Why DRC is a magnet for Kenyan firms

A growing list of Kenyan companies are looking for investment opportunities in the Democratic Republic of Congo (DRC) shifting focus from the East African Community.

This as the mineral-rich economy turns out to be a fertile hunting ground for top firms, with the World Bank and the African Development Bank tipping the nation as the next frontier for growth.

Firms with an eye on the country include insurer, Jubilee Holdings which has applied for a licence to set up a composite underwriting business as a strategy to boost its earnings, which grew by nearly a fifth last year.

Others are Equity Group which recently pointed to the strategic importance of its DRC’s subsidiaries to its future growth and KCB, which has kicked off a plan to enter the country through acquisition of an existing lender in the next four months.

But why are the Kenyan corporates and President Uhuru Kenyatta’s administration coveting Africa’s top copper-producing country?

Beyond the troubling media headlines and the reminders of a bloody past, the country’s economy has been performing almost unscathed before the Covid 19 pandemic set in.

Except for a slump in 2009, when it grew by only 2.8 per cent, expansion has averaged 7.7 per cent over the last five years.

According to the World Bank, this is “well above the average in sub-Saharan Africa.”

With a surface area equivalent to that of western Europe, the DRC is the largest country in sub-Saharan Africa offering huge untapped opportunity for access to one of the world's last economic frontiers.

It is endowed with exceptional natural resources, including minerals such as cobalt and copper, hydropower potential, significant arable land, immense biodiversity, and the world’s second largest rainforest.

According to Verdant Capital, a pan-African investment advisory firm there is a significant untapped potential for DRC given its 85 million potential consumers, mineral resources, fertile agricultural land and potential for political renewal.

The DRC was ranked 184 of 190 countries in the World Bank’s 2019 Doing Business report.

DR Congo has 19 licensed banks of which five are local, four pan-African and nine foreign while bank penetration still remains low at around six per cent placing the country among the most underbanked nations in the world.

Of an estimated 65 per cent of the population that saves, only 4.7 per cent do so through a bank providing a huge opportunity for foreign banks.

This fact was admitted recently by Equity Group chief executive James Mwangi when he pointed to the DRC as a crucial player for the future of the bank.

“DRC business will fundamentally change Equity Group. DRC at the moment contributes 27 per cent of the group balance sheet and is growing at about 60 per cent annually and may overtake Kenya between the third and fifth year,” said Mr Mwangi.

“Even in profitability, DRC will start rivalling Kenya and rise above on profits and balance sheet size eventually. DRC has quickly made us a market leader in financial services both in balance sheet and profitability as well as customer base.”

“Given the momentum of growth in DRC, the possibility of standing out and becoming more attractive is so near. Equity should now be trading at the same rate as Capitec Bank of South Africa,” said Mr Mwangi

The African Development Bank has noted that normalisation of political situation and a new determination to reform and fight corruption in the Central African nation has instilled a climate of confidence, promoting new private investment in sectors that drive the economy forward.

The World Bank argues that with 80 million hectares of arable land and over 1,100 listed minerals and precious metals, DRC has the potential to become one of the richest economies on the continent and a driver of African growth, if it can overcome its political instability and improve governance.

Last year, DRC formally applied for admission to the six-member East African Community currently comprising Kenya, Tanzania, Uganda, Rwanda, Burundi and South Sudan. Before the DRC can fully join the EAC there is a verification process which has been completed and thereafter a presentation to the EAC Heads of State for acceptance.

An admission could expand the opportunities for DRC and its neighbours like Kenya for trade and investments.

Liberalisation

Other than the general benefits of liberalisation there are direct benefits due to the EAC treaty.

The first benefit is elimination of barriers to trade. For example, taxes are harmonised making it easy to export goods to the DRC and import goods from there for Kenyan firms.

In terms of trade, DR Congo accounts for about six per cent of total exports from the EAC countries.

Kenya recently signed crucial agreements on transport, security and trade with the Democratic Republic of Congo, signalling a push to improve low figures of business between them. After a bilateral meeting between President Kenyatta and his host Felix Tshisekedi, the two sides recently signed a new deal to handle cargo from the port of Mombasa that grants the DRC certain privileges for using Kenyan facilities. Kenya also offered to open diplomatic outposts in Goma and Lubumbashi in eastern DRC in what President Kenyatta said would ease consular services for traders.

The move came as Kenya indicated a wish to improve its trade with DRC from last year’s Sh1.8 billion, 70 per cent of which were goods sold to eastern DRC.

And, despite the country relying on eastern Africa sea ports for imports, Mombasa handles less than 15 per cent of the share of goods sent to DRC, with Dar es Salaam and Beira in Mozambique getting the bulk.

“I believe that our commonality gives us a very good opportunity for us to deepen our relations further as we work together to achieve these objectives for the people of our respective countries. One thing I’d like our two [technical] teams to work on is to ensure that we ease the problem of our people being able to travel between our two countries,” said President Kenyatta.

The DRC may not be the most developed country in the Great Lakes region, but its vast and varied mineral resources present huge development potential. The country is a major supplier of cobalt, copper, diamonds, coltan and tin to global markets.

While minerals such as copper, diamonds and tin are well known to the general public, it may not be the case with cobalt and coltan. Yet fights over access to these important resources have been one of the causes of the long and simmering instability in the DRC.

Peace bids

Kenya has traditionally supported peace bids in DRC, which has endured perennial wars. In 2013, Kenya hosted Congolese parties as they signed a peace accord with the rebel group M23.

Nairobi sees DRC’s fledgling stability as good ground to expand business opportunities.

In spite of weakening global economic growth and a fall in both demand and price for minerals, DRC’s economy is expected to remain resilient, according to the World Bank, because of the increase in public and private investments, particularly in infrastructure,

At the same time, signs of the country’s transformation can be seen in the capital, Kinshasa, and other major cities, from improved road infrastructure to multiple building sites and towering cranes across the city.

High returns on investments is another key reason for investing in the DRC and the region. While no specific figures are available for potential investors, a 2014 DRC country mining guide by KPMG, a global financial consultancy, says DRC’s mining sector presents a “high-risk high-return opportunity.”

While the conflict in eastern DRC is unlikely to end soon, the country’s economic prospects remain positive.

The Congolese economy is expected to rebound in 2021 and 2022 if the world economy does, which assumes a subdued pandemic according to African Economic Outlook 2021 by the African Development Bank.

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