followed by a 15-20% in Sub-Saharan Africa.The latter is predominantly driven by net importers of commodities like Kenya and Tanzania thathave not only been less impacted from the headwinds in global commodity market but also havebenefitted from technologically driven solutions. Nonetheless, the projections are subdued at 5-10% in the Sub-Saharan microfinance market in 2017, mainly due to difficult economic outlookin the region and the limited intra-continental trade amongst neighbouring economies. Theoutlook for Nigeria was highly subdued due to sharp economic slowdown, followed by Kenya dueto introduction of the interest rate cap (discussed later in the article).

Global Trends in the sector

Technological Innovation is a key booster. Mobile money and branchless banking have not onlycreated a robust infrastructure to penetrate the rural population, but also reduced operationalcosts, lowering interest rates for its customers. Experts suggest “payments” and “lending” are thetwo crucial channels that are set to transform the Fintech companies, noting Kenya has alreadytaken lead with the M-Pesa success story that facilitates transactions worth more than Ksh.6.8bnannually and its sister company M-Shwari that has more than 50,000 mobile loans disbursed daily,with 1 in 5 Kenyan adults as active clients today.

Evolution of Products Offering is another key trend observed, in line with evolving client needs.Clients want to be able to place deposits, buy insurance and purchase leasing products. Inaddition to access to credit, MFIs are increasingly offering micro-savings products to the ruralclient base and are also linking with insurance companies to provide micro-insurance products,acting as distributors for the insurers who are unable to cost-effectively serve these markets ontheir own.

MFIs are diversifying their capital base and relying more on local resources for a sustainablefunding methodology. According to experts polled in 2016, majority believe the trend towardslocal funding sources mainly savings/deposits/local debt was set to continue due to increasinglyavailable domestic funding that is competitively priced, as reflected in 20% growth in globalmicrofinance deposits in the last two years alone.

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Increased interest from Investors as microfinance has continued to expand as an investment topic.From private investment perspective, the current market is expected to be approximately $11.6bn.Research suggests inflow into the sector has grown at an annual compound rate of c.30% in the lastdecade; with private debt fixed income funds representing 75% of the investments today. The sectorhas also seen a significant support from public investors, with major DFIs contributing aroundc.$50bn to the microfinance as well as SME finance sectors.

But it’s not a one sided game

Credit Risk remains inherent in the sector in providing the higher risk unsecured loans to higherrisk borrowers. As the supply of funds for micro-lending continues to increase over time, it hasresulted in increased competition amongst MFIs and ultimately more borrower friendly terms.Therefore, credit risk management in MFIs becoming even more crucial in this increasinglyconstrained environment.

FX risk is critical for MFIs sourcing their funding in dollar denominated loans. Volatility of localcurrencies not only results in higher debt service costs and weakened creditworthiness for MFIs butalso adds to the credit risk as it is likely to reduce the ability of the borrowers to repay existinginstalments.

Lack of diversification benefits as the sector gradually moves closer to conventional finance. Withreporting requirements improving over time, greater need for capital and introduction of savingsand insurance products, MFIs are transforming into smaller banks. Given the close correlationbetween the sectors, investment in microfinance is expected to yield fewer diversification benefitsfor investors over time, with evidence suggesting MFIs that issue stocks, behave more like bankswithout really intending to serve the poor.

Lack of appropriate governance and reporting requirements not only makes it difficult for investorsto compare asset performance amongst MFIs, but also does not provide the required assurance ofcapital being used for social and environmental impact, which is key for investors participating in thissector.

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Microfinance In Kenya

The Kenyan banking sector comprised of 13 Microfinance Banks (MFBs), with assets amountingto KSh.72.5bn; out of which KSh.48.7bn was attributed to the loan portfolio and KSh.40.2 bn to thedeposits, at December 2016. The three largest microfinance banks accounted for c.90% of themarket share, led by Kenya Women Finance Trust (c.43%), followed by Faulu Micro-finance bank(c.39%) and Rafiki Microfinance (c.8%.)

The 14% interest cap levied on all Kenyan regulated financial institutions in September 2016 hascreated turbulence in the financial sector to say the least. Given the MFIs are shielded from the cap;the microfinance sector could have significantly benefited when the formal financial sector begancredit rationing. Nonetheless the recent receivership of three commercial banks; Chase, Imperialand Dubai Bank in 2015-2016 has resulted in tight liquidity concerns as investors have taken a verycautious outlook towards the Kenyan financial Institutions. As such, the 13 MFBs collectively sunkinto an aggregate KSh. 377M loss at December 2016, compared to a Sh.549M pre-tax profit in theprior year. The CBK highlights the drying revenue streams for the decline, as the micro-lendersstruggle to secure funds for investments.

