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Financial sector

Good opportunities in Africa

by Bruno Wenn
“Cotton made in Africa” is an initiative that was started by the mail-order group Otto in 2005 to support small-scale farmers south of the Sahara. Among other things, the initiative helps cotton farmers find industrial purchases. The DEG has been involved in Cotton made in Africa from the very beginning

“Cotton made in Africa” is an initiative that was started by the mail-order group Otto in 2005 to support small-scale farmers south of the Sahara. Among other things, the initiative helps cotton farmers find industrial purchases. The DEG has been involved in Cotton made in Africa from the very beginning

The investment climate in many countries south of the Sahara is better than many German managers are aware of. The German development finance institution DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH has the mission of supporting the private sector in developing and emerging-market countries. Bruno Wenn, chairman of DEG’s Management Board, believes that German companies should become more active in Africa. Interview with Bruno Wenn

Don’t the problems of SKS Microfinance in India show that a focus on making profit and fighting poverty ultimately contradict one another?
No, they certainly don’t. Two things need to be considered:
– Financial institutions must never aim for growth at every cost. It’s a general rule that they must keep track of who takes on what burden and whether clients can do so sustainably. Of course, this is vital in microfinance too, but it was neglected in Andhra Pradesh, and that is what caused the crisis.
– Moreover, microfinance is not a panacea for all developmental problems, although some people seem to think so. Microfinance serves to support small start-ups in the informal sector. More backing is necessary when some of those small businesses grow into large, prosperous ones. KfW Bankengruppe is a stakeholding partner in the ProCredit banks, which provide SMEs, small and medium-sized enterprises, with loans of an average amount of around € 10,000. And as for investments in the millions, DEG can offer support.

KfW Bankengruppe, your parent company, is also involved in the EFSE, the European Fund for Southeast Europe. This is a microfinance fund that was recently praised by the G20. What does that mean for your work?
It’s an endorsement. The EFSE is indeed a model because it intelligently pools government money and private funds. The G20 emphasised that it is important to finance SMEs in times of crisis. That boosts our motivation, of course; our mission is to promote this very sector without using government money. Let’s face the facts: some 70 to 80 % of all companies in developing and emerging-market countries do not have adequate access to financial services. To change matters is a huge challenge. The entire international community, development banks and development finance institutions like DEG must rise to it.

What makes financial services “adequate”?
Three things matter especially:
– SMEs need long-term funding,
– they need it in the local currency, because they do not generate foreign revenues and should not shoulder exchange-rate risks, and
– they need access to financial services throughout a country and not only in the capital city and financial centres, where only a minority of these firms are based.

What does DEG do to help?
We use several methods to boost the financial sector in poor countries. They include direct equity investments, quasi-equity loans and loan guarantees, in order to encourage local banks to offer long-term loans. DEG is innovative and continually finds new ways to rise to new challenges. Basically we have to make sure that
– our commitment is financially profitable for our clients,
– it is also worthwhile for ourselves because we only operate with our own funds and
– our financing serves development in general.

What kind of developmental progress does the DEG facilitate?
First and foremost, we help to create jobs and generate sustainable incomes at the highest possible levels. Moreover, we boost companies that drive an entire economy forward in structural terms. They do so, for example, if they produce pharmaceuticals or construction supplies that so far had to be imported at high costs. They equally do so if they provide affordable and environmentally friendly electric power to customers or introduce new communication technology. We support such companies. Of course, they must treat their staff fairly, assume environmental responsibility and obey all laws, including those concerning taxes. In our view, corporate social responsibility is a crucial issue.

That sounds costly – is it really in the interest of SMEs?
Yes, it certainly is if they want to succeed and grow in the long run.

In your opinion, where is the investment climate in Africa inviting?
A lot has improved in Africa. The Doing Business Report of the IFC, the World Bank branch for private-sector promotion, has been very influential. It motivates political leaders to reform. Moreover, African governments are increasingly accessing the international financial market. Ghana, for instance, has issued bonds. Steps like this create additional reform pressure on governments, because they are exposing themselves to rating agencies and international investors. At the same time, there are strong incentives, because money beckons at favorable conditions. Last year, Rwanda made clear progress with regard to reliable governance as well as limiting the bureaucratic burdens on companies. Mauritius and, as I have just mentioned, Ghana are also doing well. But that should not distract from the fact that good opportunities are opening up in many African countries as economies are growing.

Does that trend have a bearing on your operations?
Yes, absolutely. In the past year, we pledged almost € 230 million in Africa. In 2009, the figure was € 266 million, the record so far. Ten years ago, such levels would have seemed unrealistic to us. I’d like to see more German companies becoming active in Africa. There are already a lot of foreign investors there, but they mainly come from emerging-market countries like China, India, Brazil, Mexico and South Africa.

German investors are probably scared off by news like the ongoing crisis in Côte d’Ivoire.
It is true that negative aspects dominate the news in Germany. They reflect African reality, of course, but they don’t show the whole picture. One of our duties is to serve as a kind of banister. We want to help German companies get established in developing countries, and the negative way in which German media portray Africa does not make our job any easier. It results in many managers in our country not understanding that substantial markets are being created thanks to regional integration. The East African Community, to give but one example, has close to 130 million inhabitants which, of course, means 130 million consumers too.

What do German investors offer Africa that Chinese, Indian, or Brazilian investors do not?
The quality of German products is admired worldwide. Moreover, German managers tend to think long-term and take into account social and ecological dimensions. On top of all this, German investors normally create lots of local jobs, whereas Chinese companies, for example, tend to bring along their own staff. For reasons of competitiveness, German companies don’t have that option, so they are keen on training and qualifying local people at their foreign branches.