SARB interest rate decision: Not quite there, yet


Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

24 November, 2022: The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) opted to hike the repurchase rate by 75 basis points (bp) to 7.00% today. While the tone of the statement and the post-meeting Q&A was hawkish, the voting breakdown shifted towards the dovish (or rather less hawkish) side with the voting split 3:2 for 75bp versus 50bp. In the September MPC meeting, two members would have preferred a rather aggressive 100bp increment.

Heading into the meeting, the market’s pricing was split between a 50bp and a 75bp outcome, so the reaction from the rand and rates was minimal following the announcement. The forward rate agreements (FRA) curve flattened marginally, while the yield and swap curves were steady. The rand was also unaffected by the outcome, but has been trading slightly weak relative to the level on the US Dollar Index (DXY).

Relative to the SARB’s Quarterly Projection Model (QPM), the November rate hike was another front-loaded move. According to the QPM, the projected repo rate for the fourth quarter of 2022 was 6.30% compared to the 7.00% outcome from today’s decision. This reflects the committee’s views that upside inflation risks outweigh the weaker growth outlook. All else assumed equal, this front-loading should contribute to a stronger recovery in the exchange rate, weaker growth, and a lower inflation profile than projected by the QPM.

At 7.00%, the repo rate is in line with the steady state in nominal terms. However, with inflation running well-above target, the real policy rate is deemed accommodative. The MPC views the current monetary policy stance as being supportive of the economy and credit growth.

Given elevated uncertainty on the global and local inflation outlooks with concern focused on broadening pressures and the risk of inflation persistence, the SARB seems willing to take the policy stance into restrictive territory. As such, a further interest rate increase at the January meeting should be the base case.

The size of that increase will depend on how quickly inflation rolls over from the upside surprise in the October release, the details of the BER’s Q4 inflation expectations survey results, and the tone of the Federal Open Market Committee’s (FOMC’s) statement and press conference in December. Given the voting breakdown and the cumulative policy action implemented so far, a 50bp hike will be the most likely outcome. However, we cannot rule out a smaller hike of 25bp or even a pause, should it become clear that global growth strain and more rapid disinflation are set to ease local price pressures.

The market is currently pricing in a cumulative 50bp in hikes by March next year, which reflects the risk for a 25bp hike rather than a 50bp hike in January.


Caption: Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

An overly positive budget update amid significant uncertainty


Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

26 October, 2022: Finance Minister Enoch Godongwana’s second Medium Term Budget Policy Statement (MTBPS) painted a very positive picture of the medium-term fiscal position. Not only does the National Treasury intend to move to a primary budget (revenue less non-interest expenditure) surplus in FY23/24, it aims to grow the surplus over time. In so doing, it hopes to stabilise the debt ratio at 70% of GDP in the medium term, and to outright lower the ratio from FY26/27 onwards.

Rose-tinted glasses

We think there may be too much optimism embedded in these projections. This may be merely a placeholder budget, albeit on the bullish side of the risk distribution, given significant events between now and the February 2023 Budget Statement. Importantly, the ANC elective conference in December would affect the politics of the February budget, which may have constrained the ability and willingness to be more explicit on certain expenditure or revenue items. In addition, the Financial Action Task Force (FATF) grey-listing process is set to be concluded by February, which may also have received outsized attention in the lead up to the MTBPS.

The presentation of the current fiscal year was more realistic. The tax revenue overrun is estimated at R83.5bn, with the bulk coming from corporate income tax receipts, which is no surprise in light of elevated commodity prices and strong earnings rebound. Yet, more broadly, revenues have been doing well thanks to the wage recovery, better import growth, and stronger VAT receipts (even when adjusting for refunds). The deficit was revised from 6.0% of GDP to 4.9%, which was within the consensus forecast range. The market may find it difficult to believe that the government will be able to narrow the deficit to 3.2% of GDP by FY25/26.

There are few reasons for circumspection:

·       The Treasury expects growth to hold up (around 1.8% over the medium term) despite the current slowdown in the global economy, with some of the world’s largest economies – such as Germany and the UK – already skirting with recession. As growth in China and the US move well below trend, it is difficult to see how SA’s growth will hold up when we add in domestic monetary policy tightening and what seems to be a commitment towards fiscal consolidation.

·       Linked to more sustained, albeit still pedestrian, growth, the revenue overrun is carried forward to a large extent, which assumes either a longer-term tailwind from elevated commodity prices or better revenue collection elsewhere. While we agree that capacity rebuilding at SARS is bearing fruit, it may be a tall order to rely on this to sustain revenue at over 25%/GDP, which is well above the pre-Covid level of around 23.5% – 24.0%.

·       The FY23/24 numbers include the extension of the SRD grant (for 12 months to March 2024), but there is no provision thereafter for a permanent replacement grant.

·       The FY22/23 wage bill does not reflect the current, albeit partly, settled wage agreement of a 3% increase over and above the 1.5% pay progression and cash gratuity.

·       The Eskom debt swap is still short on detail and these additional funding costs are not yet included in the medium term expenditure framework. Granted, the debt transfer should limit the need for further equity injections and so reduce the funding associated with bailouts, but the debt that the government will take on will be more expensive than that issued by the government directly and so will add to the debt service bill.

But some room for comfort

Admittedly, there is a small cushion built into the numbers with unallocated reserves of R41.3bn in FY24/25 and R47.3bn in FY25/26.

There was conditional state-owned enterprise (SOE) support of R23.7bn for SANRAL, R5.8bn for Transnet, and R3.6bn for Denel. However, Eskom did not receive additional funding over and above what was budgeted in February. The government has committed to a debt swap with a vague quantum of around R130bn – R260bn, but given the composition of Eskom’s debt – ranging from ZAR to USD denominated, guaranteed to unguaranteed, and listed to DFI loans – ironing out the details will be no easy task.

The fixed income market might be somewhat disappointed by the lack of detail on the Eskom debt swap, as well as the fact that domestic fixed-rate and inflation-linked bond issuance will be left unchanged. Rather, the revenue overrun and excess cash balances will be used to lower foreign borrowing, as well as floating-rate issuance. This is potentially a missed opportunity for the government to lower the supply indigestion in the domestic bond market, given that issuance is being done at a substantial discount compared to a relatively tight spread on the 5-year government floating-rate note. Alternatively, the government may use the floating-rate note as a flexible issuance tool on an ad hoc basis and give the market certainty in keeping the fixed-rate and inflation-linked bond issuance unchanged.

Expenditure ceiling raised … again

The overarching negative message from the MTBPS was that the commitment to the expenditure ceiling should be questioned, as this has turned into a soft rather than a hard fiscal rule. It has been raised yet again, by R51.6bn in FY23/24 and R57.9bn in FY24/25. In addition, the line in the sand on SOE support has again been crossed.

Where we could be too pessimistic is on medium-term fixed investment growth and the government’s ability (and willingness) to crowd in the private sector. A stronger growth outlook would also be more plausible if there is clear evidence that deep-seated reforms are accelerating.

Overall, markets react positively

On the surface it looks as if the markets reacted positively to the MTBPS, but closer inspection reveals that the rally in SA’s bond yields have been driven more by the decline in US yields, while the stronger rand has been a function of the weaker dollar.

Within equities there seems to be more evidence of the beneficial budget, with banks doing relatively well, but on the whole, the local bourse as has also benefited from lower US bond yields, a weaker US dollar, and higher commodity prices.

Even though offshore drivers are dominating local market performance in recent trading sessions, this budget may be enough to keep the bond vigilantes at bay until the hard decisions are taken.


Declaration of Crypto Assets as a financial product


The Financial Sector Conduct Authority (FSCA) has published the declaration of Crypto Assets as a financial product under the FAIS Act, which was gazetted on 19 October 2022. The declaration, brings providers of financial services in relation to crypto assets within the FSCA’s regulatory jurisdiction.

On 20 November 2020, the FSCA published a draft Declaration of Crypto Assets as a Financial product under the FAIS Act, for public consultation. A total of 94 individual comments were received from 22 different commentators. Following this public consultation process, the FSCA published the final Declaration in the Government Gazette
and on the FSCA’s website.

The FSCA has also published a Policy Document supporting the Declaration. The Policy Document provides clarity on the effect of the Declaration, including transitional provisions, and the approach the FSCA is taking in establishing a regulatory and licensing framework that would be applicable to Financial Services Providers (FSPs) that provide financial
services in relation to Crypto Assets.

In addition to the Declaration and Policy Document, the Authority also published a general exemption for persons rendering financial services (advice and/or intermediary services) in relation to Crypto Assets, from section 7(1) of the FAIS Act.

The intention of the exemption is the following:

• To facilitate transitional arrangements for existing providers of crypto asset activities. The transitional arrangements entail that a person may continue to render financial services in relation to crypto assets without being licensed, provided that such person applies for a licence under the FAIS Act within the period specified in the exemption. The stipulated period is 1 June 2023 until 30 November 2022. The exemption will apply until the licence application submitted has been approved or declined; and
• To exempt certain ecosystem participants from the FAIS Act. These participants are crypto asset miners and node operators performing functions in respect of the security and health of the network as well as persons rendering financial services in relation to non-fungible tokens1.

To facilitate the application of an appropriate regulatory framework for Crypto Asset FSPs once licensed, the FSCA also published a Draft Exemption of Persons rendering Financial Services in relation to Crypto Assets from Certain Requirements. The draft exemption proposes to exempt licensed Crypto Asset FSPs and their key individuals and representatives from certain requirements of, amongst others, the General Code of Conduct for Authorised Financial Services Providers (General Code) and their
Representatives and the Determination of Fit and Proper Requirements, 2017 (Fit and Proper requirements). Requirements contained in the General Code and Fit and Proper requirements will apply to all Crypto Asset FSP’s once licensed, except those requirements that they are exempted from in terms of the draft General Exemption.

