Financial Markets and Investment Banking; Unlocking the potential giant fulcrum in the East Africa’s Economy.

 In 2021, the media reported the closure of two big companies in Uganda, one being a Supermarket company (Shoprite), and another a Telecommunication agency (Africell). Yet these examples are only a drop in the ocean of the many business enterprises that collapse year in year out and close operations from the Ugandan market. The cause of such closure can or may be attributed to low market base, and operation at break-even or shutdown for long periods of time. Yet what attributes all these to companies here in Uganda yet the very same companies are making progress outside Uganda? Is it that Ugandan population is not responsive or because of the generally low economic base, or mismanagement? The devil lies in the answer to this question though I try to digest some of the facts here in this article.

Corporate growth in any economy is normally facilitated by business development companies. These are entities started mainly to assist the development of other companies. Thus companies that deal in Insurance, Market Research, Public Relations, Tech development, and Investment Banking lie in the same plane of business development companies.

Under investment banking, the Investment Banker helps the developing or developed companies with with raising capital by IPOs, risk assessment and management,  research analysis, and asset management among other services. The insiders of these other companies may not be able to effectively execute those services for themselves and thus need the services of an investment banker. In simple terms, an investment banker will come to your company, and analyse and advise you on the following: how to raise more capital, the need for new products on the market, virgin areas on the market which your company can exploit, avoidance of risk when it hits, and general advisory.  Not only does the investment banker give you advice on such, but also provides these services to you at a cost of course, in addition to analysis of the possibility of business continuity over a period of time.

However, in Uganda, it can be visibly witnessed that very few companies afford or actually hire the services of an investment banker. This syndrome can be witnessed from various indicators; the fact that many companies close down shortly after starting some closing without making a single profit, the fact that some companies start with a lot of hype but quickly descend into the oblivion is also another indicator. Investment banking also promotes innovativeness, in that manufacturing  companies are able to bring new or modified products on the market. The sluggishness of this is evidenced by the fact that very few companies are able to register patents (monopoly over the production of new inventories). Forexample in between 2019-2022, an average of less than 20 patent applications were made, and less than 10 were granted. These low figures can project that company expansion is limited even in the few years to come. This is because company growth depends on a few things mainly, exploration of new markets, putting new unchallenged products, and a general change in the economic setting. It is hard to explore new markets if no new products are being brought to the market.

This sluggish company growth and development in Uganda is proof of the failure of investment banking. However, from the statistics, we can also deduce another indicator of failure of the investment banking business; the fall of investment banking companies. In 2022, I checked the website of the Uganda Private Sector foundation for investment banking companies and one of them was Africa Alliance with offices at Workers House. I walked to Workers’ House and inquired about the company but no one knew about the company. The confidence with which I had asked for their office vanished into thin air when a security officer who had worked on the reception for two years told me he had never heard of it. I walked with my tail between my legs and browsed again till I came across a news blogsite showing how the company had closed business in Uganda in 2019.

This is not to mention the fact that many other companies are shying away from the investment banking field. For example recently Bank of Baroda transferred its investment banking business to another private company which also closed the field of investment banking and maintained only stock brokerage. With Crested Capital, Stanbic Bank and a few others being resilient and able to operate beyond break even points, the state of investment banking business in Uganda is in limbo, and so is the state of company growth.

Way Forward.

One thing we can agree upon is that investment banking is key for modern corporate growth. However, investment banking is dependant on the availability of cheap long term capital (loans with low interest rates which can last for long periods). Given that Uganda, and Eastern Africa has a problem of high interest rates (between 14-22%), it is hard for companies to take off with borrowed capital and so is the business of investment banking.

It appears that addressing the interest rate on loans is the best assured way for corporate growth in East Africa.

 

ABOUT THE AUTHOR

Prosper Ahabwe Julian 24, is a Ugandan lawyer with deep interest and knowledge in the philosophy of economics and finance. He is has written several pieces and analyses of the impact of decisions taken to the future of development economics.