Africa today is the world’s youngest continent, with a growing population and several fast-growing economies, but significant challenges, including the need for regulatory reform in banking and finance. Global Finance recently sat down with representatives of three financial institutions, including two development banks and one commercial bank, to discuss banking and the role it plays in Africa’s economic growth.
The conversation followed up on our discussion last year of the exit of some foreign banks from African markets and the new emphasis this places on the expansion of domestic banks, including pan-African institutions. We also discussed the continent’s progress at developing capital markets, banks’ efforts to develop a climate finance market, and the continuing need to upgrade infrastructure, so that it can support a larger financial sector.
Global Finance: Last year, we discussed the departure of a number of high-profile foreign banks from Africa. What challenges does the continent face with regard to getting them back—and building a more robust banking sector in general?
Paula Leynes Felipe: In many of the markets where we work, there’s a recognition of the need for reform; countries are aware that only through a robust, well managed banking system can outside investment be attracted back. One good recent example is in Ethiopia, where the central bank recently promulgated a number of new regulations that have made the foreign exchange market more competitive. That, plus other reforms, are expected to drive interest from investors.
We at the IFC, together with our World Bank counterparts, are very active in providing our support to reforms that will strengthen the financial sector.
Admassu Tadesse: It’s a good question whether the tide of exits is abating or not; we saw another European commercial bank exit from South Africa a month or so ago. And so the trend continues. I think the time has come when we need to start talking about the global cost of business in terms of Africa. Because global regulations have become very onerous and an obstacle for many banks. It’s not because of what’s happening in Africa, but it creates very strong disincentives for international banks to serve banks from low-rated jurisdictions. And I think this requires more attention. Globalization has had very good effects in terms of improving connectivity over the years, but now you’re seeing a pullback.
We’ve stepped in, like other international banks, and have made efforts to bridge the gap, but the scale of the challenge remains significant. We can’t quite cover it. You even see it in terms of ratings, where the jurisdictions continue to be under heavy pressure, and there’s a lot of debate around whether something is being missed there.
The continent has started to rebound in terms of growth; 2024 will be better than 2023. But we’re still sitting at the 3% levels. That’s not enough, given population growth, and so I think we’re too comfortable with lackadaisical performance. Without attracting more investment and getting fixed capital formation to happen, it’s just going to be a very difficult situation. We have a demographic dividend that’s very attractive; everybody talks about the future where one in four people in the world will be African. But for that to be a good story, we need to make sure that those growth levels come up, and money and finance is the lifeblood of growth.
We also have a problem with perceptions being made even worse by regulations. If you’re a global bank, and you get fined $10 billion for one thing that went wrong, obviously it’s a huge disincentive.
GF: What challenges do domestic banks face in attempting to fill the gap?
Tadesse: For the past 20 to 30 years, we’ve seen an explosion in the growth of pan- African banks, and I think that trend continues. They’re getting stronger and bolder, and some of them have even made the right decision, in my view, to exit other emerging markets and consolidate their pan-African positioning.
A much bigger challenge, however, is access to medium to long-term funding, and we know that the growth agenda of Africa depends on creating long-term assets in infrastructure and industry, the corporate sector, and small- to medium-sized enterprises. The bottom line is, we don’t have enough savings in Africa. The Asian ecosystem can finance itself because they’re saving 30%, 35%, even, in some cases, 45%. That surplus is able to be intermediated, and you don’t need to rely so much on foreign savings. We need foreign savings.
GF: The other principal source of investment is capital markets, but in many African economies, they are still in their infancy. Privatization, in some cases, is helping to kick-start the sector. How is this playing out in your markets?
Fábio Eurico Correia: Angola, at this point, has one of the most developed markets in Southern Africa, but our financial assets amount to more or less 7% of South Africa’s. In regard to country comparisons, South Africa is a huge financial market, accounting for US$400 billion. Second is Nigeria with US$150 billion, and third is Kenya, with around US$48 billion. Fourth is Angola, with US$27 billion. This is for fiscal year 2023. So we are fourth in the Sub-Sahara, and looking to Nigeria and to South Africa, which are the big brothers in our region.
The state has been selling state-owned companies; when the operation was complete, it totaled more or less $50 million: not a huge amount, but it gave a lot of confidence, because it was totally liquid. Other means of doing these transactions are not so liquid; they involve letters of guarantee, other banks, other interim carries. There is a lot of work to be done going forward.
Felipe: The capital markets are a big focus for the IFC, and we recognize that they are at various stages of development across the continent. Generally, you have a limited investor base, a lot of which are large banks. There is also the need for capacity building for the issuers themselves, as well as the framework around capital markets.
In our role as a development institution, we try to provide support for markets. Currently, we are working closely with the Ethiopia Capital Markets Authority in launching a capital markets framework there.
