Equity fund to expand presence in East Africa

By PHILIP NGUNJIRI
Special Correspondent
DEG, one of Europe’s largest development finance institutions, is planning to enlarge its equity portfolio in East Africa, mainly in Kenya.

It will concentrate on acquiring equity in private infrastructure projects in which Industrial Promotion Services-Kenya (IPSK) will act as the local link, according to DEG regional director Eric Kaleja.

DEG is a member of the KfW banking group, which finances and structures investments of private companies in developing countries and emerging markets.

IPSK is owned by the Aga Khan Fund for Economic Development (Akfed), with which DEG has co-operated for over 20 years on various projects.

DEG capital has enabled IPSK to enlarge its equity portfolio in Kenya and expand into Tanzania and Uganda.

The bulk of DEG’s investment activity is in tailor-made long-term loans. The bank also engages in equity participation, typically taking up a 5-25 per cent shareholding in profitable projects and occasionally filling a seat on the board of directors.

The most recent case was when the development finance institution took up 6 per cent shares towards additional equity capital in Kenya’s Investments & Mortgages (I&M) Bank Ltd (I&M).

Teaming up with Proparco, the private sector arm of AFD — the official French government bilateral development institution — will provide $5.6 million to strengthen I&M’s equity base.

Proparco also takes up 6 per cent shares of the Kenyan bank, bringing together a total of 1,300,000 shares towards additional equity capital in the bank.

Both institutions have been financing and structuring investments of private companies in Africa for several decades in all sectors of the economy.

Following the transaction, I&M Bank becomes one of the first medium-sized local banks in Kenya with international participation, which industry insiders say will send a positive signal to both local and international capital markets that the bank is now ready to do business.

The equity investment will enhance the bank’s market position and enable it to realise its growth potential, says Arun Mathur, I&M Bank’s chief executive officer.

“I&M Bank needs additional core capital funds, as risk buffer and to strengthen the bank’s structural liquidity. The transaction will maintain the current growth path and further increase its loan business. It will also improve financial intermediation in Kenya, which is crucial for creating sustainable economic growth.”

I&M Bank has posted impressive growth over the past three years, both in terms of assets and profitability. The bank, which started as a non-banking financial institution in 1974, is today a fully fledged commercial bank offering a broad range of corporate and retail banking products and services.

In the corporate market, I&M caters primarily for medium-sized corporations that, according to Mr Mathur, are key to fostering Kenya’s economic growth and broad-based wealth creation.

DEG’s Mr Kaleja says that, in addition to enlarging its equity portfolio, DEG will also focus more on the region’s telecommunication sector, which has great potential.

He said that, in East Africa, besides the traditionally dominant agricultural sector, tourism and telecommunications have also gained importance.

“In most of these countries, high investment costs have prevented the establishment of a fixed-line nationwide telecommunications network,” he said.

He added, “Large parts of the population do not have access to modern forms of telecommunication. There is thus massive demand, and more and more effort must be geared towards the development of cellular telecommunication networks.

“This can boost communications and trade enormously, especially in rural areas, where large distances are involved,” he said.

DEG has financed several projects in Africa to help develop telecommunication services in the region. It has financed investments in Uganda and Nigeria by providing MTN with long-term loans.

MTN is one of the leading African mobile telecommunications companies operating in countries such as South Africa, Nigeria, Cameroon, Uganda and Swaziland.

DEG invests in all sectors of the economy, with special attention to agribusiness, infrastructure and processing industries as well as the financial sector.

The financial institution has provided finance in various African countries for enterprises that produce and process foods.

These include investments made by the Aiglon Group, whose activities include the production and marketing of cotton and palm oil in Cote d’Ivoire and Burkina Faso.

It has also provided finance for companies such as Compagnie Fruitière, which grows and trades in fruit such as bananas and pineapples. DEG thus bridges financing gaps in countries where long-term finance is practically unavailable. There are considerable positive consequences for the population: Altogether, the agro projects co-financed by DEG in sub-Saharan Africa provide employment for about 250,000 small farmers.

DEG has been active in East Africa since its foundation and has provided financing of about 240 million euros ($336 million) for more than 70 enterprises in the region.

The current portfolio covers more than 20 project companies with a financing volume of about 90 million euros ($126 million).