The draft General Exemption has been published for public comment pending finalisation, to solicit stakeholder inputs on the proposed regulatory framework that will apply to licensed Crypto Asset FSP’s. Submissions on the draft Exemption must be made using the
submission template available on the FSCA’s website and be submitted in writing on or before 1 December 2022 to the FSCA at


Enquiries: Financial Sector Conduct Authority
Email address:
Telephone: 0800 203 722

1 The terms crypto asset miner, node operator and non-fungible token are defined in the published Exemption of persons rendering financial services in relation to crypto assets from section 7(1) of the Financial Advisory and Intermediary Services Act, 2002.

Crypto assets now included under definition of financial products in South Africa


By Ashlin Perumall, Partner, Baker McKenzie Johannesburg

FSCA Declaration
Crypto assets are now regulated as financial products in South Africa. On 19 October 2022, the Financial Sector Conduct Authority (“FSCA”), South Africa’s financial institutions regulator, issued a declaration (“Declaration“) that crypto assets are now included under the definition of ‘financial products’ in terms of the Financial Advisory and Intermediary Services Act, 2002 (“FAIS”). The Declaration also provides a wide definition for crypto assets, being a digital representation of value that:

  • is not issued by a central bank, but is capable of being traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment or other forms of utility;
  • applies cryptographic techniques; and
  • uses distributed ledger technology.

The effect of the Declaration is that any person who provides advice or renders intermediary services in relation to crypto assets must be authorised under the FAIS Act as a financial services provider, and must comply with the requirements of the FAIS Act. Under FAIS, ‘advice’ includes recommendations, guidance or proposals of a financial nature furnished by any means or medium in respect of a defined financial product. ‘Intermediary service’ includes any act other than the furnishing of advice, performed by a person for or on behalf of a client or product supplier with a view to:

  • buying, selling or otherwise dealing in (whether on a discretionary or non-discretionary basis), managing, administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier or in which the client has invested;
  • collecting or accounting for premiums or other moneys payable by the client to a product supplier in respect of a financial product; or
  • receiving, submitting or processing the claims of a client against a product supplier.

Exemption Application
Ordinarily, in terms of section 7 of FAIS, a person may not act or offer to act as a financial services provider unless such person has been issued with a licence by the FSCA. The FSCA has set applicable licences which an FSP would generally require, which are divided into different categories of licences. The full list of categories can be found here. However, on 19 October 2022, the FSCA also published notice 90 of 2022 exempting certain persons who render a financial service in relation to crypto assets from the application of section 7(1) of FAIS. In order for the exemption to apply, the relevant persons are required to comply with the following:

  1. submit an application to the FSCA between 1 June 2023 and 30 November 2023
  2. comply with:
    1. chapter 2 of the Determination of Fit and Proper Requirements for Financial Services Providers, 2017
    2. section 2 of the General Code of Conduct (“GCC”)
    3. all other requirements in the GCC excluding section 13.

The exemption is also subject to the condition that the relevant applicant must provide the FSCA with any information it requests that is in the possession of, or under the control of, the applicant, that is relevant to the financial services and/or similar activities rendered by such applicant. This application must be made by persons seeking an exemption by 1 December 2023. This exemption excludes persons categorised as crypto asset miners, node operators, and financial services in relation to non-fungible tokens, in respect of whom it is already deemed to apply.

As can be seen from the breadth of the legislative framework underpinning ‘financial products’ under FAIS, the consequences of the Declaration will be far reaching, and will impact many businesses in South Africa dealing in crypto assets. When the draft of the Declaration was published in November 2020, it was noted that the intention behind the Declaration was to capture intermediaries that advise on or sell crypto assets to consumers, so as to provide adequate protection for consumers who are advised to purchase these products. Businesses in this space that have until now been operating in a largely unregulated environment will need to move quickly to become compliant.

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The New York Stock Exchange and The Johannesburg Stock Exchange Announce Collaboration on Dual Listings


NEW YORK & JOHANNESBURG, 10 October 2022 — The New York Stock Exchange, part of Intercontinental Exchange, Inc. (NYSE: ICE), and the Johannesburg Stock Exchange (JSE) today announced that they have signed a memorandum of understanding to collaborate on the dual listing of companies on both exchanges.

The NYSE and the JSE also agreed to jointly explore the development of new products and share knowledge around ESG, ETFs and digital assets.

The agreement was finalized during a visit to the NYSE by a South African delegation including JSE Group CEO Dr. Leila Fourie and South African Reserve Bank Governor Lesetja Kganyago. The signing ceremony took place shortly before the delegation rang the Closing Bell, followed by a keynote address by Kganyago on monetary policy.

“The New York Stock Exchange is pleased to sign this collaboration agreement with the Johannesburg Stock Exchange in support of the important economic and trade relationship between our two markets,” said Lynn Martin, NYSE President. “Exploring the dual listings of companies on our two exchanges stands to increase opportunities for investors on both continents, underscoring the value public companies and our capital markets generate in the global economy. We look forward to collaborating on new product development with the JSE team and to the innovation that comes when two great organizations work together.”

“The agreement that we have signed today with the NYSE will unlock opportunities for investors and issuers of both bourses,” said Dr. Fourie. “This is the beginning of a new chapter and I am excited about the opportunities we will explore together as we find synergies to grow both our markets. For the JSE, as the largest stock exchange on the African continent with unparalleled market depth and liquidity, we aim to create world-class solutions for both local and international investors.”

The United States ranks as one of South Africa’s largest trading partners and this agreement is designed to help support the economic relationship between the two nations. Today, about 600 U.S. companies operate in South Africa in sectors including manufacturing, technology, finance, insurance and wholesale trade.

About NYSE Group

NYSE Group is a subsidiary of Intercontinental Exchange (NYSE: ICE), a leading global provider of data, technology and market infrastructure. NYSE Group’s equity exchanges — the New York Stock Exchange, NYSE American, NYSE Arca, NYSE Chicago and NYSE National — trade more U.S. equity volume than any other exchange group. The NYSE, an ICE exchange, is the premier global venue for capital raising. NYSE Arca Options and NYSE Amex Options are leading equity options exchanges. To learn more, visit

About Intercontinental Exchange

Intercontinental Exchange, Inc. (NYSE: ICE) is a Fortune 500 company that designs, builds and operates digital networks to connect people to opportunity. We provide financial technology and data services across major asset classes that offer our customers access to mission-critical workflow tools that increase transparency and operational efficiencies. We operate exchanges, including the New York Stock Exchange, and clearing houses that help people invest, raise capital and manage risk across multiple asset classes. Our comprehensive fixed income data services and execution capabilities provide information, analytics and platforms that help our customers capitalize on opportunities and operate more efficiently. At ICE Mortgage Technology, we are transforming and digitizing the U.S. residential mortgage process, from consumer engagement through loan registration. Together, we transform, streamline and automate industries to connect our customers to opportunity.

Trademarks of ICE and/or its affiliates include Intercontinental Exchange, ICE, ICE block design, NYSE and New York Stock Exchange. Information regarding additional trademarks and intellectual property rights of Intercontinental Exchange, Inc. and/or its affiliates is located here. Key Information Documents for certain products covered by the EU Packaged Retail and Insurance-based Investment Products Regulation can be accessed on the relevant exchange website under the heading “Key Information Documents (KIDS).”

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 — Statements in this press release regarding ICE’s business that are not historical facts are “forward-looking statements” that involve risks and uncertainties. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see ICE’s Securities and Exchange Commission (SEC) filings, including, but not limited to, the risk factors in ICE’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 3, 2022.

About the JSE

The Johannesburg Stock Exchange (JSE) has a well-established history of operating as a marketplace for trading financial products. It is a pioneering, globally-connected exchange group that enables inclusive economic growth through trusted, world-class, socially responsible products, and services for the investor of the future. It offers secure and efficient primary and secondary capital markets across a diverse range of securities, spanning equities, derivatives, and debt markets. It prides itself on being the market of choice for local and international investors looking to gain exposure to leading capital markets on the African continent. The JSE is currently ranked in the Top 20 largest stock exchanges in the world by market capitalisation, and is the largest stock exchange in Africa, having been in operation for 130 years. As a leading global exchange, the JSE co-creates, unlocks value & makes real connections happen. 

NYSE Media Contact:

Bridget Walsh

(212) 656-2298

ICE Investor Contact:

Katia Gonzalez

(678) 981-3882

JSE General Enquiries:


011 520 7000

JSE Media Contact:

Paballo Makhetha

Communication Specialist

011 520 7331

066 261 7405 (mobile)

BCBS-CPMI-IOSCO finalise analysis of margining practices during the March 2020 market turmoil

  • Global standard setters publish a report on margin practices, highlighting the need for further policy work.
  • The report presents a data-driven analysis examining margin calls in March and April 2020 and the extent to which market participants were prepared to meet them.
  • The report recommends further policy work in six areas.

The Basel Committee on Banking Supervision (BCBS), the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) (the standard setters) today published the report Review of margining practices.

The report feeds into the Financial Stability Board’s work programme to enhance the resilience of the non-bank financial intermediation sector. It looks at margin calls during the high market volatility and “dash for cash” in March and April 2020. It also reviews margin practices transparency, predictability and volatility across various jurisdictions and markets, as well as market participants’ preparedness to meet margin calls.

The report builds on the consultative report Review of margining practices published in October 2021, which in particular was based on surveys of central counterparties (CCPs), clearing members and broker-dealers, clients (ie entities that participate in these markets through an intermediary) and regulatory authorities, and other data analyses. It takes into account the feedback received on the consultative report, including through a series of stakeholders outreach events, confirming that:

  • Variation margin calls in both centrally and non-centrally cleared markets in March were large, and significantly higher than in February 2020. The peak CCP variation margin call was $140 billion on 9 March 2020.
  • Initial margin requirements for centrally cleared markets increased by roughly $300 billion over March 2020, and varied substantially across, and within, asset classes.
  • Initial margin requirements on non-centrally cleared derivatives remained relatively stable during the stress period.

A summary of the feedback received has been published alongside the report.

