Investing in East Africa, opportunities and challenges and how DTOS can help
Africa, the sleeping giant
When it comes to investment opportunities, Africa is largely considered to be a sleeping giant within the global economy.
Interest in the continent has increased significantly in recent years due to global success stories, million-dollar funding rounds, and the increasing ease of doing business within African countries. Incentivised by the promise of high returns within fast-growing African economies, Africa is in the world’s spotlight.
Foreign direct investment in Africa hit a record $83bn in 2021, according to UNCTAD’s World Investment Report. African tech startups accounted for over $2bn with investments across 564 companies. Yet, despite the potential opportunities, some investors remain hesitant about investing in Africa.
Last October, Terry Antoinette, our Managing Director of DTOS UAE, addressed this issue head-on while participating in the ‘Investing in Africa’ panel session at AFSIC.
In his follow-up article ’The Emergence of Africa and How Dubai Is Helping’, Terry explained, “the sentiment I hear most often is, ‘Africa looks like it has potential, but it’s too risky for me and my business’.
In this article, we will/are focus on East Africa, its potential and challenges, and try to demystify these misconception about the risk associated to investment into this market and highlight how DTOS is uniquely positioned to provide the required framework for investment into these East-African countries.
Opportunity in East Africa in 2023
Despite some reservations from the global community, Africa continues to grow, with East Africa seeing some of the most exciting and innovative opportunities on the continent.
East Africa is the region of Africa which includes Kenya, Rwanda, Somalia, Tanzania, and Uganda. This emerging market has a fast-growing economy and a large, young and dynamic entrepreneurial population. While renowned for its natural beauty, East Africa is fuelled by several industries, including agriculture, manufacturing, tourism, mining, energy, and financial services. In recent years these industries have been transformed by the rapidly emerging technology industry working to address the challenges affecting these industries and create new opportunities.
The startup ecosystem in East Africa has grown significantly and demonstrates the unlimited potential for investors from the UAE looking to set up in the region. Notable startups include:
- M-Pesa, a mobile money and financial services provider valued at $3 billion
- Twiga Foods, a food supply chain company that connects consumers, vendors, and farmers valued at $200 – 300 million
- mPharma, a healthcare company aiming to make medicine more widely available, valued at $120 – 180 million.
East Africa is fast becoming the entrepreneurial hub of Africa
In response to the growth and success of these regional startups, the business and investor landscape in East Africa has grown in parallel. Notable companies include venture capital firms, international corporations including Google, IBM, and General Electric, development finance institutes including the UAE government, angel investors, and crowdfunding platforms.
The United Arab Emirates (UAE) is one of many countries which has increased its investment in East Africa and the Arab nation is widely acknowledged as one of the largest investors in the region. The UAE has built many strategic partnerships to expand its regional presence with specific investments in infrastructure, energy, trade, tourism, and financial services. Several major private and government UAE organisations also operate in the region, including Al-Futtaim Group, Al Ghurair Group, Al Masaood Group, Dubai Petroleum, Dubai Aluminum Company, and Dubai Port World.
What is driving this growth and the increase in UAE entrepreneurs and businesses looking to invest in East Africa?
There are several factors that are driving investment growth into East African countries, these include:
Ease of doing business – countries in the region have been making concerted efforts to introduce reforms, streamline the business set-up process, and reduce the time and cost involved. The 2022 Absa Africa Financial Markets Index, which ranks African economies by performance, ranks Uganda, Kenya, Tanzania, and Rwanda first, second, third, and fourth respectively. On The World Bank’s Ease of Doing Business Rank 2019 Rwanda placed 38th and Kenya placed 56th globally. You may be surprised to find that this means that both countries ranked ahead of Italy (58), India (62), Saudi Arabia (63), and Luxembourg (72).
Financial infrastructure – the region is witnessing a transformation within its finance industry. Rwanda, Kenya, and Uganda have made significant investments to improve their financial infrastructure as each country vies for the position as “the financial capital of East Africa”. You can now find international financial centres in each country’s capital – Kigali, Kampala, and Nairobi, as the countries align with international standards. Country-level initiatives aim to promote entrepreneurship and support SMEs while enticing businesses through special economic zones and tax incentives.
Legal framework - East African countries have been working to improve the legal framework and the effectiveness and efficiency of the legal system to protect businesses’ and investors’ rights.
The growing market – the young skilled workforce and investments in improving transportation, power and telecommunications have created a favourable business market, increasing the region’s growth opportunity and potential.
Strategic location – East Africa is strategically located with easy access to markets in the Middle East, Asia, USA, Europe and across Africa through its roads, international airports, and ports. This gives the region immense potential regarding regional and global trade networks.
What are the challenges for UAE investors investing in East Africa
It is clear that investing in companies in East Africa has great potential for high returns. However, investors will need to be prepared for the unique challenges that may present to themselves. Typical challenges when setting up in an Eastern African country can include:
Prior to investing
Access to reliable information required to carry out due diligence and business risk assessments. This normally results in wrong valuation of the investee business, and important losses to the investor.
Language barriers and a lack of local knowledge of the business culture in these countries
Selecting and working with the right partners (lawyers, accounting firms)
Lack of understanding of the local and regional regulatory environment and local laws to maintain compliance
Ensuring the investee has the proper governance structure in place to ensure the strategy execution
After investing
Putting effective and reliable controls in place in the Investee company
Ensuring proper and accurate financial reporting
Ensuring compliance with the local laws
How is DTOS uniquely positioned to help investors overcome these challenges
DTOS has offices in both the United Arab Emirates and East Africa (covering Kenya, Uganda, Tanzania and Rwanda).
This puts DTOS in a unique position when it comes to accompanying investors from the Middle East or investing in Africa from the UAE. The investor can meet with our expert team based in Dubai, receive advice on the best structure in the UAE, whilst also getting support from our East African team for the pre and post investment processes.
DTOS’ offices in East Africa include qualified accountants and company secretaries who can provide the following:
- On-site due diligence on the investee company
- Assistance with the financial analysis required as part of due diligence
- Setting up of the governance structure and controls as per the investor/investee requirements/agreements
- Compliance risk assessments
- Providing high-calibre professionals to act as independent directors on the boards of both the Holding (UAE) and the Investee’s (East Africa)
- Acting as company secretary and organising board meetings (Preparation of board papers, attendance as secretary, and minutes drafting)
- Accounting and financial reporting in accordance with the International Financial Reporting Standards (IFRS)
- Assistance with tax compliance and compliance with Common Reporting Standards/FATCA
- Acting as co-bank signatory and ensure that the proper controls are in place concerning payments and cash management
If you are an investor looking to invest in companies in East Africa from the UAE contact Terry Antoinette, Managing Director of DTOS UAE. Terry and the DTOS regional teams are here to help you navigate the local landscape and ensure that:
- Your investment is protected;
- You have visibility on the East African investee’s operations;
- You achieve your investment objectives;
- Your business is fully compliant with local and other relevant laws.