Gambling is booming in Africa, driven by the growth of online betting. What are the opportunities for investors and what are the challenges for regulators?
On a late September afternoon in the north of England, two football teams known neither for exquisite play nor world-beating stars eked out a hard-fought stalemate under the autumn floodlights. For generations, locals have watched Hull City play Middlesbrough to little fanfare, an afternoon at the football promising a weekly diversion from life in these tough industrial towns. September’s game was indistinguishable from thousands of prior contests, delivering a goal apiece, five bookings, and limited entertainment. In years past, the result would have reached no further than the back pages of the newspapers.
Yet in 2018, over 4,000 miles away in Kenya, thousands of viewers paid close attention to this second tier contest. Staring into their smartphones or craning their necks to watch the game amid the bustle of a betting shop or internet café, they hoped and prayed for a goal, a moment of brilliance, that would make or break the weekend. Why is so much interest placed in the clashes of mid-level English football clubs? A clue lies in the brand emblazoned on Hull City’s shirts. SportPesa, a Kenya-based sports betting operator that also sponsors Everton FC, is one of the most successful players in Africa’s booming sports betting market. This young, brash, multi-million dollar sector is mushrooming in size and capturing African imaginations and wallets.
From unemployed grifters in Dar es Salaam to office workers in Lagos, sports betting offers punters a shot at instant wealth by piggybacking off the continent’s obsession with football. But it’s not only football betting that is booming in Africa. Casinos, lotteries, and internet gaming are taking off as economies grow and the emerging middle class look for entertainment. Increasing internet penetration and the popularity of smartphones and online payment systems offer an unparalleled opportunity for firms to reach middle-class consumers far from the smoke-ridden dens of the past.
A 2017 survey from GeoPoll found that 54% of young people in six sub-Saharan African countries (Nigeria, South Africa, Ghana, Tanzania, Uganda and Kenya) have tried gambling. Kenya has the highest number of youths who have participated in gambling or betting at 76%, followed by Uganda at 57%. The Kenyans surveyed bet on average once a week, mostly on football, spending around $50 per month. “The general proposition is that Africa has a fairly young population. We’re seeing tremendous growth in certain territories… more people are getting connected online and mobile banking apps are very prolific. Payment systems, particularly in Nigeria and Kenya, are very well developed,” says Garron Whitesman, a gambling sector lawyer at Cape Town-based Whitesmans Attorneys.
“I absolutely think it’s poised for growth and will continue to grow – one really only has to look at the interest that operators are expressing, the efforts that operators are making.” While gambling firms and local governments salivate over the prospect of new revenue streams, the rise of gaming offers unique challenges. Many governments struggle to police a notoriously complex sector that confounds even developed markets. Emerging technologies offer unscrupulous operators a chance to bypass regulators and target consumers from distant servers, while resources to treat problem gambling are limited. Critics say that an unregulated, lightly taxed industry risks consigning millions of Africans to a life of debt while imposing huge clean-up costs on governments.
“Corruption levels have tended to create a scenario where there is a perceived benefit to quick and easy money. Strong advertising by providers shows instant millionaires. That’s an incredibly attractive proposition for those who need hope because of high unemployment,” says Victor Owuor, an industry critic and senior research associate at OEF Research. “My issue with sports betting is that it’s mushroomed into something unimaginable… until you go to the continent it’s hard to describe, because the prevalence of it is clearly the biggest danger.”
Spinning the wheel
South Africa, so often a bellwether for trends on the continent and for decades its most advanced gaming market, provides a glimpse of the regulatory challenges that African governments will face. The country is no stranger to gambling. For decades, luxury casinos served a wealthy corporate elite. The once notorious Sun City resort northwest of Johannesburg – an international symbol of the apartheid regime where performers such as Frank Sinatra commanded million-dollar fees to perform for mainly white audiences – is now just one of the 38 licensed casinos that raked in R17.9bn in gross gambling revenues in 2016.
