DealMakers Africa Q3 2018
From the editor's desk
In its recently announced regional economic outlook for sub-Saharan Africa, the International Monetary Fund expected growth to recover to 3.1% this year from 2.7% in 2017, reflecting domestic policy adjustments and a supportive external environment, including continued steady growth in the global economy, higher commodity prices, and accommodative external financing conditions.
While the aggregate number for growth in the region for 2019 may well be influenced by the outcome of the general elections in the region’s two biggest economies – Nigeria and South Africa – these two countries in no way reflect the growth potential of many of the smaller countries. The analysis of M&A activity of the individual countries within the region reflects this (page 10).
M&A activity captured by DealMakers AFRICA during the first nine months of the year for the Continent’s five regions (excluding South Africa) stood at US$7,87bn off 314 transactions. Kenya, Nigeria and Egypt are the most prominent markets from a deal activity perspective. Of the top 15 deals for the period, almost half were in the energy sector. The table ranks the top three regions and countries by deal value and deal flow.
Of the three largest deals recorded in Q3 the top two were in Egypt and the third in Kenya. The acquisition by Noble Energy, Delek Drilling and Dolphinus of a 39% stake in Eastern Mediterranean Gas was valued at $518m while the acquisition by SOCO International of Merlon Petroleum El Fayum was valued at $215m. East African Breweries’ acquisition of an additional 21.5% stake in Serengeti Breweries was third.
It is essential, if we are to ensure that DealMakers AFRICA develops into a relevant publication that a close relationship is formed with advisory firms in all the regions. By doing so, not only will DealMakers Africa as a publication have a better understanding of the M&A space in these areas, but also assist us in shaping bespoke league tables and awards that will fully reflect the type of work undertaken by advisory firms. What we have learnt, is that each region has its own unique deal characteristics and should be analysed as such. Our aim is to develop a set of criteria to best reflect the activity in the different regions. While this will be an ongoing process the new look rules as they are will be published on the website at the end of November.
I am pleased to announce that DealMakers AFRICA will host its next awards event on February 26th, 2019 in Nairobi. The commitment from advisory firms, principally in East Africa, has been heartening and in time I hope to include the co-operation of all the advisory firms in West and North Africa.
Kenyan insolvency regime has two sides that
companies must consider
By Vruti Shah
In the past six years, a number of large Kenyan companies have found themselves in financial distress. In most cases, one key reason for financial difficulties faced by these companies can be traced back to the decisions to fund their growth through foreign currency debt financing during the period between 2007 and 2012, when the economy was booming.
While the decision to fund growth through foreign currency debt financing made sense at that time, the currency fluctuations in the following years resulted in the debt becoming very expensive for these companies to service. This, among other macroeconomic reasons, such as interest rates, exchange rates, competition, corruption and a general decline in the economy, had long-term effects for companies that had invested in their growth plans, which did not pan out as expected.
Currently, Kenyan companies in financial difficulty have more options than ever before in getting back on their feet or restructuring their debt, but with these options come rules and responsibilities, particularly for directors. This is certainly the case with Kenya’s new insolvency framework: although it offers companies in trouble some much-needed breathing space, this goes hand in hand with clear implications for directors’ liability.
The impact of the borrowing trend is still being felt in Kenya, where one of the most recent casualties of so-called “binge expansion” is Nakumatt, East Africa’s biggest supermarket chain, which owes a multiplicity of creditors.
Two years ago, ailing companies, like Nakumatt, would have had only limited options to deal with their financial crises – to enter into a scheme of arrangement with creditors under the Companies Act or to proceed to liquidation due to their inability to pay their debts as they fell due.
Kenya’s new insolvency regime, under the banner of the Insolvency Act 2015 (Act), is a welcome development then, for financially distressed businesses. The Act, which came into effect in 2016, is a consolidation of laws relating to insolvency and provides for new and more detailed procedures and mechanisms relating to insolvency.
Up until 2015, a company in financial distress was often met with the liquidation culture (ignited voluntarily, or by a creditor or subject to the courts’ supervision). A company that was unable to pay its debts, but did not want to ascribe to the liquidation culture, also had the option of either compromising with its creditors and/or undergoing a reconstruction through amalgamation or merger with another company, with a transfer of liabilities.
The Act provides for alternatives to bankruptcy and winding-up that can facilitate the management of a company’s affairs for the benefit of employees, shareholders and creditors. This includes the introduction of rights to conduct restructurings and bankruptcy work-outs under an administration process.
One of the biggest changes ushered in under the Act is the introduction of a statutory moratorium when a company is placed under administration. This was not previously available in Kenya and gives a troubled company a 12-month breathing space to continue as a going concern while undergoing reorganisation or realising its assets.
There are three key insolvency procedures that entities incorporated in Kenya can turn to under the Act:
• Administration is used to rescue a company in financial difficulties and allow it to continue as a going concern. It is intended to enable an eligible company to undergo reorganisation or to realise its assets under the protection of a statutory moratorium. The moratorium prevents winding up petitions from being made or resolutions from being passed. Security over the company’s assets may not be enforced without the court’s permission. While this means that a bank with a debenture cannot crystallise a floating charge or enforce its security where the customer is in administration, the administrator can only dispose of assets with the security holder’s consent, or with permission from the court. The courts in Kenya have, in recent times, made rulings on the required standard that an eligible company must show to prove that an administration order is reasonably likely to achieve the objective of administration.