Central Bank of Kenya Initiatives

Whilst the sector may go through temporary turmoil, the CBK has been at the forefront indeveloping a robust and sustainable all-inclusive financial system for the economy. The key policydevelopment initiatives undertaken by CBK recently include:▪ Imposing cash reserve ratio of 5.25% in May 2016 on all deposit taking microfinance banks in amove to protect customer deposits;▪Licensing of new microfinance bank, Maisha Microfinance Bank (MFB) Limited which beganoperations in June 2016 and caters to small and medium Enterprises (MSMEs);▪ A new website launch in June 2017 to promote full disclosure of cost of credit to the consumers.The website provides comparative pricing information for credit facilities, empowering theborrowers to shop around for the best priced products.

Recent trends in the Kenyan Microfinance Market

The sector continues to leverage on Fin-tech growth with a number of thriving new players; Mobile-based lender, Branch has undergone significant growth since inception (2015) with Sh3.63bn loans inKenya, a 350,000 customer base and 1.5M loan transaction by July 2017. Another player, Farmdrive,a data analytics startup has attracted growth funding from Safaricom (amount undisclosed) inFebruary 2017, which aggregates data from multiple sources to build comprehensive credit scoresfor smallholder farmers helping them

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access credit from MFIs and local banks. The sector has also witnessed new digital money walletlike Bitsoko that seeks to integrate the blockchain technology to the mobile payment market andreduces transaction costs for merchants across sub-Saharan Africa. In addition to targeting localbusinesses, the company has also signed up small scale vendors like mama mbogas and will usefunding from the Bill & Melinda Gates Foundation to support digital currency infrastructure andfinancial literacy in Africa

Rise of Innovative asset based lending providers like M-Kopa and Mobisol that offer solar energyon pay as you go basis through the Mpesa platform. M-Kopa currently serves more than 500,000low income households in Kenya, Uganda and Tanzania, and recently in Ghana. Moving forward,the company is looking to expand the solar-powered leasing options to products with a powerfulsolar charging capacity such as TVs, refrigerators and other household appliances, with the aim toreach 1 million clients by 2018. The company is backed by three Silicon Valley investors who havemade known investments in the region of $52M, and is expected to attract further investment tosupport its growth proposition towards a billion-dollar valuation and a future IPO.

Microfinance in the agricultural sector continues to widen. One Acre Fund, in partnership withCiti Inclusive Finance, continues to digitalise loan repayments via mobile money for small holderfarmers in Kenya. The fund also recognises that access to credit alone is insufficient and continueevolving their proposition by incorporating delivery of loans in the forms of seed and fertilizer,along with the provision of training on correct agriculture practices, post-harvest storage supportand market price fluctuations. Similarly, Umati Capital launched an innovative supply chainfinancing app in April 2016, that allows farmers to access working capital against invoices raisedfrom the buyer. In addition to Farmdrive mentioned above, other Fintechs also continue tofacilitate financial inclusion in the agricultural sector: myAgro is a mobile savings system enablingfarmers to pay for crucial farm inputs in pre-paid installments; SunCulture is offering asset financeto farmers to purchase new technology and Cellulant, a digital payments service provider usesmobile wallets to empower farmers and small scale merchants across Africa.

Horizon Transactions

In light of this increased market activity, Horizon has also witnessed a growing number ofopportunities in the sector and has successfully completed the below transactions:• Subordinated debt raise ( aggregate over two raises in 2 years) for a relatively new mobiletechnology company that provides solutions to extend credit access to users through existingmobile money platforms in Kenya• Valuation analysis for a leading microfinance platform in Kenya that offers a combined savingsand lending proposition

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Worth Noting…

Kenya back to the pollsSeptember 1st marked a historical landmark for Kenya as the Supreme Court nullified the re-election of President Uhuru Kenyatta, sighting irregularities made during the electoral processby the Independent Electoral and Boundaries Commission (IEBC). This marks a critical first forKenya and Africa, demonstrating that democratic institutions are capable of actingindependently and resolving disputes that in the past have often spilled over into violence.Under the court order and constitution, Kenya will now have to hold a fresh presidentialelection within 60 days of the court ruling.

Rwanda holds electionIn Rwanda, presidential elections were held on August 4th. The incumbent President PaulKagame was re-elected for a third term, with a landslide victory of 99% of the votes cast.

Kenya’s plastic bag banKenyans producing, selling or even using plastic bags will risk imprisonment of up to four yearsor fines of up to USD 40,000 from August 28 as the worlds' toughest law aimed at reducingplastic pollution came into effect. Kenya has tried to ban plastic bags before in 2007 and 2011without much success. Given the population’s heavy reliance on plastic bags and a lack of aviable alternative it is to be seen if this latest attempt of the ban will succeed.

Ethiopia’s coffee threatened by climate changeGlobal warming is affecting the lives of an estimated 15 million Ethiopian farmers, who heavilyrely on the coffee industry for their livelihood. Ethiopia is Africa’s largest coffee producer andranks fifth globally, but dry spells are having a direct effect on production. A recent study saysthat up to 60% of the area in which coffee is grown in Ethiopia may be unsuitable to do so bythe end of the century because of the effects of climate change.

