European Investment Bank (EIB) have released their annual Finance in Africa report which examines developments in Africa’s financial sector through banking specific practices.
A survey of 33 banks in Sub-Saharan Africa from April to June 2023 delves into how war is affecting business and their views on climate lending, digitalisation of the financial sector and access to finance for women.
The report contextualises why 2023 has been another challenging year for Africa. The combination of a slowing global economy and tighter global financial shocks are exacerbating the shocks caused by the COVID-19 pandemic and Russia’s invasion of Ukraine.
These shocks are causing high inflation rates which have a severe impact on poor people, increasing the cost of essential products like food and energy. Recent events have pushed the number of people living in extreme poverty from 444 million in 2019 to 497 million in 2021.
Financial conditions and the private sector
The report develops a financial conditions index for Africa that gauges the tightening of financial conditions since the onset of the pandemic. Individual indices were constructed for Nigeria, South Africa, Egypt and Kenya. These were then combined to provide an overview of the financial conditions at continental level.
The index shows that financial conditions loosened after the pandemic’s onset because of lower policy rates and resilient stock markets. But, from mid-2021, there was a significant tightening in financial conditions as inflation increased. Although financial markets are not as tight as they have constricted in past episodes, the deterioration from an extremely loose position in 2021 suggests increased difficult in accessing finance.
A growing share of public debt on bank balance sheets has affected the credit availability of the private sector. The report updates “the so-called severity of crowding out” index, which shows intensified crowding out since the pandemic as public finances have come under pressure.
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This has increased the need for banks to finance governments and compete with rising demand from the private sector. There is a variation at regional level though, with crowding out pressure highest in East Africa and lowest in North Africa.
Global risk aversion in 2022 severely affected private capital (in the form of private equity and venture capital) fundraising in Africa because of an increased global risk aversion. But, private investment remained strong, decreasing only 3% to $6.3 billion in 2022, remaining close to the all-time high set in 2021.
A considerable portion of private capital investment is concentrated in South Africa, Egypt, Kenya and Nigeria, accounting for almost two-thirds of all private capital investment into the continent.
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Digitalisation and gender specific banking practices
Banks in Africa are embracing the digital era, providing digital services as a core offering with only a few providing no digital services at all. In addition to transforming their own digital infrastructure, 90% of banks are also reforming their organisational structures to better suit the delivery of digital services.
Analysing firm-level data shows that during the COVID-19 pandemic, female-led businesses were hit slightly harder than male-led businesses in terms of sales losses and liquidity problems. Post-pandemic though the female-led businesses showed similar resilience to their male-led counterparts, with comparable rates of permanent closures and bankruptcy.
The data shows that well-managed enterprises are more likely to be led by women. Female-led firms tend to invest in innovation, export goods and services and offer employee trainings.
The EIB Banking in Africa survey showed that 65% of banks have a gender strategy in place and another 19% plan to implement one. This means only a small minority of banks in the region will lack a gender strategy in the future.
And, it turns out that banks in Africa continue to observe better asset quality when it comes to female lending. More than half of the sampled banks reported a lower rate of non-performing loans among women than men.
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Climate finance landscape in Africa
While Africa has seen a rise in climate financing, its share of global climate financing remains at around 5%, primarily concentrated in the continent’s largest economies.
A defining feature of Africa’s climate finance landscape is its heavy reliance on overseas and international funding (accounting for almost 90% of total climate flows). This dependence is shaped partly by the role played by multilateral developments banks which financed 45% of climate investment on the continent in 2020.
Local financial institutions use balance sheet debt financing and market rate project debt as their two main instruments to finance climate projects.
Reviewing climate risk on bank balance sheets the EIB report analyses the exposure of domestic banks in 21 African countries to sovereign debt, household debt and debt from various industrial sectors through the climate riskiness score of each type of borrow.
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Climate risk
Of the 31 countries studied, 13 have high country physical risk scores. This means physical risk is of greater concern for banks in Africa than transition risk, which is mitigated by current low emissions levels. Physical risk exposures for banks are highest in West Africa and lowest in Southern Africa.
The survey also showed that 59% of banks already have a climate change strategy in place and a further 22% plan to introduce one. Further, 65% of banks currently consider climate risk when evaluating new clients and projects, with 23% planning to follow suit.
“However, it is important to support local banking sectors when they introduce or expand green product lines, and banks continue to seek technical assistance to fully leverage the potential of these new business opportunities, benefitting both themselves and their potential borrowers,” read the EIB report.
Find the EIB’s Finance in Africa report for 2023 online