GF: Ethiopia is launching an equity market.
Felipe: In November. They recognize the potential of utilizing the capital markets to generate long-term financing. We have teams in both Ethiopia and in Rwanda, supporting the government in developing a legal and regulatory framework that will incentivize investors to participate, since it’s very important to have transparent principles by which these capital markets operate, and also visibility to investors. We’ve also participated in some interesting transactions, particularly in Tanzania, both with NMB Bank and CRDB Bank, where we anchored their bond issuances, which are focused on sustainability and climate finance. We see the capital markets as a way for financial institution issuers to introduce important thematic areas for investors to participate in.
Tadesse: Capital markets are indeed an area of growth. Stock markets have really expanded in number on the continent; today, we have not far from 30. Of course, the problem is that they’re not deep, and they’re inactive, generally speaking. It’s one thing to get them up and going; it’s another to get significant activity to happen. There have been some lessons learned. One of the advantages of the South African exchange is it combines equity and debt instruments. Even if you have a lull in equity, you could have significant fixed income activity, or vice versa. There’s always going to be liquidity, because in many cases, if you’re able to integrate the banks themselves to do interbank lending through the exchange, then that is a regular flow that keeps the exchange active.
But that doesn’t address the underlying issue that there just are not enough firms with listings. In the case of Angola, some state-owned entities are now moving to list. In the case of Ethiopia that you mentioned, 10% of the largest telecoms company [Ethio Telecom], which is owned by the state, is going to be listed.
It’ll take time, of course, for all of this to build up critical mass. The foreign or non-domiciled investors have exited some of these stock exchanges, because, when you’re a foreign investor and you come into a stock market, you’re facing exchange rate risk, and you’re also facing the dynamics around interest rates.
Correia: Local interest rates have risen 20% to 25% range; but in the other hand, these equity investments, in certain private and local companies, are not tied to country risk/bond pricing as we knew it; and therefore, can surpass inflation and state bond securities yields. Thus, it’s a matter of carefully analyzing sector and company opportunities.
Tadesse: I think the good news is inflation is cooling worldwide, but it was 7.1% last year, and that’s been a big problem, frankly, for many of our exchanges. You actually had massive outflows; I’ve seen some countries where it was scary how much outflows there were. But this is why the whole question of the business environment is so important.
We had an experience not long ago where we helped a local investor list a company in a very small African country, and it was a very exciting moment, all the bells ringing and so on. But because the market was not active, even though the company was profitable and the valuation was going up, the stock price was not moving on the exchange. And now they want to delist. They have some holders of the equity who want to exit, but now you have an exchange, and the price is determined by the exchange. But for you to exit two years after you invest, you want to see the profits that have been retained, reflected in the price.
GF: Otherwise, it’s a loss.
Tadesse: Otherwise it’s a loss. You have to have a capital gain. These are some of the challenges we see. If you’re on the exchange, you’re subject to market forces, and if there’s no movement, you have a static price.
But I must tell you, we were very excited about the Ethiopia exchange, and we bought 10% of it, and we’ve been seeing some interesting developments. And so, it’s a question of size.
GF: Climate finance is attracting more and more investor attention. What is your perspective?
Felipe: It’s high-priority for the continent. IFC has committed to align 100% of new investments from July 2024 with the Paris Agreement. In the last fiscal year, IFC’s climate commitments in Africa totaled $2.69 billion, included $1.51 billion in own-account investments and a further $1.18 billion in mobilization. In addition, we also committed a record 29 investment transactions that are focused on gender; we feel gender financing is beyond diversity. It really is good business for banks.
In South Africa, between 2020 and 2023 we deployed about $1.6 billion in climate finance, and we strongly supported the green build-ing industry there, through our “Scaling Up Climate Finance in the Financial Sector” program. We’re working right now with the Johannesburg Stock Exchange as part of this program as part of our comprehensive approach to promote climate finance.
We’re also working with the Banking Association of South Africa to raise awareness and attract banks to the opportunity of investing in climate finance, including through the capital markets. Elsewhere in Southern Africa, we recently did a pioneering capital market investment in Madagascar.
There are many aspects of climate that are now getting a lot of attention from banks: not just green building, but renewable energy and sustainable finance. As it broadens out, it cuts across many of our activities on financial inclusion at IFC. In Egypt, we’ve collaborated with the Central Bank of Egypt in addition to Commercial International Bank and others, promoting climate finance.
In smaller markets, we’ve also started working on raising the awareness. What we’ve seen over the last few years is that financial institutions view climate finance as not only sitting somewhere in their CSR [corporate social responsibility] activities, but really being a significant business line for the bank. So that’s what we’re trying to replicate across the markets. There’s a clear demand; the climate finance gap in Africa runs into the hundreds of billions of dollars per year, both for mitigation and adaptation. There’s definitely a role for financial institutions to support that. The important thing is for financial institutions to be able to use the right credit perspective in assessing these financing opportunities.
