New EIB Study on Banking in Africa: Delivering on Financial Inclusion, Supporting Financial Stability

The European Investment Bank has released its new study: ‘Banking in Africa: Delivering on Financial Inclusion, Supporting Financial Stability’. In its fourth edition, this economic report analyses recent development in the African banking sectors, including through a survey of African banking groups, addresses structural issues and investment opportunities for the continent and proposes policy options for all stakeholders. The report also portrays the state of bank recovery and resolution laws in Africa and maps out policy options to finance infrastructure development. Finally the study explains the type of financial support and technical assistance that the EIB can offer to financial sectors in Africa.

EIB Head of the Country and Financial Sector Analysis Division, Barbara Marchitto said: “As this publication has highlighted, private enterprises across Africa struggle to access finance for productive investment, particularly at longer tenors. Smaller, younger firms and innovative companies are often the most affected. Many of the concerned firms are likely to grow, innovate, and sustain and create employment if they can access appropriate finance. The EIB reaches out to African private sector firms via financial intermediaries: local or regional banks, financial institutions or funds, and many receive support such as Technical Assistance alongside an EIB loan. This means that these operations help to strengthen both the firms receiving funding and the local and regional financial sectors.”

The study combines in house research with contribution from leading market experts from commercial banks operating in the region, International Financial Institutions and other institutions.

Here are the main findings:

Sub-Saharan Africa is recovering from the most severe growth slowdown in two decades. Recovery is vulnerable and is expected to remain uneven across countries. While the region’s growth in per capita gross domestic product has been positive since 2017, it will remain insufficient to significantly reduce poverty. Rising public debt burdens are fuelling debt sustainability risks, while tighter global financing conditions and weaker than expected commodity prices pose additional downside risks.

North African countries are currently undergoing a prominent economic transformation with efforts towards regional integration and inclusion. The economic outlook for North Africa remains positive, thanks to considerable structural and macroeconomic reform efforts. Nonetheless, the region should continue its efforts to strengthen inclusive growth and create sustainable and quality jobs. Financial intermediation is fairly developed in North Africa, although non-bank financial institutions are still at an early stage of development. Nonetheless, microenterprises and SMEs need to have better access to financial products and services, despite the notable progress already made. A large share of enterprises appear to be “disconnected”, shutting themselves off the financial system and missing opportunities to invest and expand, even when they operate at full capacity.(1) Small and innovative firms often find it difficult to obtain credit.

In many Sub-Saharan Africa banking markets, the last two years saw a pause in financial deepening but systemic crises have been successfully averted, demonstrating the improved resilience of the financial systems. However, non-performing loans are on the rise and capital adequacy and asset quality have deteriorated since the last full edition of this study in 2016. Advanced economies’ banks have been withdrawing from the region, and regional banking groups have consolidated their presence. Smaller domestic banks have been too preoccupied by the difficult economic situation to take advantage.

Despite more than a decade and a half of financial deepening in nearly all Sub-Saharan Africa countries, banking sectors still need to catch up with other regions. Access to finance still tops the list of constraints for SMEs in Sub-Saharan Africa, notably due to increased banks’ holding of sovereign papers in recent years. Although International Financial Institutions have developed programmes to offer portfolio guarantees to commercial banks for SME lending, a significant portion of banks’ needs for portfolio guarantees is still unmet.

On the supply side, however, the study reveals a push for new technologies. Half of the banking groups report being fully deployed in terms of general IT infrastructure but the majority of them are in deployment and planning deployment in terms of internet-banking technology, mobile banking and FinTech.

The importance of strengthening the legal, regulatory and supervisory super-structure of Sub-Saharan Africa’s and North Africa’s financial sectors to promote financial intermediation cannot be overstated. Working out non-performing loans and resolving banks that cannot return to profitability will be key to underpinning the confidence that is necessary for private investment in Sub-Saharan Africa. Requiring banks to prepare recovery and resolution plans and introducing well-defined recovery floor would reduce uncertainty for investors.

As financial inclusion for individuals and microenterprises advances, new challenges will emerge that will need to be addressed to ensure that financial deepening is fair, broad-based and sustainable. Consumer protection will be key to maintaining the confidence of first-time depositors and financial service users and to ensuring a level-playing field with regulated players.

As African economies continue to recover, the opportunity to deepen the regions’ financial sectors and promoting inclusion should not be missed. Broadening investor base and bringing down the financing needs of governments through fiscal consolidation and structural reform can free up space on banks’ balance sheets. Enhancing banks’ capacity to assess risk and monitor their clients would reduce the perceived risks and facilitate financial intermediation. Helping clients to identify and present bankable projects would also raise lending to the private sector.

Private sector development will require technical assistance and knowledge transfers, not just financing. Development partners could help to crowd-in capital and support private sector development by offering innovative financial and policy instruments, including FinTech, portfolio guarantees and bankers’ academies.

Moreover, financial sector deepening can help to address the continent’s important infrastructure bottlenecks. Infrastructure needs are particularly high in energy and transport and new needs arise from rapid urbanisation, population and economic growth. Private investors can play an important role in financing vital infrastructure in Africa.