• Company Voluntary Arrangement (CVA) is a process used to provide for a restructuring plan which, if it obtains sufficient creditor support, can be imposed on dissenting creditors. A CVA has great flexibility with respect to the company’s proposed restructuring or scheme as there are minimum restrictions relating to it in law. The one key limitation provided in law is that no proposal may alter the rights of secured or preferential creditors without their individual consent. Creditors cannot commence a CVA.
• Liquidation results in forcing the company to cease trading and involves a liquidator collecting its assets and distributing the resulting realisations to its creditors so as to satisfy, as far as possible, its liabilities. A company can be wound up through a voluntary liquidation process or a compulsory liquidation process (which is started by a court order).
Insolvency comes with rules and responsibilities
The Act is now fully operational and we have seen a number of companies in Kenya using the insolvency procedures available under the Act.
That said, companies should be aware of the rules and responsibilities that go with making use of these procedures. For example, if a company continues to trade when it is insolvent, the legal duty of the directors changes. They are required to act in the best interests of the creditors rather than those of the company and its shareholders, as they would during the ordinary course of business.
Directors who are worried that the company is facing or is likely to face financial difficulties should keep matters continually under review, monitor the financial position and future cash flow, and seek to reduce expenditure.
If it becomes clear that action is needed to rescue a company, its directors would be well advised to take professional advice on whether insolvency procedures are inevitable and, if so, which option would be the most appropriate procedure in the circumstances.
Shah is a Partner in Bowmans’ Kenya office.
African regulators get their ducks in a row for fintech era
By David Geral, John Syekei,
Kamami Christine Michira and Brian Kalule
All may seem quiet on the fintech regulation front in Africa but, under the surface, there is considerable activity as regulators get their ducks in a row, in anticipation of change. Bowmans specialist lawyers in this emerging sector comment on the state of play in Kenya, South Africa and Uganda.
Kenya has been among the first to show its hand, homing in on the consumer credit market where conventional bank lending has been taking a back seat to technology-leveraged credit. Since strict legal limits were imposed on the interest rates banks may charge – as a result of the Banking Amendment Act of 2016 – banks have become increasingly reluctant to lend to retail consumers.
The gap left has been eagerly filled by a host of new players who are leveraging technology to provide credit services, including mobile money service providers, microfinance providers, online lenders and even some traditional banks as well.
This new breed of technology-driven lenders and lending services is credited with contributing to a six-fold increase in access to retail credit in Kenya between 2010 and 2016.
The flipside of the coin is growing concern about lending practices that unduly burden borrowers, such as poor debt assessment, resulting in the granting of unaffordable loans, and the high rate of credit bureau listings of individuals who default on nominal sums.
Concerns have also been expressed about the broad spread of interest rates charged, from 13% on the low side to 700% in some cases. Unlike lenders governed by the Banking Amendment Act, there have been no caps on the interest rates charged by other credit providers.
Authorities respond with far-reaching draft legislation
All this has raised alarm bells at the country’s National Treasury, amid fears that unrestricted fintech lending could undermine the gains made through the mobile payment industry, which has helped increase financial inclusion in Kenya to above the global average of 65%.
The response has been the drafting of the Financial Markets Conduct Bill of 2018.
Published for public comments in May 2018, the draft Bill seems set to usher in a new framework for the regulation of the retail financial services market, consisting of four new regulatory bodies: the Financial Markets Conduct Authority, the Financial Sector Ombudsman, the Conduct Compensation Fund Board and the Financial Services Tribunal.
The Financial Markets Conduct Authority in particular would have wide powers. All providers of financial products and services would have to apply to it for mandatory financial conduct licences and the Authority would be able to set maximum interest rates and impose hefty fines on any provider failing to abide by the standards and practices set.
An important feature of the draft Financial Markets Conduct Bill is that it appears to be technology agnostic, applying to all financial services providers, regardless of the technology used for delivery.
The draft Bill is still in the early stages of the legislative process, so it is not clear how the establishment of the Financial Markets Conduct Authority would dovetail with the activities of the Central Bank, which administers the National Payments Systems Act, the Banking Act and the Money Remittance Regulations, among others.
However, after the Governor of the Central Bank publicly voiced unease about the Bill, Kenya’s Minister of Finance said the proposed new regulator would not impinge on the mandate of the Central Bank, whose views would be considered before the Bill is finalised and presented to Parliament.
An interesting point to note about fintech regulation as it stands in Kenya is that the Capital Markets Authority (CMA) is the regulatory body responsible for blockchain applications, among other things, but cryptocurrency falls under the Central Bank.
Earlier in 2018, the CMA issued a policy paper outlining its plans for a regulatory sandbox and invited innovators to register their projects. The Central Bank, on the other hand, has come out strongly against cryptocurrencies and it remains to be seen whether there will be any takers for the CMA’s invitation.