GF: You mention South Africa and Egypt as two flagship countries for climate finance. Is it growing in other countries where the IFC is active?
Felipe: In West Africa and across all regions, because banks see the opportunity for this, especially in countries where the government laid it out as a primary objective. The financial sector plays a big role in realizing these objectives. The challenge for ourselves is, how we replicate this in other markets so that they also benefit from what we’ve seen in these two flagship markets.
Correia: Our bank is starting to develop these programs. It’s not huge yet. It’s in its early stages. We have oil and gas companies, and we know that’s the biggest impact they have. As a banking entity, we have a small part of the overall worldwide impact. But still, we have a role, mainly in financing new developments. These companies must comply with the government’s requirements—that is, the Ministry of Environment, etc. So they must be approved.
Tadesse: There are some exciting developments, clearly, where various institutions and partners are trying to help Africa move up in getting some significant financing going. But if you look at the numbers, the commitment so far is $300 billion, and the estimated amount required to achieve the continent’s climate action plans of is $2.8 trillion.
GF: Less than 12%.
Tadesse: Exactly. There’s a huge opportunity to leapfrog. South Africa and Egypt are, of course, the flagships, because they’re the biggest emitters in Africa. But there needs to be much more effort to ensure that the other countries embark on a greener path as they industrialize.
The bottom line is, if we don’t get carbon credit markets to work, the countries that are not involved in the production of carbon are going to say, “Well, there’s no credibility here.” But the voluntary side of the equation is nowhere near what needs to happen.
I’m hoping that in the years to come, we can use carbon credits as a key to unlock green development in Africa, because countries like the Democratic Republic of Congo (DRC) have massive carbon sinks. They can make a huge contribution to the reduction of the global greenhouse gas problem. But again, every strong economic concept is not being unlocked in practice.
Felipe: There’s one more thing to add. If you want financial institutions to participate, from a risk perspective, they need to understand what exposure they’re taking. We’ve seen a number of regulators mandate having good climate risk assessment frameworks for banks to employ in these types of transactions. But if we’re going to look at this as a business, it has to be aligned with how the rest of the institution looks at their own lending portfolio. That kind of rigor, but also being cognizant of the specific factors that drive climate risk, has to be part of the banking discipline in growing your loan portfolio. And it’s not there yet. It’ll take some work for banks to be in a place where they have the capacity to assess this in the right way. But also, again, part of what we do within IFC is we try to get banks on that path of understanding climate risk and incorporating it in their overall credit risk management framework. Because, again, it’s going to affect the overall asset portfolio at the back.
GF: Non-African observers are particularly interested in African efforts at greater economic and market-centered cooperation and integration. What is the status of these efforts?
Tadesse: One positive thing that came out of these last few years of shock after shock—poly-crisis, as they refer to it—is Africans have realized that the one thing that they have control over is integrating their own economic space: to create a more attractive environment for investment, but also to enable Africans to be a bit more resilient in the face of a lot of uncertainties at a global level. The treaties that have been in the headlines recently—the African Continental Free Trade Area is one—are intended to help the whole continent create a much stronger value proposition for investors.
I talked about small countries that had difficult experiences with listing. Imagine creating a combined capital market for Africa. Companies in a lot of these small countries could list on a continental exchange, as opposed to tiny, small exchanges. And it applies to other markets, not just capital markets.
There’s a lot of movement in that direction. Of course, the big countries sometimes are not as committed, because they know they already have the scale, so it’s the small countries that are sometimes pushing harder. But the treaties are getting much more attention—for example, on free movement. There are subregional arrangements where people don’t need visas to travel anymore; countries like Rwanda, Mauritius, and Seychelles have abolished visas.
But of course, it’ll take time, and we need industrialization to happen. For Angola and the DRC to trade, one of the two of them needs to have something the other doesn’t have. And the problem is we don’t have enough diversification of the economies. But export processing zones and industrial development zones are being pushed. And of course, energy is critical to all of this, and the climate agenda. Because if we don’t have a transition framework that allows African countries to build affordable energy, industrialization will be prohibitive.
But I’m very excited about the prospects of green hydrogen and some other new technologies, if we can unlock it. And I think countries like Namibia, Mauritania, and Senegal will be in a position to take advantage.
Correia: I will give you a qualitative answer. For green energy to really get to a usable scale, infrastructure, communications infrastructure, and ease of doing business will be the key factors. Angola’s neighbor countries, from north to south, are the Republic of Congo, the Democratic Republic of Congo, Zambia, and Namibia. But for me, it’s easier to go to Dubai, Portugal, or Brazil. If we really want to increase this network of help within African countries, it must be easier to travel.