On the back of the analysis, and taking into account feedback from industry, the report confirms six areas for further policy work on:

  • Increasing transparency in centrally cleared markets.
  • Enhancing the liquidity preparedness of market participants as well as liquidity disclosures.
  • Identifying data gaps in regulatory reporting.
  • Streamlining variation margin processes in centrally and non-centrally cleared markets.
  • Evaluating the responsiveness of centrally cleared initial margin models to market stresses, with a focus on impacts and implications for CCP resources and the wider financial system.
  • Evaluating the responsiveness of non-centrally cleared initial margin models to market stresses.

Notes to editors:

Margin is collateral and funds that are collected to protect against future or current risk exposures resulting from market price changes or in the event of a counterparty default.

KPMG Insurance Survey 2022: The insurance industry sees strong growth despite tough market conditions


21 September 2022; KPMG South Africa today launched its annual South African Insurance Industry Survey for 2022. 34 non-life insurers, 19 life insurers and four reinsurers were surveyed. The results indicate that while the reinsurance market in South Africa has had a rough ride, the overall insurance industry has had a better-than-expected year – with strong gains in both the life and non-life sectors. However, there are some very real risks that face the sector over the next year and looking forward, including economic volatility, ever increasing evidence of climate change, a much-needed focus on ESG reporting, support and understanding as well as understanding how to navigate South Africa’s social cohesion challenges.

“It is great to see in this year’s survey that the non-life and life insurers have bounced back nicely after the pandemic and have shown strong recovery at the top and bottom lines – creating a strong base from which the industry is able to enter what seems to be the end of the pandemic,” says Mark Danckwerts, Partner: KPMG Africa insurance practice leader.

Non-life insurance industry

Following the significant volumes and values of business interruption claims in 2020 because of the Covid-19 pandemic, the non-life insurance industry presented robust 2021 results, with the sector increasing profits by more than double the 2020 figures to R12.1 billion.

The industry reported gross written premiums (GWP) of R131.6 billion, an increase of 7% from the prior year. The ten largest non-life insurers, when measured on GWP, have a market share of 76.5%. There were marginal shifts in this space with Escap moving into the top ten, Centriq Insurance Company Limited moving down to the tenth position and Mutual and Federal Risk Financing Limited moving out of the top ten into eleventh position.

GWP growth for the sector exceeded headline CPI of 5.9%, with five insurers outperforming the GWP growth rate of 7%; these are Escap SOC Limited (Escap), Guardrisk Insurance Company Limited (Guardrisk), Discovery Insure Limited (Discovery), Bryte Insurance Company Limited (Bryte) and Lombard Insurance Company Limited (Lombard). Growth came from diversifying client bases and improved new business volumes. In this period Discovery Insure reported its lowest lapse rate since inception; 2% lower than the previous year.

The sector has shown incredible resilience by getting back to pre-pandemic results, with profit after tax increasing by 110% from R5.6 billion to R11.7 billion, largely as a result of a decreased industry loss ratio of 57% (61% in 2020).

“While the non-life industry has had a strong year – the pressure is on to remain resilient. Increasing crime, weather-related catastrophe events, the continued erosion of social cohesion in South Africa, and supply chain and power supply disruptions, all paint a picture that will require tenacity, skill and an increased focus on loss-preventing technology,” says Danckwerts.

Life insurance industry results

“While life insurers faced another turbulent year, the industry experienced improvements in the volume and profitability of new business and welcomed a positive lapse experience and better equity and bond market performance. The industry demonstrated its resilience once again and was able to remain well capitalised to meet policyholder obligations,” says Danckwerts.

In 2020, several life insurers reported having paid or accrued for more claims than ever before, resulting in an overall loss of R5 billion. The life insurance industry has done well to return to profitability in 2021, reporting healthy profits of R17.1 billion. ASISA reported a 17% increase in new individual recurring premium risk policies and a reduction of 28.8% in lapsed policies.

“It is important to note however, that for many life insurers’ results have not yet returned to pre-pandemic levels and these insurers would need to refocus efforts on other drivers of profitability such as digital innovation, cost optimisation and pricing reviews,” says Danckwerts.

Reinsurance industry results

While the primary insurance industry was sufficiently protected by the reinsurance industry through the robust reinsurance structures and arrangements in place, there is no doubt that the reinsurance industry bore the brunt of the loss events that occurred during 2020 and 2021. With GWP growth of only 1%, an 11% decline in investment income and underwriting losses from all surveyed reinsurers (R3.8 billion), it is safe to say that the reinsurers did not recover well following Covid-19 related business interruption claims from non-life insurers and increased mortality experience by life insurers.

“The reality is that while reinsurers writing life insurance risks were hit much harder than non-life insurance risks, it was a tough year all round for both. Consequently, we have seen the hardening of reinsurance rates in 2022.”

“This year’s survey has shown us once again how the insurance sector has, at large, shown resilience in the face of adversity – a trend that has continued after our previous survey. However, to remain agile, insurers are going to have to consider the role they play in mitigating risk, in dealing with risk brought about by changing technology, social patterns and economic turbulence and in finding ways to innovate further to meet the unique challenges that the South African landscape presents,” concludes Danckwerts.

South Africa: The unintended consequences of Most Favoured Nation Clauses in Tax treaties

By Francis Mayebe, Candidate Attorney, overseen by Virusha Subban, Partner and Head of Tax, Baker McKenzie Johannesburg


Bilateral tax treaties are mainly based on the principle of reciprocity. Under this principle, one state negotiates better treaty terms with another in exchange for making a particular concession. As is clearly seen in most protocols, the Most Favoured Nation (MFN) clause is usually included as a concession by a developing state looking to renegotiate particular treaty provisions. An illustration of this can be seen in the inclusion of the MFN clause in South Africa’s protocols with the Netherlands and Sweden, as it was negotiating to include withholding tax on dividends.

The broad rationale behind MFN clauses stems from the field of foreign direct investment. Throughout history, the MFN clause has seldom been accepted as a principle to be included in tax treaties. It is indisputable that the MFN clause comes with some benefits, however, its downfalls are significant. The most significant of these being that the clause creates various opportunities for the reduction of source taxation and that it exposes the source states, which are usually developing countries, to large-scale base erosion of taxes. To illustrate this, we analyse two court cases involving the Netherlands, South Africa and India.

A judicial perspective

In ABC (PTY) ltd v C: SARS 2019, the taxpayer sought to receive beneficial treatment from the South African and Kuwait Double Taxation Agreement (DTA), which provided an exemption from the dividends withholding tax. The basis for this claim had come about through a technical flaw in the wording between Sweden and South Africa’s DTA, which omitted the words “after the date of this convention”. As a result of this wording, treaty benefits afforded to another State by South Africa that are more favourable than those in the DTA with Sweden triggered the MFN clause. In effect, the exemption to withholding tax on dividends in the Kuwait DTA would automatically apply to the Swedish DTA. 

The ripple effect of this clause is that all other States with an MFN clause, like the Netherlands in this instance, could claim the same exemption afforded in South Africa and Sweden’s DTA.

It is on this basis that the taxpayer argued that the exemption of withholding tax on dividends should apply to Dutch residents, by virtue of the MFN clause, in their tax treatment with South Africa.

The tax court found in favour of the taxpayer and instructed the South African tax authorities to provide refunds to all withheld dividend taxes to Dutch residents. Therefore, the technical or unforeseen error in the MFN clause between South Africa and Sweden resulted in a huge fiscal loss of revenue for South Africa. This case clearly demonstrates the dangers of unintended consequences that come with the inclusion of the MFN clause in tax treaties.

In the case of Concentrix Services Netherlands BV WP and Optum Global Solutions International BV WP (C) the court again found in favour of the taxpayer, who was a Netherlands tax resident. This resulted in the application of a lower withholding tax of 5%, as was applied in India and Slovenia Double Taxation Avoidance Agreement (DTAA), based on the MFN clause contained in the Indian and Netherlands DTAA.

A turning point, in this case, was a condition that required the third state to be an Organization for Economic Cooperation and Development (OECD) member before or at the time the DTAA was signed between the third state and India. However, the court held a contrary view, to the effect that the condition would only be fulfilled at the time the MFN benefit was claimed and not after the treaty. This interpretation, in our view, goes beyond the scope of the ambits of the MFN clause and its intended purpose when the tax authorities included it. This largely broad interpretation violates the principle of good faith as enshrined in the Vienna Convention on the Law of Treaties (VCLT).

This case demonstrates a clear downfall of the MFN clause in that it may result in unintended consequences due to the uncertainty posed by its interpretation, particularly in the judiciary. 

Practical comments

As can be deduced from the above discussion, the MFN clause infringes on the fundamental principle of the “Pacta sunt servanda” as enshrined in Article 26 of the VCLT. It infringes this principle by altering treaty provisions that are decided upon and conceded bilaterally by states during treaty negotiation by invoking future benefits or treaty terms that go beyond the original terms agreed upon by the states in their DTA.

These unforeseeable future treaty benefits have serious repercussions for states that would not gain from the invoked benefits. As already seen after the ABC v SARS decision, the MFN clause significantly increased investment flow through South Africa and the Netherlands due to the zero-rated withholding tax on dividends, thus increasing treaty shopping and significantly reducing South Africa’s collectible tax revenue on the declared foreign dividends.

Therefore, states negotiating or renegotiating their DTAs, including the MFN clause, should exercise caution when drafting the clause, and undertake a rigorous assessment of its impact on their tax treaties within their network prior to ratifying it.

Including direct shares in your retirement annuity

By Schalk Louw, portfolio manager at PSG Wealth

Is it possible to structure your RA in such a way that you can invest in direct shares? The answer is yes, but unfortunately most people don’t know this.

A Personal Share Portfolio (PSP) allows you to tailor your own bespoke share portfolio as part of your retirement investment strategy. Most RA platforms in South Africa now offer the solution for a portfolio manager to choose a selection of local and international shares, which, as a direct share portfolio, can be included in your retirement annuity investment and be actively managed. This solution offers quite a few advantages, including: 

Tax advantages

No capital gains tax or income tax is payable within a retirement annuity, so you can have exposure to direct shares within your RA, without the usual tax implications attached to a separate direct equity portfolio (which does not form part of your RA). 