Uganda says it has agreed terms with consortium to build oil refineryUganda said in August that it had agreed preliminary terms with a consortium of investorsincluding General Electric to build and operate the country’s first oil refinery, reviving a much-delayed project. The oil is due to start flowing in 2020 and the government is keen to build arefinery to process it and retail a larger slice of profits. The ministry of energy and mineraldevelopment said “core project terms” had been agreed with the Albertine Graben RefineryConsortium (AGRC), whose other members include India’s Yatra Ventures LLC, and Italy’sSaipem SpA.

Worlds' biggest drone drug deliveries take off in TanzaniaTanzania is set to launch the world’s largest drone delivery network in January, with dronesparachuting blood and medicines out of the skies to save lives. California's Zipline will make2,000 deliveries a day to more than 1.000 health facilities across Tanzania, including blood,vaccines and malaria and AIDS drugs, following the success of a smaller project in Rwanda. Thisinitiative could ease tensions between frustrated patients and health workers.

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Transaction highlights in East Africa

Sector Acquirer Target Transaction Description

May 2017

Technology

Synergy

Communicat

ions

Wananchi

Group

Synergy Communications, a South African firm backed by

Convergence Partners is buying the Wananchi Group business

services unit to help the group focus its efforts on developing

new products and services for Zuku, its consumer and retail

services business.

FMCG

Catalyst

Principal

Partners

Jambo

Biscuits

Catalyst Principal Partners acquired Jambo Biscuits from the

Dawda family via, Britania Foods, a newly formed company

whose name originated from the company’s flagship biscuit

brand that is a household name in Kenya. Catalyst plans to

support the portfolio company strategically by improving its

technical capabilities, management skills, corporate

governance as well as reinforcing the company’s distribution

network.

Technology food

distribution

Omidyar

Network,

DOB Equity,

Uqalo, 1776,

Blue Haven

Initiative,

Alpha

Mundi, and

AHL

Twiga Foods

Kenyan mobile-based B2B food supply platform Twiga Foods

has raised USD 10.3 million series A funding to enable it

increase the number of vendors it serves. The US$10.3 million

round was led by Wamda Capital and includes Omidyar

Network, DOB Equity, Uqalo, 1776, Blue Haven Initiative,

Alpha Mundi, and AHL, while Twiga has also secured US$2

million in grant funding from organisations such as USAID and

the GSMA to support bolt-on farmer services, financial

inclusion and domestic food safety initiatives.

July 2017

HospitalityThe Abraaj

GroupJava House

The Abraaj Group acquired Java House from Emerging Capital

Partners and Kevin Ashley, the African coffee chain founder.

The deal is being transacted through Abraaj’s Africa Fund III

following a year long auction process which is reported to

have attracted about 12 non-binding bids for the company.

The Abraaj Group plans to continue the expansion of the

company’s 3 brands – Java House, Planet Yogurt and 360

Degrees Artisan Pizza.

Plastics & PackagingKibo Capital

Partners

Blowplast

Limited

Africa-focused private equity fund manager Kibo Capital

Partners is backing Blowplast Ltd, a plastic packaging company

based in Kenya. Financial terms of the deal were undisclosed

however, the capital will be used to fud the company’s

expansion plans for East Africa and beyond.

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Horizon’s Sector Expertise

Agriculture & Agro-processing

Real Estate

Energy, Oil & Gas

Fast-Moving Consumer Goods

Financial Services

Hospitality

Heavy & Light Manufacturing

Information and Communication Technology

Infrastructure

Telecommunications

Transport & Logistics

News from Horizon

Transactions UpdateSelected Completed Transactions:Q2 2017• Capital raise for an infrastructure project under a Public Private

Partnership in Kenya• Capital raise for a manufacturing company in Kenya• Debt raise for a mixed-use real estate project in Tanzania• Business valuation of a brand communications agency• Business valuation of a telecommunications company• Business valuation for an experiential marketing company

Selected Ongoing Transactions: 2017Mergers & Acquisitions

• Sell-side advisor to an education institute in Kenya• Sell-side advisor for two hotels and a restaurant chain in Kenya• Sell-side advisor to a leading healthcare services provider in East

Africa• Buy-side advisor to a leading FMCG manufacturing company in

East Africa• Buy-side advisor for two manufacturing companies across East

Africa• Buy-side due diligence for an agriculture company in Kenya• Buy-side due diligence for a recycling company in Kenya

Capital Raising

• Debt raise for four manufacturing companies across East Africa• Debt raise for a horticulture company in Kenya• Capital raise for a hotel in Tanzania• Acquisition finance raise for three leveraged finance transactions

across East Africa• Debt raise for an education institute in Kenya• Debt raise for an Ethiopian trading company

Advisory

• Commercial feasibility study for a manufacturing company inKenya

• Project management for a real estate development in Kenya• Transaction advisory for a large scale mixed-use development in

Kenya• Business planning and valuation for a fleet management

solutions provider

Horizon Africa Capital Limited

Apollo Centre | 2nd Floor | Ring Road Parklands

P.O. Box 103646- 00101, Nairobi, Kenya

Telephone: +254 20 3742614/5

www.horizonafrica.com

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