In the townships of Cape Town and Johannesburg, thousands of licensed and illicit betting outlets capitalise on the zeal for sports betting. According to consultancy PwC the South African sector made a total of R2.9bn ($203m) in 2016 and this should grow to R5.2bn in 2020. Yet despite a relatively strong regulatory system inclined to liberalism, South Africa is mired in a long-running debate over how best to deal with the rise of online gambling. While sports betting is embraced, online games usually associated with casinos, including poker and roulette, are banned. Stephen Louw, a senior lecturer in politics at the University of Witwatersrand, and a former member of the national Gambling Review Commission and the Gauteng Gambling Board, says that regulators are inundated with challenges as the market mutates.
“In South Africa the problem is massive because in order to get a gambling license a lot of crafty engineers and lawyers have invented new products that don’t easily fit into the old categories, that aren’t obviously casinos or betting. They’re developing innovative platforms that are hard for us to comprehend and regulate in terms of the traditional categories of gambling. Twenty years ago games were quite distinct but nowadays everything is on an internet server and you can easily offer a variation of a game.”
For now, the government has responded by slamming the door shut on online gambling, despite a local government desire for gaming revenues and arguments that a blanket ban fuels illicit activity. But with a parliamentary portfolio committee asking for new submissions from the industry and other stakeholders, lobbyists believe that they may be on the cusp of a major breakthrough that could have Africa-wide implications for online gambling. “We may finally get somewhere in creating a licensing regime. If that’s the case I would think other countries in Africa may take a leaf from South Africa,” says Whitesman. “There’s never any guarantee, at the end of the day each country will have its own mores and comfort levels. But it looks like the tide is turning here.”
Across the continent, African economies are carefully eyeing Pretoria’s response to online gaming for clues as to how to proceed with their own regulation. For many, the current problem is not South Africa-style overregulation, but the untrammelled development of a “Wild West” in online and sports betting where early entrants have been able to dictate their terms of engagement. While that has sparked an exciting and entrepreneurial start-up industry in Nigeria and Kenya and minted several local champions, it has also led to a situation where regulators are playing catch-up with a constantly evolving market they fail to understand.
“Now that they’ve realised that the industry is moving from retail to online or remote gambling they are working on regulations and it’s a slow process,” says Nigerian gambling lawyer Yahaya Maikori of Law Allianz. “By the time you get all the stakeholders involved, come up with a draft law and get the legislative house to pass it, it can take two to three years… Key issues like data protection, money laundering, and where servers are located are still not being addressed at this level. There are many regulators that find themselves without requisite knowledge or experience.”
Maikori says that a vacuum of effective legislation has emboldened less salubrious operators, including opaque companies operating from lightly regulated domiciles, such as parts of Eastern European. Such companies pay scant regard to data protection and money laundering concerns, while an ability to base servers abroad can obscure the nature and scale of their operations. They seek to capitalise on little more than their early entrant status. Yet Maikori argues that these are the exception, not the rule, in a market that is increasingly attracting credible, well-regulated European brands keen for exposure to Africa’s demographics.
“Most of the established European firms have a reporting obligation to primary regulators… some of the big operators have to make a report of any income they make beyond a certain threshold. In the past year there are six or seven big European brands that have started doing business in Africa – Kenya, Nigeria and Congo… part of the work they are doing is ensuring best practices at home are also being applied locally here in Africa.”
Gaming companies licensed in the European Union already comply with stringent EU directives for money laundering. Less stringently regulated players could be edged out of the market or bought out as established firms enter, says Maikori. According to Digi-Capital, $28.4bn of mergers and acquisitions took place in the global gambling market in 2016, driven by the uptake of mobile gaming. With that trend highly likely to dominate in Africa’s industry, the chance of future M&A activity is considerable.
“For A-grade operators there’s so much focus on being regulated that the mindset of operators has changed to a regulatory model from a commercial point of view,” says Whitesman. “They are looking for licenses and looking to be regulated well… There are others who prefer the Wild West but I don’t think any decent operator is comfortable with that anymore. The change is clear and meaningful and applies to operators looking to go across Africa. The more you’re regulated and the more licenses you have, the more it helps you to realise capital value in your business.”