Personal attention

Unlike most asset management companies, many stockbroking companies offer you direct access to portfolio managers.


The current average total expense ratio for general equity unit trusts amounts to 1.56% per year with additional performance fees attached to many of these funds. In most cases, personal share portfolio management fees start from 1.15% (incl. VAT), which can be reduced on a sliding scale based on the value of your portfolio, with no performance fee charges. These fees will vary from provider and provider, and you need to negotiate the fees with your portfolio manager, so be sure to do some homework before you commit. Also bear in mind that a certain minimum portfolio size should be reached before it becomes viable and suitably diversified.

Estate planning

RAs hold many advantages for estate planning, including a potential 3.5% saving in executor’s fees. 

One of the main advantages of an RA that is also invested in direct shares is probably the fact that you have more control over your investment composition. The reason for this is that any RA is subject to Regulation 28 of the Pension Funds Act. According to Regulation 28, there are certain restrictions in terms of the weights you are allowed to allocate to different asset classes within an RA. 

Based on historical data, it is a well-known fact that shares held within an RA certainly offer the best long-term growth potential. For a young investor looking to invest directly in shares, the problem is two-fold. Firstly, Regulation 28 restricts the investment in direct shares (both locally and offshore) within a RA to 75%. 

Another problem is that if you choose to invest in equity-based unit trust funds, you should know that very few of these funds can actually invest 100% of the fund in direct shares, simply because of cost recovery and the fact that it has to have the capacity for withdrawals to be made.

By including an extra layer of unit trusts in your RA, the possibility of you reaching that 75% is unlikely. By investing directly in shares, however, you have more control, which means that you can reach your 75% target. 

The good news is that this option is now available to most investors, which can definitely give your RA a huge boost in terms of performance. 

Quantitative Tightening and Expansionary Policy Effects on the Global Banking System

By Clarke Chesango, MIFM

Quantitative tightening is a monetary policy instrument of increasing interest rates to tame increasing inflation and discourage borrowing by businesses and households. Companies will downsize to rein in increasing costs.  This means unemployment will likely soar and cause social instability if the governments do not come up with intervention programs to mitigate poverty.

The opposite is an accommodation policy where the central bank lowers interest rates to encourage borrowing so as to stimulate demand and expand economic activities.

The adoption and implementation of these two central bank monetary policy tools depends on the economic environment existing in the specific country or globally.

The 2007-08 financial crisis and the Covid era prompted governments to implement an accommodation policy to cater for depressed demand and systemic paralysis in economic activities.

The early 2022 to the current period, we are seeing a world tightening regime to fight inflation brought about by a decade of low interest rates and the Covid era, which gave rise to excessive borrowing underpinned by relaxed underwriting standards by lenders chasing elusive risk premiums.

During the low-rate regime, banks loaned out a lot of money as can be measured by the Debt to GDP ratio to businesses and households. Interest service costs are manageable as long as the business deploys the loans to increase productive capacity to meet increasing demand.

The ability to service the debts was hamstrung by the effects of the Covid 19 era. In order to contain the virus, governments around the world implemented various measures. For example, China implemented a zero-covid policy which was a total closure of all businesses. Other countries implemented a partial closure of businesses and only allowed critical service businesses to continue operating within strict guidelines.

In order to mitigate the effects of Covid and the financial crisis, central banks injected liquidity into their economies by buying government bonds and other securities from banks. The result was excess cash on bank balance sheets to on-lend to the productive sectors and households. Some governments also borrowed from the International Monetary Fund due to inadequacy of revenue streams as economic activity had declined. This led to fiscal imbalances as interest costs became unsustainable to service the loans. It also led to exchange rate volatility risks as some loans were foreign currency dominated.

Interest rates play a big part in the overall earning capacity and capital structure of banks and companies.

Depending on the conditions of the loan agreement, some portfolios are structured with adjustable rates.  They are then exposed negatively to positive movements in interest rates, unless the duration of the assets and liabilities is structured to minimize the negative effects on the capital adequacy and structure.

Quantitative tightening effects on Banks

Banks with fixed rate assets on their balance sheet will experience fair value losses due to the inverse relationship between interest rates and fixed rate assets. The tightening regime increases the probability of systemic risk. For the banks to minimize this risk, they either have to hedge their interest risk exposures through interest rate derivatives or they have to sell some assets early. Due to the costs of hedging, only part of the risk is usually hedged, leaving the banks still somewhat exposed. In addition, full hedging will likely eliminate all profits.

Some depositors looking for higher interest rates move their funds currently in bond portfolios to higher interest earning money market funds. In order to raise deposits, banks have to increase their deposit rates, and thereby reducing their profitability.

Leveraged positions increase their exposure during the tightening period and deleveraging has to be done earlier to mitigate systemic risk. This also applies to hedge funds who apply leverage to make profits, but this strategy is a problem in an increasing rate environment.

Banks must increase their loan loss provisions as the ability of customers to continually service their debts is constrained. In South Africa and elsewhere, most banks reported an increase in loan loss provisions in their financial statements this year (2024). There is credit migration from high quality graded debt to sub-investment and or even junk debt and to some extent, to defaults. This makes raising capital in the capital markets more costly as investors request higher premiums for the increased risk. Some banks with fragile balance sheets cannot continue increasing loan loss provisions, and hence they have to resize and restructure earlier, or they will fail.

Financial stability oversight entities and central banks worldwide will increase their surveillance and supervision to counter systemic risk within banks. This is necessitated by the interconnectedness of the banking ecosystem.

Quantitative easing effects on Banks

The US Federal Reserve Bank and the European Union reduced interest rates to near zero during the financial crisis of 2007-09 and the Covid era but this failed to stimulate the economy.  Since there was no space to reduce interest rates further, they employed quantitative easing. They bought government bonds and other securities from banks so as to inject liquidity into the banking system. This gave banks ample liquidity to on-lend to the productive sectors of the economy, which has the following consequences.

Excessive borrowing

Due to low interest rates households and businesses load their balance sheets with unnecessary loans which do not support their strategic impetus and assets. Banks engage in poor underwriting standards so as to lend more money. Banks’ balance sheets will be loaded with poor loans which will not withstand adverse economic conditions.

Misallocation of financial resources

Funds end up being employed to undeserving sectors of the economy as the economic system is altered to cater for the low-rate policy. The demand and supply rules are no longer applicable.

Asset bubbles

Asset values are increased without a fundamental or underlying basis to support these values. This is because of increased competition for profits which are hard to find in the low-rate environment.  As a result, companies and households end up entering a speculative bubble by investing in risky distressed debt.

Inflation creation

Too much money building up in the low-rate regime ends up creating inflation by bidding up prices of goods and services.

Policy suggestions and opinion

Forward-looking central bank analysis

The central banks must be proactive by adjusting their supervision and regulation with changes in bank risk profiles, complexity and changes in economic conditions. Fair value losses going forward can be estimated in advance and corrective measures applied before the risk materialize. As the interest rate increases, fair value losses also increase on fixed asset holdings on the banks’ balance sheet. Assumptions can be made in advance, taking into account individual banks where the fair value losses with deplete the required capital holdings beyond a certain interest rate.  Immediate solutions can be found to contain this risk before it spreads to bankruptcy and contaminating the whole bank ecosystem and the economy at large, locally and even globally.

Bank resolutions and moral hazard

Previously, banks’ profits were retained by private shareholders, while their losses were potentially covered through bailouts by the government using taxpayers’ money. Bank boards of directors could therefore enter into risky lending as long as they knew in advance that a bail out was going to come from taxpayers’ money. I foresee directors being held accountable for risky lending that is not in the banks interests. Taxpayers will lobby the governments to do away with bailouts using taxpayers’ money unless negligent risk-taking is penalized and the bail out approved by relevant authorities. The best solutions will be to sell saleable assets to the right takers or to find the best banks with ample liquidity to take over problem banks.

Uninsured deposits

This gives rise to panic withdrawals, and I therefore argue that full coverage of all deposits will be created in the near future to create confidence in the banking system.

Already South Africa recently created the Corporation for Deposit Insurance (CODI) to protect qualifying depositors in the event of bank failures.

Financial literacy

I believe that the marginalized communities will, in the future, need to undergo financial education before being given loans.  Banks should be mandated to educate these communities so that they are part of the inclusive and transformation agenda and stand to benefit from diversity and inclusivity policies.

Tokenization to Become a Reality in South African Financial Markets

Daniel Makina, University of South Africa

The Treasury’s 2024 Budget Review reported that the Intergovernmental Fintech Working Group (IFWG) is currently examining the potential effects of tokenization on the financial markets. A paper on the overview of tokenization is expected to be published by June 2024. Then by December 2024 a discussion paper on the policy and regulatory implications of tokenization and blockchain-based financial market infrastructure is expected to be published.

What is tokenization?

It is generally accepted that definitions or meanings are derived from authoritative sources. For English word meanings, the Oxford Dictionary is usually taken as an authoritative source, but it is no longer the sole source, especially for technical words. There are other competing sources that have emerged over the years. When it comes to technical financial terms, we have the IMF, BIS and others that are considered as credible sources for definitions. The BIS defines tokenization as “the process of recording claims on real or financial assets that exist on a traditional ledger onto a programmable platform” that typically relies on distributed ledger technology; while the McKinsey Institute defines it as “the process of creating a digital representation of a real thing.” In simple terms, tokenization is the digital representation of asset ownership on a blockchain. Real assets such as real estate, stocks, commodities, etc are represented as digital tokens on a blockchain. Blockchain technology, in particular Ethereum and its smart contract functionality is the root of tokenization.

