Brian Bollen discusses the macroeconomic changes affecting the African custody landscape and the up-and-coming players in the region

“What is important about the African custody market?”

This was the question put to a number of industry experts. Interviews were conducted just as the news of the Sudan crisis hit the front pages of newspapers worldwide. Despite this, many other African countries have been experiencing rapid economic growth.

Rwanda, Côte d’Ivoire, Benin, Ethiopia and Tanzania are all among the 10 fastest-growing economies in the world, notes Werner Gerber, regional head of customer relationship management for Southern Europe and Africa at Apex Group.

“Although Africa is a relatively small market, it holds significant potential for growth and investment opportunities, which has allowed its custody levels to grow,” he says. “However, demographic trends will play a key role in determining how fast this growth will accelerate.”

Gerber adds that Africa has a young and growing population, which will drive the demand for financial services in the long term. “As more people enter the workforce and accumulate wealth, they will require access to various financial products, including investment and retirement services, which often rely on custody services,” he says.

“As a direct result, local and regional banks are facing increasing competition from international banks entering the African custody market, attracted by the growth potential in the region.”

Region by region

Standard Chartered states that the African custody market is made up of “multiple domestic markets that are at various levels of maturity and size.”

“Therefore, it simply cannot be referenced as a collective,” says Michelle Swanepoel managing director, regional head, financing and securities services, Africa.

Africa’s capital market and general economic growth between 2020 and 2023 is mainly attributable to domestic contribution as COVID-19 and the Russian invasion of Ukraine have challenged individual markets’ fiscal positions — particularly as demand for foreign currency has increased as inflows reduced.

“In addition, the appetite for emerging market investment risk has waned and there has been a substantial outflow of investment from offshore investors. Paradoxically, domestic investment remains robust and has more room for growth, particularly with the heightened focus on the local pensions industries,” adds Swanepoel.

The global bank has continued to see the development of product diversification in African markets, with new funds being tabled for approval in Nigeria and Ghana. The latter has seen the establishment of exchange-traded funds and real estate investment trusts, while in Kenya and Botswana securities lending is very much on the agenda.

“Exciting opportunities exist in the commercialisation of technology solutions to support growth in the African funds and pensions sector,” Standard Chartered says.

“There is still room for development in the post-trade environment across the digitisation agenda, with the adoption of SWIFT and other automated information exchanges by stakeholders in the trading and post-trade environment.”

“Major trends include a series of infrastructure upgrades across the board,” the bank continues. “Nigeria’s central securities depository (CSD) is progressively introducing application programming interfaces (APIs) for clearing and settlement processes.”

In South Africa, Strate, the country’s principal central securities depository and central collateral platform, intends to develop a full API suite for all processes and services.

The Botswana CSD has introduced more automation as part of its system upgrade. The Kenyan market is working towards end-to-end SWIFT usage in the equities post-trade environment, while Ugandan settlement infrastructures have plans to expand the use of SWIFT in securities transactions.

Proxy voting

Depositories continue to seek new revenue streams and improve return on system investment in private markets, unlisted securities and commodities markets. For institutional investors and their intermediaries, the landscape is primarily shaped by regulations and the fact that their clients still require intermediary services for voting. Therefore, software companies may need to find a balance between direct shareholder e-voting and intermediated e-proxy voting in the near future. In December, software company Proxymity announced an agreement to connect exclusively to Computershare in South Africa to ensure the company would have golden source announcements, real-time voting and vote confirmations throughout the shareholder chain of ownership.

Bennie van der Westhuizen, CEO of Computershare South Africa, says: “Since the announcement, respective parties have been testing and integrating systems which are expected to come online soon. Vote Connect Total enables clients that have investments in South Africa to benefit from Proxymity’s unique ability to convey golden source announcements, real-time voting and vote confirmations across the entire proxy voting ecosystem.”

He adds: “Shareholders want convenience, certainty and trust in the technology they use. Our issuer clients also want regtech solutions that help drive greater transparency — such as the voting decisions of the underlying investors. Issuer clients want more governance, which is critical when it comes to shareholder engagement. Proxymity seeks to deliver this with their platform.”

Corporate and digital developments

Switching attention to corporate developments, the recent acquisition of Maitland Group by Apex is being seen as a highly relevant motion to change the local landscape for third-party fund administration in South Africa. Apex entered the South African market via the acquisition of SANNE in 2022. Due to the purchase of Maitland, Apex now employs more than 1000 local experts in Cape Town and Johannesburg. The company also plans to hire over 500 new experts in Johannesburg over the next year to deliver its solution to a global client base of asset managers, capital markets, private clients and family offices.

“The fund administration market in South Africa is mature and increasingly dominated by domestic-based, third-party fund administrators as well as global custodian banks offering fund administration and broader banking services,” explains Fiona Green, director at Adapa Advisory.

She adds: “While many major asset managers have already outsourced components of their back offices to domestic and international providers, there are larger pension funds following suit. Investment administration requirements such as portfolio accounting, performance measurement and compliance monitoring are being outsourced to custodians or third-party fund administrators.”

Maitland and Apex recently won a significant mandate in South Africa, meaning that Apex will now provide portfolio management services to Eskom Pension and Provident Funds — the second-largest retirement funds in the country.

Digital assets

Financial institutions and asset owners continue to explore opportunities to diversify and expand capabilities to support digital assets in Africa.

“A notable trend in South Africa has been the increased engagement between local banks and digital asset technology providers,” Green says. “The demand for digital assets in the local market is currently driven by retail demand, which has been the case for some years now.”

At this early stage, engagement requirements are centred around proof of concept — an overall assessment of the digital asset ecosystem, accompanied with an analysis of how it parallels or integrates with current technology infrastructure.

Green concludes: “There is increasing interest amongst financial institutions to understand the new technology and the various ways it can be leveraged to support current and new operating models.”

This article was originally published on Asset Servicing Times.