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As soon as I graduated from university there was an invitation from the managing director of a top Nigerian engineering company to join the organization. There I learned the business of construction and after four years of strategic support work I left to start my own building engineering service firm with a partner. It looked easy!
In Nigeria, starting a new enterprise seems like a piece of a cake and it’s very convenient for people to suggest you should “start something on your own”.  Lagos, where I live, has an annual government revenue one of around $1 billion. With this kind of cash seemingly flowing through the streets, it is assumed it is easy to finance one’s start-up.
My partner and I started our business with our tiny fund – around $320 – and within a few months, had invested most of it on marketing. We didn’t have a car to drive around Lagos so we used taxis to get to meetings. We pushed on until we eventually landed a construction site deal. This process taught us how unsupportive financial institutions in our part of the world can be.
The average entrepreneur in Africa finds it difficult to get their idea to market because of ridiculous interest bearing loans. As we began to talk to our banker for financial support, it became clear that the banking sector was not going to be of much help. We did not have a property, in a choice part of the city, to guarantee the loan which in itself attracts over 20% interest.
With time running out, and needing to get our workers and equipment to site, we resorted to a desperate measure. Desperate people do desperate things. In this case it was a ship sinking decision for us. A private investor offered us a short-term loan with a monthly interest of 15%. We assumed all would work out; we had millions to get people and equipment to site, and substantial work could be done to impress our client. Within 30 days, we would be paid and refund our creditor. It was unrealistic.
In an environment where uncertainty is high, relative to other part of the world, such a straight-line strategy requires many back-up plans. Our company defaulted and the loan extended to a third month, with an accumulated interest of 45% on every million naira. We defaulted because our client delayed payment. He couldn’t pay us because his funds were not released. That circle of failure is the undoing of many businesses.
In a society where moneylenders and investors place an emphasis on the reputation of an entrepreneur, one needs to have a plan to protect this. The harshness of the African business environment triggers desperation and keep entrepreneurs focusing on short-term plans. This needs to change; the longer a business’s plans are considered, the better it will be. There are other strategies that work with raising fund. In south-western Nigeria, Yoruba parlance says that “it is from home that treasures are taken out”. The interpretation is that success begins at home.
Many business owners that I have had the opportunity to talk to use their relationship with family and friends to raise funds, equipment and other resources. The benefit of this is that family is more willing to forgive you and this type of loan usually comes without interest. However, this strategy is limited on a continent where around 70% live below the poverty line.
This provides a huge opportunity for capital ventures and angel investors. It provides opportunities to bridge the poverty gap and create wealth on a continent that is thought to be the next global investment destination. To truly realise this opportunity, the purse of an entrepreneur shouldn’t be bullied.

Desperate People Do Desperate Things

As international investors became more familiar with the continent, international listings and debt offerings by African companies increased as the need for capital to power investments intensified. Record low interest rates globally created an issuer-friendly debt market over the past five years, while foreign equity markets also made it easy for African companies to list. By 2013, over 100 sub-Saharan focused entities were represented on the London Stock Exchange (LSE), with a total market capitalization of $70 billion which accounted for roughly 5% of Africa’s total market capitalization.
This year, the much anticipated listing of Dangote Cement on the LSE is expected to be the latest African-based issuer. As a result of this trend, many emerging market equity players have come to prefer gaining exposure to African companies via developed world exchanges as opposed to investing via the issuer’s local bourse.
Nonetheless, due to the increase in interest rates in the United States (US) and subsequent weakening of local currencies relative to the US dollar and other major funding currencies, this trend is likely to dissipate this year as repayment of foreign currency denominated bonds has become more expensive. Moreover, the implosion of developed equity markets means investor appetite for international listings may not be sufficient. For this reason, since raising capital is a continuous process, this could the perfect opportunity for Africa’s capital markets to rise up and lure more African companies from the grip of international bourses. London has remained a leading destination for African companies listing abroad for over 60 years, according to LSE. Needless to say, work is clearly cut out for the more than 23 African stock exchanges to improve their platforms to succeed in this.
Perhaps the place to start is solving the challenges of illiquidity, high trading costs and small-sized markets. In my view, the last two require the integration of regional stock exchanges, such as what has been done successfully by the BRVM in West Africa and what the East African Community (EAC) is seeking to do. In this regard, the Johannesburg Stock Exchange (JSE) could consider relaunching the Africa Board, implementing the lessons learned from the initial failed attempt in 2009. Considering the economic size of many African nations, it’ll be very expensive to operate such an exchange.
On illiquidity, there will be need for more investor education and more listings for change to occur. Surely, something is not right when the second biggest equity market in sub-Saharan Africa, Nigeria’s stock market, has a daily turnover of less than $30 million. The Nairobi Securities Exchange has 61 listings, but just 10 of those constitute roughly 90% of its annual markets liquidity. Further progress would also require African countries to harmonize their trading laws and accounting standards, set up convertible currencies and establish free trade among members.
Despite this, African capital markets have been growing and gaining recognition over the years. At the end of 2015, total market capitalisation stood at $1 trillion, up from $113 billion in 1992. African equities are now included in emerging frontier indices and Africa-focused benchmarks indices, such as the Russell Frontier Index (RFI), MSCI Emerging Markets Africa (excluding South Africa) Index, S&amp;P Africa Frontier, S&amp;P Pan Africa, and FTSE ASEA Pan Africa Index. According to PwC’s recent 2015 Africa Capital Markets Watch, over the past five years alone, there were more than 100 initial public offers (IPOs) and 336 further offers (FOs), raising a total of $41.3 billion. Furthermore, African equity markets have seen a surge in Africa-focused equity funds, such as JPMorgan’s Africa Equity Fund and the Old Mutual African Frontiers Fund, which invest directly in equity and equity-related securities of companies domiciled or listed on an African exchange.
Given Africa’s economic prospects and volatility in global capital markets, now is the time for Africa to establish its exchanges in order to offer its home-grown enterprises the services that they need, while also tapping into the growing portfolio allocations toward the continent. For Africa to emerge as an important player in the world of capital markets, a well-established capital market is necessary to provide a better alternative to its well-known rivals.
They say a journey of thousand miles start with a step – thankfully Africa has already made several steps and is closer to its destination.

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