Consumer protection a priority in Uganda
In neighbouring Uganda, meanwhile, consumer protection in the fintech space is also emerging strongly as a flashpoint for regulators and policy-makers.
Fintech services are hugely popular in Uganda, especially among the younger generation. Mobile money services in particular are abundant, used by up to 80% of the population.
However, data breaches and incidents of fintech-related fraud have occurred. Uganda’s regulators and lawmakers appear to be worried about this state of affairs, which explains why consumer protection, data privacy and anti-money laundering laws are looming large on their agendas.
Up to now, there have been no legal restrictions on the use and disclosure of personal and private data in Uganda. This gap will be plugged once the Data Protection and Privacy Bill of 2015 is enacted. However, just when that might be is not known at this stage.
Another upcoming piece of legislation is the National Payment Systems Bill, meant to address the challenges of regulating electronic payment systems such as mobile money, as well as e-commerce transactions in general. However, the Bill has not yet been presented in Parliament and it is not clear when this will take place, leaving the regulatory status quo intact for the time being.
Regulation is a mixed bag
When it comes to fintech, the status quo in Uganda is a mixed bag.
Although regulation does exist, it applies only to certain areas of the fintech market and even in those areas, it tends to be loosely applied.
For example, mobile money guidelines were introduced in Uganda in 2013 but are not binding. What’s more, these non-binding guidelines apply to some players in the mobile money space but not to others. Those who provide digital wallets are not affected. On the other hand, those who provide the platforms for these services are.
Cryptocurrencies are completely unregulated and the Bank of Uganda has issued a warning that anyone trading or investing in cryptocurrency does so at his or her own risk.
Initial coin offerings (ICOs) are also unregulated. It should be said that there has yet to be an ICO in Uganda but should there be one, self-regulation would apply.
The regulators themselves have given several reasons for the rather erratic state of fintech regulation in Uganda.
One is the challenge of where to assign regulatory responsibility given that fintech lies at the intersection of financial services and telecommunications. So far, both the Uganda Communications Commission and the financial regulators, the Bank of Uganda and the Capital Markets Authority, have declined to take a position on whose responsibility fintech regulation should be.
Other reasons given are that fintech innovation is happening so fast that regulators cannot keep up and have gaps in their knowledge, especially about ICOs, making it difficult for them to influence policy. In other words, they cannot regulate what they neither know nor understand. In an effort to improve their knowledge of cryptocurrencies, they are advocating increased private-public collaboration, which could be beneficial for private companies too as it gives them the opportunity to influence fintech policy-making.
Cryptocurrency high on the agenda in South Africa
While consumer protection in the fintech space is of paramount concern in both Uganda and Kenya, South Africa is in a different position. The country already has a raft of consumer protection legislation, which is relatively well enforced, and a highly regulated lending and financial intermediation environment that applies to all financial services providers, regardless of the delivery technology they use. South Africa also has well-evolved legislation targeting bribery, corruption and money laundering, which applies as much to fintech as to conventional financial services.
What appears to be top of mind for financial services providers and regulators alike is potential use cases and the regulatory position around distributed ledger technologies and cryptocurrencies. Cryptocurrencies and other digital tokens are not subject to specific regulations or the mandate of a single regulator. While the South African Reserve Bank (SARB) does not recognise them as legal tender, it has issued explicit guidelines around virtual currencies and ‘e-money’, and also led an intensive and comprehensive public-private sector study on inter-bank settlements, called “Project Khokha”, the results of which were published in June 2018. The South African Revenue Services (SARS) and the Financial Intelligence Centre (FIC) have also issued notices regarding the applicability of their respective regulatory frameworks to cryptocurrencies, tokens and transactions involving them.
Users, traders and intermediaries have little legal protection from regulators or recourse to regulated remedies, and engage in virtual currency-related activities entirely at their own risk, ultimately governed by basic common law principles of contract and delict (tort). The position is the same with ICOs, which the SARB neither regulates nor supervises, and on which the Companies and Intellectual Property Commission (CIPC) has made no utterance.
What we do know is that the SARB has come together with the country’s other financial services regulators, the National Treasury, Financial Services Conduct Authority and FIC, to form an Intergovernmental Fintech Working Group which entails inter-departmental and private sector engagement, so as to engage with industry from an informed and united stance. We also know that they have formed special teams to investigate and properly understand blockchain and virtual currencies, and have been taking a keen interest in fintech regulatory approaches around the world.
In turn, the mood in the marketplace is eager and expectant that the next steps in the evolution of fintech regulation will allow for appropriate regulation without stifling innovation and growth. That is surely the hope in many other jurisdictions, including Kenya and Uganda, where fintech has dramatically improved financial inclusion.
Geral is a Partner and Head of Bowmans’ Banking and Financial Services Regulatory Practice, Syekei a Partner and Head of Bowmans’ Intellectual Property Practice, Michira a Partner in Bowmans’ Kenya office and Kalule a Partner in Bowmans’ Uganda office.