Tokenization offers a range of advantages, including immediate global reach and streamlined cross-border remittances. It also allows for fractional ownership, enhances liquidity, and speeds up the transferability of assets, making previously illiquid assets tradable and accessible to a broader spectrum of investors. The widespread adoption of tokenization can deliver substantial economic benefits by increasing economic efficiency via lower transaction costs, simplifying asset management, and boosting market liquidity. Moreover, the expansion of the tokenization sector could generate job opportunities across various industries, including technology, finance, agriculture, and legal services. In the long run, by democratizing access to investment opportunities, tokenization can promote greater financial inclusion and fairer wealth distribution, thereby encouraging economic growth and stability in developing countries.

Global trends of tokenization

The tokenization technology is now maturing, and regulatory frameworks are being developed to govern tokenized assets, with a view to balance innovation with investor protection and market stability. Furthermore, tokenization has brought about an expansion of asset classes beyond traditional assets (such as real estate, commodities, and securities) to include art, collectibles, intellectual property, etc. The emergence of non-fungible tokens (NFTs) like art, music, and virtual real estate has shown the potential for tokenization beyond financial instruments. The concept of decentralized finance (DeFi) leverages tokenization to create decentralized alternatives to traditional financial services.

There are global efforts to improve interoperability between different blockchain networks to facilitate the seamless transfer of tokenized assets across platforms. Financial institutions are exploring tokenization to improve efficiency in processes such as securities trading, settlement, and cross-border payments. Examples of financial institutions embracing tokenization include the following.  Over the years JPMorgan has been exploring blockchain and tokenization through its Quorum blockchain platform and has the JPM Coin initiative for cross-border payments. Deutsche Bank is similarly exploring blockchain technology and tokenization for various financial assets. Société Générale is involved in blockchain initiatives and tokenization projects in areas of trade finance and derivatives. Goldman Sachs is participating in blockchain, and tokenization projects related to digital assets and is exploring potential applications in trading and settlement. Furthermore, the concept of tokenization is intersecting with other technologies such as the Internet of Things (IoT) and Artificial Intelligence (AI) to create new use cases and business models.

The above trends reflect a growing acceptance of tokenization and its growing potential to reshape the global economy. Several leading companies and platforms are engaged in tokenization. Ethereum is considered a key player in tokenization and pioneer of smart contracts and decentralized applications. Because of its low transaction costs and compatibility with Ethereum, on the other hand, Binance Smart Chain has become the popular platform for token issuance and DeFi systems because of its compatibility with Ethereum as well as its low transaction costs. For tokenization projects seeking scalability and interoperability, the Polkadot blockchain protocol has been an attractive solution, whereas Tezos, a decentralized ledger hosting the digital token Tez (XTZ) offers a blockchain platform that supports tokenization and smart contracts.  Cardano, a public blockchain platform that is open-source and decentralized, has a goal to provide a secure and scalable platform for the deployment of smart contracts and tokenized assets. Its emphasis on peer-reviewed rigorous research methods is attractive to projects that are looking for a robust foundation for tokenization.

The above platforms and others are pioneering tokenization, each of them offering unique features and capabilities to support the issuance, management, and transfer of digital assets across various industries and applications.

Africa stands to benefit significantly from advancements in tokenization and blockchain technology. A report by PwC predicts the tokenization market in Africa could reach $100 billion by 2025[1]. In alignment with this potential, the African Development Bank has established a $10 million fund to encourage blockchain and tokenization initiatives across the continent[2]. Moreover, several African countries are exploring the tokenization of land ownership records.

South African use cases

In 2018 DoshEx, a Bryanston-based exchange and South Africa’s first developer of tokenised ecosystems, formally launched the trading of tokenized assets on its exchange. While tokenization is still a novel concept in South Africa, it has great potential as a tool for leveraging corporate growth for businesses with international aspirations.

To some varying degrees, several financial institutions in South Africa are embracing tokenization. The South African Reserve Bank (SARB) is exploring the potential of tokenization, in particular the viability of central bank digital currencies (CBDCs). The largest bank in South Africa, Standard Bank, is involved in blockchain and tokenization initiatives whereby it is exploring applications such as cross-border payments and trade finance. Similarly, ABSA and FirstRand Bank are exploring the use of blockchain and tokenization in various areas of their operations.

Notwithstanding the high demand for tokenized solutions in South Africa, the major constraints are scarce local skills and absence of blockchain and cryptography training. The tertiary education sector is still figuring out an appropriate curriculum for the innovation.

The financial system of the future

In a recent paper, a staffer of the Bank for International Settlements (BIS) and an Indian entrepreneur sketched the elements of the future digital financial system. They termed it the “Finternet” which they define as “multiple financial ecosystems interconnected with each other, much like the internet, designed to empower individuals and businesses by placing them at the centre of their financial lives”. Tokenization is one of the innovations that the Finternet leverages alongside other technologies such as the internet, blockchain technology, distributed ledger technology and unified ledgers. The Finternet is touted as a user-centric approach capable of lowering barriers to access to financial services and thus fostering financial inclusion. However, since its realization will depend on proactive collaboration between public authorities and private sector institutions, the jury is out there.


[2] ibid

Bank Runs and Associated Impact

By Clarke Chesango, MIFM

Long queues were all over the bank`s branches. In three days, panic withdrawals topped three billion pounds (£3billion). This was compounded by wide publicity in the news media. The bank was caught in this crisis because of its business model of securitisation where the mortgage loans on its books were packaged and sold to investors locally and worldwide. Some of these assets were transferred to the bank` s own self-created special purpose vehicles, either with recourse and or non-recourse. A transfer with recourse means the bank is still obligated to meet any shortfalls in case of failure of the special purpose vehicle as well as to take control of the assets back into its balance sheet. Non-recourse means without risk and the bank is insulated from any bankruptcy or inadequacies of the special purpose vehicle. The funding and credit markets for this particular asset disappeared and the bank could no longer fund its operations. The bank was solvent but illiquid. The UK Treasury and central bank came to the bank’s rescue by guaranteeing all deposits and offering a discount window for borrowing, albeit at penal rates to discourage moral hazard. This was Northern Rock Bank, a UK bank caught up in the crisis of the US financial crisis of 2007.

Lessons from the Northern Rock Crisis

1.Rollover Costs

The cost to renew maturing liabilities exceeded the return on assets, hastening default due to business insolvency. Thus, the return on the assets is less than the funding costs.

2.Concentration of Funding

The risk was inability to secure more funding to continuously run the business in a sustainable manner. It is therefore important to diversify funding sources to minimize business disruption in severe or acute economic conditions.


Sources of funds that move in correlation with the economic environment should be scaled down. Negative correlated sources of funds will aid business in countering funding hurdles as it minimizes depth of the crisis and cost.


Proper communication in a crisis scenario should be well managed so that it does not exacerbate the situation. Business crisis communication procedures should be activated to counter negative publicity and to manage reputational damage. It should also spell out recovery procedures to the public. Public buy-in can yield positive results hence all stakeholders should be informed.

5.Resolution Speed

The central bank should have ready-made solutions to assist banks in crisis. Various crisis scenarios should be tested at central bank level so that it becomes easier and faster to implement resolution procedures. The more the delay, the more customers and investors lose confidence in the bank and banking system at large. Customers and investors will miss contractual obligations as they are not able to access their accounts. The resolution should also take into account penalty costs in terms of failure by customers to make good their obligations in time. Who should be responsible for these costs? I suggest the bank shoulders the costs.

Deposit Insurance

The stipulated amounts guaranteed by the deposit corporations will not serve purpose as long as the covered deposits are less than the uncovered deposits. I suggest banks should then tailor coverage based on their balance sheet mix to counter withdrawals in crisis situations. In current position deposit corporations are after creating confidence in the bank system and protection of retail customers.

Technology and Innovation

Due to technology, withdrawals are made at speed. This is a new factor which needs to be planned for so as to mitigate systemic funding issues.

Maturity Transformation

Some short-term deposits are used to fund long term assets. As the short-term funds mature, they will have to be refinanced at prevailing rates in the market. As long as there is negative duration gap value of equity is increased. However, if funding is concentrated in the short-term deposit market there is bound to be a crisis if this market is closed. The bank needs to have contingency funding plans to cater for the specific bank funding incidents or a market wide shock. Contingency funding plans should be tested and updated with changes in micro and macroeconomic factors.

Capital Adequacy

Regulatory capital buffers are a minimum requirement to cater for cyclical downturns and crisis economic situations. The bank risk profile and complexity of its products plus its capital structure determines the requisite capital to sustain the business strategy within its risk appetite and tolerance. The bank supervision can still increase the capital limits depending on the riskiness of the bank operations over and above the regulated capital.

Human Capital

Continuous training of employees to adapt to the changing business landscape is a cornerstone of business success. Tangible training plan including succession planning is of utmost importance in achieving targets and organisational goals. A dedicated expert in risk management from the central bank should also be included in the bank board of directors as non-executive director. His independency will in some way increase effectiveness of the board overall function and oversight.

Central Bank Stress Testing

The mother bank should also be stress tested under different worst-case scenarios to gauge effectiveness in resolution and crisis management over its financial stability role of banks.

Stable sources of banking funding promote the achievement of banks short- and long-term strategic targets and objectives. The structure and diversity of bank funding is of primary importance in meeting profitability, capital adequacy and positive shareholder returns.

It is not only the funding source but also the bank’s core strategy that can give rise to costly funding mismatches. Board of directors should have clear oversight of the bank strategy as the responsibility lies with them despite delegation to senior management.

In adverse economic environments all normal plans and strategies are inadequate to meet intended targets. Hence there is need to readjust and resize with speed to cater for the new normal in adverse economic environments.

Demystifying Blended Finance

By Thomas Meyer

Working in development finance, I often get asked what kind of “blended finance” solutions we have available for projects. According to the OECD, blended finance is the strategic use of development finance from multiple sources, including public and private sectors, to mobilize additional capital towards projects with social or environmental objectives in developing countries. It’s like mixing different ingredients to create a more potent solution.

