Finance in Africa 2023

Africa is facing another challenging year in 2023 due to a combination of factors, including a slowing global economy and tighter financial conditions following the COVID-19 pandemic and Russia’s invasion of Ukraine. These shocks have resulted in high inflation, affecting the poor most severely by increasing the cost of essential products like food and energy.

Despite a tough environment, banking in Africa continues to show resilience and a desire to support private-sector development. Key banking indictors, such as capital ratios, profitability and non-performing loans, have not deteriorated despite the challenges the region is facing. While pandemic support measures to bolster the African banking system may have initially played a role in this success, many of these measures have since been wound down. Most key bank metrics remain solid.

The results of the EIB Banking in Africa surveys have shown that banks’ concerns have changed over time. After the onset of the pandemic, the banking sector’s primary concern in 2021 was asset quality, which remains an issue for some banks. In 2022, however, new concerns emerged against the backdrop of rising inflation and higher domestic interest rates, which caused worry about local currency funding costs. These concerns have persisted despite rising bank profits from higher net interest margins. However, the 2023 edition of the EIB survey shows that banks are mainly concerned about the cost or availability of funding in foreign currency. This mirrors the situation in sovereign debt markets, where much of the debt is issued in foreign currencies like the US dollar.

Bank profits, however, are being driven by more positive than negative factors. Higher interest rates and higher business volumes are two of the biggest drivers. Issues with asset quality, a reduction in asset values and staff costs have been the biggest drag on profits. About 80% of banks expect profits to be higher in 2023 compared to 2022.

Half of the banks that responded to the 2023 EIB Banking in Africa survey wish to grow their lending operations at a faster pace over the next 12 months. However, banks are also exercising caution, and credit standards are expected to tighten. Funding could also be a constraint for banks wishing to expand their operations.

The report develops a financial conditions index for Africa based on individual indices for Nigeria, South Africa, Egypt and Kenya. The index shows that financial conditions improved after the initial shock of the pandemic, mainly because of lower interest rates and resilient stock markets. However, from mid-2021, a significant tightening in credit occurred as inflation increased, leading to a reversal of monetary policy and causing African exchange rates to weaken. This deterioration suggests increased difficulty in accessing finance.

Crowding out occurs when banks choose to put their money in public debt rather than lend to the private sector. The so-called severity of crowding out index, which we updated in this report, indicates that bank holdings of public debt grew in Africa since the beginning of the pandemic, putting pressure on lending to the private sector. The severity of crowding out was also driven in recent years by a recovery in gross domestic product growth from pandemic lows, which has fueled the private sector’s demand for credit. Crowding out pressures are highest in East Africa and lowest in North Africa.

Outstanding sovereign debt in sub-Saharan Africa (excluding South Africa) was more than 20 times higher in 2021 than in 2010 and seven times higher in North Africa. Hard currency sovereign bonds issued by sub-Saharan African economies are held by overseas investors, which makes these investments more prone to the flight of investors searching less risky assets. Sub-Saharan African debt is predominantly issued in US dollars, which accounts for 83% of all hard currency government bonds in the region.

The EIB Banking in Africa survey shows that 65% of banks currently have a gender strategy in place, and another 19% plan to implement one soon.

Women make up 29% of the workforce in sub-Saharan Africa, and 33% of firms are female led, revealing a significant gender gap. Female-led firms employ more women than male-led firms. The data show 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 training. In addition, over half of the banks sampled in the survey report a lower rate of non-performing loans among businesses led by women than men. Female-led firms also have marginally lower rates of bankruptcy and were less likely to close as a result of the pandemic, despite being as badly affected as male-led firms.

As climate risks grow, it is important to understand the scale of the risks facing the financial sector. This report reviews the climate risk on bank balance sheets. It analyses the exposures of domestic banks in 21 African countries to sovereign debt, household debt and debt from various industrial sectors.

Of the 21 countries studied, 13 have banking sectors that are highly exposed to physical risks, according to our analysis, meaning that physical risk is a greater concern for banks in Africa than the green transition, as emissions in many countries are already low.

According to the 2023 EIB Banking in Africa survey, 59% of banks already have a climate change strategy and a further 22% plan to introduce one. Furthermore, 65% of banks currently consider climate risk when evaluating new clients or projects, with an additional 23% planning to follow suit.