It is not just gambling firms that spy opportunity in Africa’s rise. Technology companies, video game developers and payment facilitators are all looking to muscle in on the new market, promising investment and job opportunities for the burgeoning industry. French content producer Gameloft, South African mobile network operator MTN and Greek lottery operator and gambling services firm Intralot have all partnered with local Nigerian companies to gain exposure to the market, according to PwC. Faced with such innovation elsewhere on the continent, Louw says that South African regulators need to modernise their approach.
“If you’re not prepared at a central level to move into the online regulatory space you’re making it very difficult to anticipate and respond to the new forms of gambling, because they’re all going to have an online component. We want to encourage people to move onto a regulated legal space and develop legislation that’s better able to understand the new types of games offered.”
If there is one thing that will persuade authorities across the continent to throw their support behind the emerging industry, it is the prospect of enhanced revenue streams flowing into public coffers. The South African industry contributed R2.7bn in taxes and levies in 2016 alone, say PwC. According to reports, the Kenyan government is targeting almost $300m a year in industry contributions.
In Nairobi, the reality of a rapidly expanding industry has sparked fierce debate about how much gambling firms should contribute to the fiscus. Following debates over the country’s 2018 Finance Bill in September, legislators eventually opted for a 15% tax on the gross profits of gaming firms after a hike to 35% in 2017 from an initial 7.5% on bookmakers. There will also be a new 20% tax on betters’ winnings. The government say that the increased revenues will be used to fund sports, culture and the arts. But while an increase in revenues is welcome for treasuries, there is a danger that a stampede for licensing fees could lead to the approval of harmful products.
“Gambling boards are inherently conflicted, they make their money by issuing licenses to allow people to gamble, so they have no inherent reason why they should try and restrict or curtail gambling,” says Louw. “Provincial gambling authorities [in South Africa] get to keep the tax money they raise from gambling… so it’s particularly important for them to grow those revenues.”
Questions over the fair dispersal of tax revenues get to the heart of the crucial debate over gambling in Africa – whether additional taxes at local or national level can ever make up for the perceived harm of an industry where losers will always outnumber winners. Critics see an unseemly rush to embrace an industry whose social outcomes, including problem gambling and indebtedness, are debated the world over.
“It’s already a problem among vulnerable populations and mostly the youth who are unemployed,” says Owuor. “You have a scenario where the youth are borrowing money to gamble. That’s a no-no because it’s a question of percentages and the house will always win. It needs to be studied more: gambling as a growing disorder. The tax may not be able to compensate for the problems we are seeing arising.”
Owuor urges African regulators to think about limiting aggressive advertising, introducing compulsory health warnings, launching mass education programmes on the dangers of gambling, and putting revenues into research and treatment for problem gambling. Facts about the reality and scale of problem gambling remain absent.
“The legal industry clearly do bring a lot of money to the fiscus, but there’s absolutely zero evidence to suggest the positive outweighs the negative,” says Louw. “I’m not saying there’s evidence to suggest the other way round either – we just don’t know. We hear repeated assertions by people from one side or another that gambling is predominantly good or bad, but there is no hard evidence. Regulatory authorities all over the world are extraordinarily negligent in understand the opportunity costs. We need to do research for a much broader understanding of harm.”
Nevertheless, those working to expand the industry in Africa insist that the continent is already beginning to benefit. Whitesman says that evidence shows that the vast majority of gamblers do not have a problem, while Maikori points to gaming revenues that the Lagos state authorities were able to use for a security restructure.
“If you look at the benefits, there’s no doubt about it, a new industry has opened up, there are new opportunities for entrepreneurs, affiliate agents and employment,” says Maikori. “The savvier the regulator, the more taxes – there are lots of taxes to be made from it. You look at the internet dividend that comes to local people because of gaming, there’s even infrastructure tax and office and retail store rental. So eventually the whole ecosystem will get bigger, and in the next three years I see Africans providing most of the services in this industry.”
While the problems cannot be overstated, there is little doubt that the industry offers exciting revenue streams and opportunities for governments, businesses and even the occasional lucky gambler. Whether those winnings will ever be cashed in will depend on the agility and intelligence of the continent’s regulators.