Typically, blended finance involves combining concessional funds (often from governments, NGOs or foundations) with commercial capital (from private investors or financial institutions). The aim is to mitigate risks and attract private investment to projects that might otherwise be deemed too risky or financially unattractive. By leveraging public funds to catalyze private investment, blended finance can help address funding gaps and support sustainable development goals. It maximizes the impact of limited public resources and encourages private sector involvement in addressing global challenges.

In practice, people tend to think that blended finance is a magic wand, that can fund any project that does “good things” in society – irrespective of the project’s risk-return profile. For finance nerds, this means allocating capital to projects that are not on Robert Merton’s Efficient Frontier. For others it means investors accept inferior returns because the investment achieves a developmental goal. On paper this is indeed correct, but since the concessional finance component is the limited resource in this equation, there will always be heavy competition for the use of this magic wand.

So how do the custodians of concessional capital decide on the merits of allocating this scarce capital? I recently responded very intuitively to this question at a conference, and since the analogy seemed to resonate with the audience, it might also be useful here: Imagine that you are a first-time home buyer, and you have found the perfect house. The seller wants 100. The bank offers to lend you 80 and you have 10 in your piggy bank. Where will you find the remaining 10? The reality is that it would most likely have to be a relative, like an uncle, who would do it for one of two reasons: Firstly, the fact that he knows you personally and can judge the likelihood of you repaying the money. This would address the asymmetric information around your (perceived) credit risk, which moves this investment for the uncle back towards the efficient frontier. The alternative is, that he understands the (softer) benefits of you owning your own house, which motivates him to part with his money despite the likelihood that you might not be able to repay him. It is unlikely that he would do the same, even for your best friend. The result is that he uses 10 of concessional funding, to leverage another 90 from the private sector, so that you can buy the house.

Moving back to societal needs, the analogy demonstrates that project developers need to find their own “uncles”. Uncles who are motivated by the objective that their concessional capital would achieve, the main driver being the leverage that such concessional funding can achieve in the quest to address any specific sustainable development goal. And once project developers have found their uncle, they might have to do some of the “blending” themselves, just like when you buy your first house. Real magic wands in finance are very scarce, even though you might be lucky enough to find one from time to time.

FSCA Update on Approved Crypto Asset Service Providers


The Financial Sector Conduct Authority (FSCA) has provided an update on the licensing of Crypto Asset Service Providers (CASPs) under the Financial Advisory and Intermediary Services (FAIS) Act. As of 30 June 2024, the FSCA has approved a total of 138 CASPs in South Africa.

The FSCA’s licensing only pertains to the provision of financial services related to crypto assets, not the recognition of crypto assets as legal tender. For further details and updates, please visit the FSCA website.

Please click here for the full press release.

In line with these developments, SAIFM is excited to announce that we have launched a Crypto Assets module to further support industry professionals. Enroll and register now on

ZARONIA Set to Replace JIBAR in the South African Money Market

Daniel Makina, University of South Africa

Since the discontinuation of the London Interbank Offer Rate (LIBOR), the Johannesburg Interbank Average Rate (JIBAR) has been the primary benchmark for the South African money market, representing the cost of bank borrowings for maturities up to 12 months. JIBAR has been widely used in financial contracts, including derivatives, bonds, and loans. However, following the Global Financial Crisis and subsequent reforms in major markets to improve the reliability and robustness of interbank offered rates, South Africa has also embarked on a reform process to replace JIBAR with the South African Overnight Index Average (ZARONIA).

In August 2018, the South African Reserve Bank (SARB) initiated the interbank rate reform process in collaboration with the Market Practitioners Group, which includes various industry stakeholders. This group published a consultation paper outlining the plan to replace the JIBAR with ZARONIA). This new benchmark aims to provide a more accurate reflection of the true cost at which banks fund themselves, based on actual overnight deposit rates.

Global Interbank Offered Rates (IBORs) Reform

In the early 1980s, a global initiative began to create standardized benchmark rates to aid in the pricing of financial instruments. By 1986, the London Interbank Offered Rate (LIBOR) had become the dominant benchmark, representing the rate at which banks could borrow from each other. However, the need for reform emerged due to manipulation scandals and the quest for more reliable benchmarks.

In 2012, investigations revealed that major international banks were manipulating LIBOR to benefit their trading positions and project financial stability, undermining its credibility. This manipulation was possible because LIBOR was based on estimates from a small number of banks rather than actual transaction data, making it vulnerable to distortion and less reflective of real market conditions.

The Global Financial Crisis of 2008-2009 further exposed significant weaknesses in financial benchmarks, underscoring the necessity for transparent, reliable, and resilient systems. As a result, central banks and financial regulators worldwide initiated comprehensive reforms to interbank offered rates. The aim was to establish benchmarks grounded in actual transaction data to enhance governance, oversight, and reliability under varying market conditions. The objective was to replace existing benchmarks with risk-free or nearly risk-free rates.

Notable outcomes of these reforms include the replacement of LIBOR with the Sterling Overnight Index Average (SONIA) in the United Kingdom and the Secured Overnight Financing Rate (SOFR) in the United States. These new benchmarks are based on actual transactions, making them more robust and reflective of true market conditions, thereby restoring trust in financial benchmarks.

The Transition from JIBAR to ZARONIA

In South Africa, JIBAR has been a key benchmark interest rate, but it has been criticized for not accurately reflecting the true cost at which banks fund themselves. The South African Reserve Bank (SARB), along with the Market Practitioners Group (MPG), has been working on transitioning to ZARONIA, which captures the rates on 95% of overnight deposits from a wide data set of contributing banks. Unlike JIBAR, which is forward-looking, ZARONIA is based on historical transactions and calculated in arrears.

Since November 2023, the SARB has been publishing ZARONIA rates on its website ( (

The foundation stage, completed in 2023, included the endorsement of ZARONIA and initial market engagement. The adoption stage began in January 2024 with market communication about the future cessation of JIBAR. By the fourth quarter of 2024, ZARONIA is expected to be used in the derivatives market, with full transition across all markets by the first quarter of 2026. (see figure 1 below).

Figure 1: Draft ZARONIA Timelines

Source: Transition plan MPG April 2023.pdf (

The transition from JIBAR to ZARONIA is not without pitfalls

The transition from JIBAR to ZARONIA is ambitious, with SARB aiming for a timeline shorter than the five years taken for LIBOR’s replacement. However, this rapid transition poses potential challenges, including possible disruption of contracts linked to JIBAR and the need for consistency across financial and non-financial sectors. Changing investment mandates and ensuring smooth integration across all financial instruments will be critical.


Despite the challenges, the transition to ZARONIA is a progressive step in line with international best practices. Supported by principles from the Financial Stability Board and the International Organization of Securities Commissions (IOSCO), ZARONIA aims to provide a more transparent, reliable, and resilient benchmark for the South African money market.

For more detailed information, visit the South African Reserve Bank website.

Liquidity Management in Banks

By Clarke Chesango

Liquidity plays a critical role in the smooth operations of banks and failure to adhere to effective liquidity risk management can lead to insolvency and bankruptcy.

This will have systemic negative spill-over effects on the wider economy and to some extent globally depending on how the business is funded and on its supply management chain.

A case in point is the 2007-08 financial crisis where many banks and companies went bankrupt due to sudden evaporation of liquidity and dislocation of the credit markets.

Liquidity is the ability of the business to meet both its short-term and long-term contractual obligations when they fall due.

This includes meeting collateral margin requirements, off-balance sheet and non-funded commitments when specified event triggers occurs.

Early warning signs of liquidity stress include but are not limited to the following:

  • Rating agency credit watches for potential downgrades on debt issues
  • Rising funding costs in an otherwise stable market
  • Reduction and or elimination of committed lines of credit by counterparties
  • Widening of spreads on debt, credit default swaps and stock price declines
  • Difficulty in raising debt in the markets
  • Negative press coverage gives rise to reputation risk.
  • Margin calls.

Banks Liquidity management

Bank sources of liquidity are:

  • Retail customer deposits
  • Wholesale deposits
  • Market deposits
  • Securitization
  • Asset sales
  • Borrowing from central bank and counterparties
  • Committed lines of credit

Bank liquidity management policy is documented and approved by the Board of Directors. All staff should read and understand this policy. The liquidity risk management part is done through the Asset and Liability Committee (ALCO) which manages the assets and liabilities to ensure the bank earns adequate returns on its capital.

Banks employ procedures and processes and standards to cushion themselves from the effects of liquidity stress. Balance sheet structure and composition of assets and liabilities give rise to liquidity imbalances which can impair the adequacy of capital to act as a buffer against adverse market conditions and in a normal market environment.

Sensitivity of assets and liabilities to macro-economic factors should be considered as this can also be a source of liquidity strain on the balance sheet. The responsiveness of assets and liabilities creates liquidity gaps that need to be funded or allocated appropriately.

Banks by their nature operate a highly leveraged business hence the regulatory control and continuous onsite and offsite supervision by the central banks to mitigate systemic risk and financial instability in the economy.

Banks are required to adhere to Basel Committee of Banking Supervision (BCBS) standards to have access to the international market.

The current Basel 111 standards stipulate the best way to manage liquidity risk through the Liquidity coverage ratio (LCR) and Net Stable Funding Ratio (NSFR). Stress tests are done on the bank portfolios (on and off-balance sheet) against plausible worst-case scenarios to find out the adequacy of capital provision to meet adverse stress conditions. If the capital is insufficient to meet the stress shortfalls the bank has to restructure its assets and liabilities or raise more capital. Current liabilities maturity will be extended while assets maturity will be shortened. The capital raising will depend on the bank`s position in the markets and the riskiness of its portfolio. The bank will choose the cost-effective alternative.

In addition, the bank has to keep high-quality liquid assets that are easily convertible into cash at a reasonable price to cater for unexpected bank-specific events and or external shocks. These high-quality liquid assets should be unencumbered.

Diversification of funding sources and tenor should be of paramount importance.

Contingency funding plans and business resumption plans should be tested and assumptions updated depending on conditions in the market.

