A Mauritian bank sets its sights on the continent

It is one thing to harbour grand ambitions, quite another to achieve them. So, while State Bank of Mauritius wants to carve out a pan-African presence and has the full backing and encouragement of the government, the truth is it has made little headway. The shift towards Africa, mooted by former finance minister Xavier-Luc Duval back in 2013, makes sense, given the changing pressures on the Mauritian economy.

Independent since 1968, following periods of colonial rule by the Dutch, French and British, Mauritius had been largely dependent on agriculture, trade and tourism, and saw Europe as its main market. In recent years, as part of its economic diversification, it used low taxes and a multitude of trade treaties to build up an offshore financial sector so massive, in the words of the IMF, that offshore assets were estimated at $630 billion or roughly 50 times the island’s GDP.

A global backlash against such havens and their tax avoidance schemes is already taking its toll in similar jurisdictions. India, for example, is revising its treaty with Mauritius to curb foreign investment via the island. So Mauritius and its banks and businesses need to find new pastures. And for Kee Chong Li Kwong Wing, a former parliamentarian appointed chairman of SBM’s parent holding company in 2015, Africa is where the bank must be.

“Mauritius wants to be part of Africa, wants to be a strategic partner for the development of Africa,” says Li in an interview with Euromoney Africa. 

“We have to accompany the Mauritian government, we have to grow,” he adds. “Everything will have to be part of our African strategy. We are not bothered with any other thing.”

When Li came on board at SBM Holdings, the state-controlled bank was active primarily in Mauritius, with a smaller presence in India and Madagascar, and a representative office in Myanmar. The group – encompassing State Bank of Mauritius and affiliates including SBM Mauritius Asset Managers and the broking firm SBM Securities – was not present on the African continent.

To Li it was clear from the outset that SBM Holdings, which is one of the largest stocks on the Mauritian exchange, should focus its energies on entering that region.

“Mauritius has become too small,” he says. “The market is too limited for us to grow any further.”

He says that this strategy of expansion started with his arrival and is part of the government’s broader push for closer ties with Africa.

Two years on, the challenges appear immense. SBM has so far acquired only one small bank, in Kenya – and a “completely rotten” one at that, in the words of Li. Still, the chairman, who has headed a variety of financial and economic boards and institutions, is convinced that SBM will achieve its goal of becoming a pan-African institution. 

The Mauritius economy, which grew 3.8% in 2016, has been hailed as a model of stability and prosperity for Africa, and boasted the third-highest GDP per capita in Africa last year.

It overtook South Africa as Africa’s most competitive economy in the World Economic Forum’s Global Competitiveness Report for 2013/14, based on indicators ranging from institutional and infrastructural strength to financial market development, technological readiness and labour market efficiency.

With its large offshore sector, Mauritius has succeeded in attracting the custom of large companies and the world’s wealthiest. SBM and the rest of the island’s financial sector benefited from the influx of funds, building a strong banking reputation in trade finance, foreign exchange, custody and lending to projects. The pitch of any corporation or bank from Mauritius looking to set up shop abroad has therefore been: give us trade agreements and low tax rates and we can reproduce the successes we’ve achieved at home.

Given the country’s expertise as a financial centre, banks such as SBM think they can start selling their services more widely and serve as a launch pad to Africa for investors and companies.

Li says businessmen he speaks to all refer to the Mauritian success story. He says that gives SBM a selling point when moving into new markets: “We can provide knowhow, market knowledge, the entrepreneurial drive and the capital.”

SBM’s strategy is to be the main financial partner in the creation of four special economic zones across Africa and to establish itself in four countries on the continent, each of which would act as hubs from which to access the surrounding regions.

The planned special economic zones are the result of negotiations between the state of Mauritius and the governments of Ghana, Senegal, Mozambique and Madagascar. Memoranda of agreement for the development of these zones have been signed over the last year, Li says, adding that they are now at different stages of development.

“We are working on the master plan. In some cases it’s very advanced, in some cases the land has not yet been earmarked, in some cases, people have already moved there without waiting for the zone.”

