SMALL, ENCLAVE and with few natural resources, Rwanda has no obvious path to wealth. But a new international financial center in Kigali, its capital, offers a clue to the government’s strategy. It promulgated new laws to encourage investment and signed agreements with financial centers as far away as Morocco and Belgium. The idea is to “position Rwanda as a gateway to the rest of Africa”, explains Nick Barigye, Managing Director of Rwanda Finance Limited, the agency which is piloting the project.

Listen to this story

Enjoy more audio and podcasts on ios Where Android.

Kigali (pictured) is one of many cities in mainland Africa trying to become financial hubs to capture some of the business that is currently flowing through offshore hubs such as Mauritius. Kenyan officials have signed an agreement with the City of London as part of a plan to launch a financial center in Nairobi. Ghana is in the process of drafting laws to create its own; Sampson Akligoh, adviser to the finance minister, says Accra can become a hub for everything from pension funds to private equity firms, like a Singapore for West Africa.

Jet-set financiers have spread the gospel of free capital and low taxes through consultant reports and study tours. Advice also comes from donors such as CDC Group, the UK government’s development finance arm. Colin Buckley, its head of external affairs, says it’s good for development because foreigners are more confident to invest in countries with strong financial centers. Residents can also learn new skills.

The architects of these potential clusters speak of building a financial “ecosystem”, with expertise in law, accounting and business services. “We tried to move away from the idea that this is just a business district or an iconic tower,” says Vincent Rague, president of the Nairobi International Financial Center. He boasts that Prudential, a UK insurer, will be the first company to set up in the hub. A thriving local center, he says, would make it easier for borrowers in the region to issue bonds close to home. Its partnership with the City, meanwhile, would help companies listed on the Kenyan stock exchange access foreign capital by allowing them to also list their shares in London.

But nurturing this type of ecosystem takes time, expertise and political will. Kenya has been talking about a financial center for almost a decade. The presence of established hubs serving Africa, whether in Mauritius or Casablanca, makes it more difficult for new entrants to enter the market. “The competition isn’t just African,” says a partner in an Africa-focused private equity fund. “It’s global.”

One of the ways the centers compete with each other is to lower taxes for businesses that set up there. But it can trigger “a race to the bottom,” warns Chenai Mukumba of Tax Justice Network Africa, a pan-African campaign group. He goes to court to challenge the tax benefits offered by Rwanda and calls for a temporary shutdown of central Kenya until its tax and transparency rules are tightened. When Ghana first attempted to open an “offshore” banking center in the late 2000s, the project collapsed and the country was blacklisted by the Financial Action Task Force, an international body. money laundering monitoring. None of the three countries are among the 130 that have recently signed up to a OECD, a club mainly of rich countries, to set a floor of 15% on corporate tax.

Each center offers its own set of investment incentives. In Rwanda, this includes a base corporate tax rate of 15% which can go down to 3%. It does not tax dividends, interest or royalty payments. Mr Barigye says the investments will be “clean and compliant [with] global standards ”. The government has strengthened its laws on money laundering. Investors will need to show that they are more than just setting up mailboxes, but establishing a real presence in the country.

Even with the allure of tax breaks, the odds seem against the new centers. A fund manager at a European bank doubts that the new African financial centers “are getting very big”. But Mr Rague points out that it has taken cities like London hundreds of years to become the global financial leaders that they are today. If these projects are successful, he says, “we will contribute to the maturity of Africa”. â– 

This article appeared in the Middle East and Africa section of the print edition under the title “Capitals”