Bank supervision through central banks plays a critical role in containing wayward behaviour by banks.

The emergence of innovative blockchain technology through its decentralization role and tokenization of assets is likely to change the banking landscape in the near future and this also calls for innovative ways of managing liquidity.

The non-bank financial companies are also dispersing loans on a large scale and this is shifting liquidity risks into this sector.

Cybersecurity risks are a cause for concern as far as liquidity risk and management is concerned as they disrupt set plans and processes to contain it.

Finally, adherence to ESG (Environment, social and governance) creates movement towards sustainable financing towards climate and this is a new source of funding albeit geared towards ESG principles.

Sources: Principles for sound liquidity risk management and supervision, September 2008, Comptroller`s Handbook, safety and soundness, liquidity version 1.00 June 2012

Key Economic Indicators and How They Impact Currency Markets

Citadel Global Director, Bianca Botes

The volatility of the South African Rand (ZAR) against the US Dollar (USD) and other major currencies is a trend that is keeping many South Africans up at night. To unpack the forces that drive the currency, foreign exchange expert and Director at Citadel Global, Bianca Botes, weighs in on the trends and economic indicators that influence currency performance and risk management.


“How well the USD performs and how it impacts the value of the ZAR, is greatly impacted by factors such as the US employment figures, inflation rates and gross domestic product (GDP) data, pronouncements by the US Federal Reserve (Fed), and locally, South Africa’s trade balance, GDP, inflation levels, unemployment figures, and guidance from the South African Reserve Bank about monetary policy. We are also closely watching the impact of the continuous tight monetary policy over the past two years around the world, and the anticipation of central banks moving to a looser stance,” says Botes.

According to Botes, geopolitical events and global economic trends interact with economic indicators to shape currency market dynamics in several ways. Global events seriously impact the risk appetite of investors, the movement of commodity prices, the stability of traditional trade relationships, the existing exchange rate differentials between countries, and which asset classes investors turn to as safe havens. “Economic indicators related to economic stability, fiscal health, and monetary policy credibility become particularly important during volatile periods such as the one we are experiencing now, and these factors all influence currency market dynamic,” she explains.

“One crucial economic indicator that is easily overlooked is trade balance data. The trade balance reflects the difference between a country’s exports and imports of goods and services. Apositive trade balance (surplus) occurs when exports exceed imports, indicating that the country is selling more goods and services abroad than it is buying. This can lead to increased demand for the country’s currency as foreign buyers need to exchange their currency to purchase goods and services, thus strengthening the currency. Conversely, a negative trade balance (deficit) occurs when imports exceed exports, indicating that the country is buying more goods and services from abroad than it is selling. This can put downward pressure on the country’s currency as more of it is sold to purchase foreign goods and services, leading to currency depreciation,” she adds.


“Currency trading requires preparation, analysis, and swift decision-making. A key part of the process is interpreting and reacting to economic data releases in real-time,” says Botes. She shares a concise overview of the process:

  1. Preparation: Currency traders maintain a calendar of economic events and data releases, including indicators like GDP, inflation, employment, and trade balance. They anticipate the potential impact of each release on the currency markets based on consensus forecasts and historical trends.
  2. Analysis: When economic data is released, traders quickly assess whether the actual figures meet, exceed, or fall short of expectations. They compare the newly released data to previous readings to gauge the direction and magnitude of any changes.
  3. Market reaction: Traders closely monitor the initial market reaction to data released. If the data significantly deviates from expectations, it can cause sudden volatility in currency prices. Traders assess the strength and direction of the market movement to determine potential trading opportunities.
  4. Decision-making: Based on their analysis and market conditions, traders decide whether to enter, exit, or adjust their positions. They consider factors such as the significance of the data release, the duration of the market reaction, and their risk tolerance.
  5. Risk management: Traders implement risk management techniques to protect their capital and minimise losses. This may include setting stop-loss orders, adjusting position sizes, or hedging against adverse market movements.
  6. Adaptation: Economic data releases can sometimes be unpredictable, leading to unexpected market movements. Traders must remain flexible and adapt their strategies as needed to respond to changing market conditions.


Looking ahead, Botes believes advancements in technology, including artificial intelligence (AI) and algorithmic trading, will have a colossal impact on forex management. “AI is likely to lead to increased market automation and the use of high-frequency trading strategies. This could result in faster and more efficient price discovery in currency markets, as well as changes in the dynamics of how economic indicators impact currency prices,” she elaborates.

Currency dynamics will also be greatly affected by shifting central bank monetary policy strategies, including shifts towards unconventional tools such as yield curve control, says Botes.

The growing popularity of digital currencies, including central bank digital currencies (CBDCs) and cryptocurrencies, introduces new dynamics into currency markets. While digital currencies may initially coexist with traditional fiat currencies, they could eventually impact trading strategies as they become more integrated into the global financial system.

Lastly, the increasing focus on environmental, social, and governance (ESG) factors are having a growing impact on currency markets and trading strategies. Botes points out that investors will prioritise currencies of countries with strong ESG credentials, leading to shifts in capital flows and currency valuations.

In closing, Botes believes the current heightened levels of geopolitical uncertainty are likely to be sustained in the coming months, not just from a military conflict perspective but also from a trade relations perspective therefore, traders must navigate geopolitical risks and developments, and this is best done with real-time data.

The spate of JSE delistings is traceable to low economic growth in South Africa

Daniel Makina, University of South Africa

The 2023 annual report of the JSE indicates that the market capitalization of the bourse has fallen from R21.34 trillion in 2022 to R19 trillion at the end of 2023. That is an over R2 trillion decrease in a single year. Pundits have attributed this decline to several factors, namely, JSE delistings, foreign capital flight, political uncertainty, greylisting, geo-economic fragmentation, weak economy, energy problems, amongst others. Indeed, the number of listings on the JSE has gone down in the last two decades from 616 in 2000 to 284 at the end of 2023. According to the South African Reserve Bank (SARB) Quarterly Bulletin for Q4 of 2023, foreign investors sold R21.6 billion in equities in the fourth quarter.  The effect of weak economic growth is a no brainer because the South African has been on a well-known pedestrian growth path since 2008.

Foreign investors sold R62.6 billion worth of South African equities and bonds during the first five months of 2023, compared with net sales of R476 million in the comparable period a year earlier, data from the Reserve Bank shows. This is also clear in the performance of the JSE against its competitors. Since the beginning of the year, the FTSE/JSE all share index has risen 5.8 per cent in rand terms. In dollar terms, it was up by just 0.5 per cent. Compare this with the MSCI emerging market index’s 7.5 per cent gain in dollar terms. It is even worse when compared with the performance of the US stock markets, with the S&P 500 up 18 percent in dollar terms and the Nasdaq gaining 44.6 percent.

South Africa’s low levels of economic growth have remained a seemingly intractable problem of the JSE performance. More so, low growth is further exacerbating social problems like crime and corruption, thus creating a negative feedback loop that in turn undermines the country’s ability to make meaningful progress. But what does economic theory and empirical evidence tell us about the link between the stock market and economic growth?

Schumpeterian economics

The importance of the financial sector in promoting economic growth was first articulated by an Austrian economist, Joseph Schumpeter in the early 20th century in his seminal book – The Theory of Economic Development. He postulated that financial institutions such as banks, venture capital firms, and stock markets provide the necessary funding and resources for entrepreneurs and innovators to pursue their ideas. Central to his thesis is the concept of “creative destruction” to describe how innovation and technological change drive economic progress by replacing old industries and technologies with new ones, fostering economic growth in the process. A well-developed financial system has been observed to encourage entrepreneurship, risk-taking and investment in new technologies. In the literature, the link between financial development and economic growth has been observed to have dual causality. In the first instance, financial development does spur economic growth, that is, a finance supply-leading relationship. On the other hand, economic growth can spur financial development. This is a finance demand-leading relationship arising from economic growth.

In theory, a well-functioning stock market promotes economic growth through similar channels as the banking sector, that is, through raising the saving rate, the quantity and quality of investments[1]. It has been further observed that equity finance does not experience adverse selection and moral hazard problems to the same extent as debt finance does in the presence of asymmetric information. Therefore, the existence of equity markets in the economy enhances the allocative efficiency of capital because providers of debt finance would allocate credit efficiently by being afforded knowledge of the riskiness of borrowers[2]. Some scholars have emphasized this role of equity markets as follows: “The existence of public stock prices focuses the attention of managements and investors alike on value and value creation.”[3]

Overview of the history of the JSE

Following the discovery of gold in the Witwatersrand in South Africa in the 1880s, there was increased economic activities in the country. This prompted a South African businessman, Benjamin Woollan, to found the JSE in November 1887 with a goal of providing a platform for gold mining companies to raise capital.  Over the years other minerals were discovered and more companies were served by the JSE. The growth of the South African mining industry then was reflected in the economic boom of the 1890s that the JSE experienced. In 1947 the first legislation covering financial markets was enacted. It paved the way for the JSE to join the World Federation of Exchanges in 1963. In the early 1990s the bourse upgraded to an electronic trading system. In 2001 it acquired the South African Futures Exchange (SAFEX). This was followed by the launch in 2003 of an alternative exchange, AltX, for small and mid-sized companies as well as the launch of Yield X for interest rate and currency instruments. In 2005 it demutualised and listed on its own exchange. Then in 2009 it acquired the Bond Exchange of South Africa (BESA).

Today, the JSE is seen as the oldest and largest exchange in Africa by market capitalization, offering five financial markets, namely, Equities and Bonds as well as Financial, Commodity and Interest Rate Derivatives. In the world, it is ranked the 19th largest stock exchange by market capitalization.

The rise and fall of the JSE listings

As Exhibit 1 below shows JSE new listings and delistings as well as market capitalization have had a chequered trend in the past two decades.