The main advantages of the zones will be the physical and legal protections afforded those that settle there.

“The zone will be not only physically secure but the zone will benefit from investment protection treaty that we will sign with the governments, so if anything happens in the zone, our investment is protected. Nobody can expropriate.”

Such protection is particularly important given the problems that some Chinese investors faced in Vietnam in 2014, he says, when anti-China protests led to looting and attacks on Chinese-owned factories.

“You saw what happened in Vietnam, where all the Chinese factories were burned,” he adds. “We need security, we need protection and we need tax benefits.”

Li says the four countries approached Mauritius because they wanted to introduce the low-tax, high-stability model that had worked on the island into their own economies. SBM is acting as financial partner on the development of these zones, and will encourage customers to move there.

Of the benefits Mauritius could derive from these zones, Li says: “We take advantage of local labour, the local market and the local incentives provided by the local government to grow our own industries and services that we cannot expand further within our domestic market. That’s the main target.”

The second prong of SBM’s strategy is to establish a presence in four other countries in Africa and the Middle East, using these as bases from which to conquer the continent. Li says the bank has identified South Africa as a potential gateway into the southern part of the continent, Kenya as a portal into east Africa, Dubai for north Africa and either Ghana or Senegal for west Africa.

“Once we have put ourselves in those hubs then we can serve the whole of Africa and we can call ourselves a real pan-African bank,” he says, “because our goal is to be a regional bank.”

SBM is set on this strategy. “We must have hubs,” Li says. “We must have four hubs.”

Given the government’s drive to focus on Africa, SBM is not alone in trying to forge a pan-African strategy. Asked who is trying to move into the African market, Li says: “Everybody, the whole of Mauritius. All the big banks, all the big insurers, all the big hotels, all the textiles, all the conglomerates, everybody is there, all the IT.”

And that is exactly why SBM needs to be there, he says, to accompany the Mauritius-based private sector, which wants to enter the African market and will need a trusted banking partner to do so.

“We are a small country, we have a small group of big corporates,” he says. “They have to move. If they don’t move, they will be stuck and will be swallowed by multinationals. So we are accompanying them.”

SBM’s first foray into the African market took place earlier this year when it bought Fidelity Commercial Bank, a Kenyan bank that it subsequently renamed SBM Bank Kenya. Li talks about it as the first building block in SBM’s pan-African strategy and sees it as the launching pad for SBM’s east African operations.

Kenya’s central bank governor, Patrick Njoroge, provided a few words of encouragement in announcing the completion of the acquisition in May this year.

“SBM is well poised to play a significant role in financing intra-Africa trade and investments, using Kenya as a launching pad into other African markets,” he said. The central bank “welcomes this milestone in the strengthening of the banking sector, that will lead to the emergence of a world-class financial sector.”

Yet the fact is in Kenya’s overcrowded banking sector, where lenders struggle to find a profitable niche, Fidelity only ranked around 30th in terms of assets. It is a small bank by Kenyan standards and a far cry from the regional player that SBM hopes it will become.

When the acquisition was announced last year, SBM said the purchase price for the entire share capital was KSh100, or just below $1 and roughly the price of a coffee in central Nairobi. That symbolic price may have befitted the bank’s worrying financial situation, considering its non-performing loan ratio of 17% and its liquidity ratio of 11%, well below the statutory minimum of 20%. Even though Fidelity had not been put under receivership by the central bank, as other Kenyan banks were last year, by all accounts it was struggling.

Li does not deny that. 

“Nobody wanted it,” he says. 

“This was a rotten thing, completely rotten,” he adds, although he considers that at such a low purchase price “it was a very good bargain.”

Since then, SBM has invested $20 million in the bank, Li says, and will inject more money if necessary. SBM is also changing the bank’s management, and has taken out the toxic assets, Li says.

SBM’s plans to expand further have faltered. When Euromoney Africa spoke with Li, SBM was bidding to acquire Chase Bank, another troubled Kenyan bank (this one under central bank receivership). Subsequently, Moses Harding, adviser to the board of directors of SBM Holdings, said SBM had withdrawn its bid for Chase because it was not ready for such an acquisition so soon after buying Fidelity. 