Having shaken off the bubble in the early 2000s, new listings picked up significantly from 2002 to 2007. Although there were delistings in this period, they were largely outpaced by new listings. The onset of the Global Financial Crisis in 2008 adversely affected new listings so that total delistings outpaced them in the period 2008-2010.  From 2010 to 2015 new listings picked up to match delistings. However, in the period 2016 to 2023 new listings were substantially outpaced by delistings.

The JSE market capitalization more or less followed the pattern of listings. From 2002 to 2007 it rose in tandem with the higher GDP growth which averaged 4.6 per cent annually. It dipped in 2008 when the Global Financial Crisis hit. However, from 2009 to 2015 it rose and plateaued thereafter. During this period GDP growth averaged 1,7 per cent annually. From 2016 to 2023 GDP growth averaged 0.6 per cent annually, and JSE market capitalization stagnated and fell drastically from R21.34 trillion in 2022 to R19 trillion at the end of 2023.  There were minimal new listings and more delistings in this period. Evident from the trend is the link between three variables, namely, net JSE listings, market capitalization and economic growth.

Global trends of equity markets

The decline of listed companies is not only peculiar to South Africa. It has also been reported in the US and Europe. For instance, according to the index provider, Wilshire, in the US listed companies have declined from more than 7,000 to less than 4,000. Furthermore, JP Morgan has recently reported that the global equity supply has mostly turned negative since 1999. Exhibit 2 below is illustrative of the global trend.

Exhibit 2

The shrinking of the global supply of listed equity is being attributed to economic uncertainty and geo-economic fragmentation as well as large-scale share buybacks. Small companies are preferring private markets (private equity or venture capital) as a source of finance to raising finance via stock exchanges. The stringent financial and regulatory requirements for going public are also contributing factors. As a result, there is a growing market concentration in big exchanges, that is, the threshold to be considered a large-cap stock has substantially increased for, say, the S & P 500 and the Russell 2000 exchanges. It is also a phenomenon observed on the JSE.

Rekindling the vibe of the JSE

Although Keynes described the unpredictable and irrational behaviour of investors in financial markets as “animal spirits”, the performance of a stock market is ultimately driven by economic growth. The performance of the JSE since its inception has been driven by economic growth. Therefore, when conducive conditions for growth are created so that economic growth picks up to levels above the population growth rate, economic activities will result in more listings as companies seek public equity finance. In theory, resurgent economic growth, and a rising JSE, will spur more companies to raise finance by selling new shares.

Historically, the fortunes of the JSE have been driven by resources, but going forward it will be driven by services and technology sectors. The business model of the largest company by market capitalization on the JSE, Naspers, which has interests in Tencent (China) and Prosus (Netherlands) provides us with an indication of where future growth will come from. The top 10 largest companies on the JSE have now only three resource companies (Goldfields, Kumba Iron and Anglo American) where the other seven are financial institutions and technology companies (Naspers, FirstRand, Capitec, MTN, Standard Bank, Bidvest, and Vodacom). In other words, resource counters are on the wane and technology companies on the rise. The analysis of the performance of JSE sectors in 2023 is testament to the trend. The JSE performance for the year ended 2023 indicated that healthcare counters led, followed by industrial counters and then financial counters, all which are technology-driven in their operations. “Creative destruction” as advocated by Schumpeter is on the march. The first quarter results of the world largest sovereign wealth fund of Norway has reported a profit of US$110 billion (R2 trillion), largely driven by technology stocks. This makes South Africa, with its commodity-heavy stock exchange, an even less attractive investment destination. This situation will be sticky and hard to change unless economic growth picks up with the services and technology sectors as key growth sectors. This is what will make the JSE find its mojo again.

[1] Singh, A., 1992. The Stock Market and Economic Development: Should Developing Countries Encourage Stock Markets? UNCTAD Discussion Paper No. 49.

[2] Cho, Y.J., 1986. Inefficiencies from financial liberalization in the absence of well-functioning equity markets. Journal of Money, Credit and Banking, 19 (2): 191-200.

[3] Beim, D.O., Calomiris, C.W. 2001. Emerging Financial Markets. McGraw Hill Irwin, New York, page 63.

The African Continental Free Trade Area Investment Protocol signalled a new era in sustainable trade and investment

By Michael Foundethakis, Partner, and Global Head of Project and Trade & Export Finance, Baker McKenzie Paris and Virusha Subban, Partner specialising in Customs and Trade, and Head of Tax, Baker McKenzie Johannesburg

The African Continental Free Trade Area (AfCFTA) is predicted to increase Africa’s trade income by USD 450 billion by 2035 and will boost intra-African trade by more than 81 percent, according to a recent report by the World Bank. Since the start of trade under AfCFTA in 2021, African countries have been implementing changes to diversify their economies, increase production capacity, and widen the range of products made in Africa. To be able to do so effectively, they must attract sustainable funding and investment.

Several countries are now trading under the continental free trade area, with South Africa joining other active AfCFTA trading countries in January 2024. Current product lines being traded across the free trade area include food and beverages, consumer goods, and industrial and healthcare products. Eight countries – Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, Tanzania, and Tunisia – were the first to be given the opportunity to participate in free trade in Africa under AfCFTA’s Guided Trade Initiative.

The Protocols

Some of the AfCFTA Protocols, developed to facilitate investment and harmonize policy and regulations across African Union (AU) member states, have now been adopted, including Protocols on Investment, Competition Policy and Intellectual Property. Most recently, in February 2024, Protocols on Digital Trade and Women and Youth in Trade were adopted. The Protocol on Investment was launched one year ago, in February 2023, at the same time as the Competition Policy Protocol. The AfCFTA Protocols include in their mandates a focus on sustainable and inclusive socioeconomic transformative goals and a consistent approach to public interest.

The Investment Protocol

Developed to both facilitate and protect investments in intra-African trade, the intention of the Protocol is to ensure Africa is seen as a desirable destination for trade and investment. The Protocol specifically incorporates initiatives that facilitate industrialisation, assist in reducing poverty, and boost the growth of the private sector.

The Protocol builds on the policy guidelines found in the Pan-African Investment Code, various investment instruments and legal frameworks of Africa’s Regional Economic Communities, and bilateral investment treaties between AU member states and other countries. It also incorporates the principles of the United Nations Conference on Trade and Development (UNCTAD) Investment Policy Framework for Sustainable Development, further emphasizing the focus on sustainable investment.

Inclusivity focus

The Protocol encourages the participation of small and medium businesses, local communities, and underrepresented groups, including women, disabled people, and youth. It contains a definition of the concept of investment-related human rights, extending it to incorporate the protection of environmental, health, and core labour rights. The Protocol includes obligations for investors to protect these rights and comply with regional and national legal frameworks on environmental protection, anti-corruption, anti-money laundering, anti-bribery, and taxation, for example.


The definition of investment is refined in the Protocol, to extend coverage to only investments made in the form of an enterprise established in a host country. This is because enterprise-based investments are the most likely to bring in foreign investment benefits such as job creation, increased tax revenue, and capacity-building initiatives. The definition also clarifies that only assets owned through an enterprise are covered by the Protocol. There is also a definition of substantial business activities: to benefit from Protocol protections, investors must sustain a significant level of business activity in the host state. This is to ensure investors act responsibly in enhancing market access for African businesses. The Protocol also requires all state parties to commit to streamlining investment administration, such as the facilitation of

visas and permits.

Treaty shopping, a process whereby investors change their corporate nationality to access treaty benefits, is strongly discouraged in the Protocol, which clarifies that a significant amount of sustainable investment in host countries is necessary for transactions to be covered by the Protocol. Essentially, the Protocol aims to balance the rights granted to investors under the Protocol with their obligations to the host state.


The Protocol excludes certain matters from its coverage, including certain tax laws and the granting of government subsidies under development programs, public and state enterprise debt restructuring, and investments made with capital or assets of an illegal origin.


The standard of protection and treatment of investments also contains carve-outs for public interest measures. This is different from previous investment agreements that have mostly focused on the investors’ rights over those of the state. This is to allow the host states leeway in the regulation of their specific public interest and sustainability requirements.

Climate incentives

The severe climate challenges that the continent faces are addressed in the Protocol, including regulations around the sustainability of investments and incentives for low-carbon projects, for example. Other provisions include commitments from investors to ensure they do not contribute to lowering environmental, governance, and social standards in host countries and the reaffirmation of the ability of African states to regulate their own climate challenge stipulations on a public interest basis.

Pan-Africa Trade and Investment Agency

The Protocol has established the Pan-African Trade and Investment Agency to assist investors in mobilising financial resources and to provide technical and business support. It is also a platform for knowledge sharing and capacity building.

Trade Finance

Trade finance is a critical enabler of cross-border investment in the free trade zone. The implementation of streamlined clear and transparent rules and mechanisms via the Investment Protocol allows financial and development finance institutions to more seamlessly support cross-border investment.

Development Finance Institutions have increasingly been bridging Africa’s trade finance gap through increased lending and alternative products to support market participants. Banks such as Afreximbank and the African Development Bank (AfDB) have been providing financial solutions to boost intra-African trade. For example, Afreximbank recently announced it would increase intra-African trade funding to USD 40 billion by 2026, up from USD 20 billion in 2021. This is in the form of an AfCFTA Adjustment Fund, which will facilitate and provide support through financing, technical assistance, grants, and compensation to state parties and private enterprises to participate in African free trade.

Other significant developments for financing intra-African trade since the launch of AfCFTA include the Transaction Guarantee Instrument, which, among other things, supports transactions for underserved groups and sub-regions with higher than usual rejection rates; the Pan African Payment and Settlement System, which is a centralised payment and settlement system for intra-African trade and commerce payments; and the Base Fund of the AfCFTA Adjustment Fund, which supports African countries and the private sector to participate in the new AfCFTA trading environment.

The Investment Protocol provides the continent with a clear set of guidelines and principles to facilitate financing and investment across what will be the world’s largest free trade zone. While the benefits of the AfCFTA have not yet been fully realised, the Investment Protocol is aligning the continent with global trading standards and setting Africa on the path towards realising its multi-billion-dollar trade potential.