In fact, SBM has come somewhat late to the game in Africa. The other big Mauritian bank, Mauritius Commercial Bank (MCB), entered the continent sometime ago. MCB has a presence in Mozambique and the Seychelles, and representative offices in Johannesburg and Nairobi. Half of MCB’s profit is now foreign-sourced.

SBM also faces competition from all the other local and pan-African banks that already exist.

“Our model is different,” Li says when asked what sets SBM apart in that crowded landscape. “We go for small and medium-sized enterprises, we are going to go for digital banking, SMS banking. Everything is done in a more smart way, you don’t need to go to a branch, you open a bank account, you transfer, you pay.” Just like other banks then. And unlike Africa’s other banks, SBM has the disadvantage of a limited knowledge of the market: though it already caters to some African clients, it has never worked on the continent.

Still, Li says competition does not bother him. “We are not competing with anybody,” he says. “The beauty of us is we don’t go in to compete with people, to be bigger or smaller than anybody. We go there because we have a strategy, a strategy that is also fully supported by government and driven by government.”

Ade Ayeyemi, chief executive of Ecobank, believes there is room for more transnational African banks. 

“I’m of the view that there’s always room,” says Ayeyemi, who runs the largest pan-African bank by geographical coverage, “especially in places where the level of financial deepening is still low. There’s room for so many people to participate.”

Though there are many banks in Africa, it is true that much of the population is still unbanked, which may present an opportunity for new entrants such as SBM.

Mauritius also hopes to take advantage of its geographical position, in the Indian Ocean between Asia and Africa, to act as a bridge between the two regions. 

That strategy is starting to bear fruit. Early last year, Bank of China secured a Mauritian banking licence, in the most visible sign yet of the island’s potential to become a conduit for Asian investment in Africa. Air Mauritius has improved its connections to the continent, adding Dar es Salaam and Maputo to its list of destinations, on top of Nairobi, Johannesburg, Cape Town and Durban. And with a bilingual (French and English) population, Mauritius can converse in the native languages of many Africans.

SBM is relatively well placed to deliver on the bridge strategy. It has had a presence in India’s commercial capital Mumbai since 1994, and operates a network of three other branches in Chennai, Hyderabad and Ramachandrapuram. In India, SBM is able to provide corporate lending, working capital funding, hedging solutions, trade transaction services to corporate customers, financial institutions, small and mid-tier clients across industries and segments. 

The bank is not yet in China, but Li says SBM is looking at changing that.

“We have to be in China,” he says.

Asked what SBM could offer Asian clients with regards to Africa, Li says: “For them to go directly to Africa can be a challenge, unless it is the government that is sponsoring or investing. If you’re a government, it’s ok. You’re an international airline and you want to invest in Africa, it’s ok. But if you’re private, it’s a challenge. For big Indian corporations and big Chinese corporations, when you are a private-sector operator, you face a lot of complications.”

How would SBM help them face these complications? “We are there, we are funding, we have capital, everything. We are a one-stop shop for everybody going to Africa.”

Has SBM set its sights too high? Li thinks not. But he admits it could take a while to see these plans realized. Asked if SBM today has the capacity to provide funding to big multinationals across Africa, as would be needed to become a pan-African bank, he says: “Not today, I don’t know, 25 years down the line. All of this started only two years ago.”

Although SBM is considering organic growth and the launch of new banks, entry in new markets will primarily be through acquisitions. “More buying,” Li says. “For the whole operation it’s more buying.”

According to the Mauritian Financial Services Commission, only 16% of financial flows through Mauritius emanated from Africa in 2011. SBM and the other Mauritian banks still have a long way to go to establish themselves as key players on the continent. It will be years before one can assess if the strategy of African expansion was worth the cost and effort. But Li says SBM won’t change its mind.

“There is opportunity,” he says. “We have to be there, we have to be there.”