Finance in Africa

Banks in Africa are weathering the COVID-19 pandemic well and showing a lot of creativity to overcome the problems created by the crisis. But the war in Ukraine is causing new concerns. With interest rates rising in many countries and bond funding becoming more expensive, a significant number of banks are worried about rising financing costs. This was not the case in the survey last year, when banks were mainly worried that the pandemic could hurt the quality of their loan portfolios.

Other issues facing banks today are:

• the push to use more digital technology and expand mobile banking;
• the need to invest in climate action;
• the drive to increase funding for projects run by women.

Clients’ asset quality remains a concern this year for many banks, especially for loans to small and medium businesses. The main figures for non-performing loans do not tell the whole story — there is a significant number of loans that are being restructured or that are under a moratorium, which means:

• repayments are being delayed;
• the non-performing loan problem may be bigger than official data suggest;
• non-performing loans are likely to increase in some countries as government support measures wind down and tough global economic conditions persist.

Banks expect to see an increased demand for loans, and they plan to expand their operations, which will in turn require an expansion of their funding capabilities. The number of banks planning to expand lending is somewhat higher in 2022, compared to 2021. Despite clear concerns about clients’ asset quality, the mood in the sector is one of cautious optimism.

Credit quality concerns mean that banks plan to tighten lending standards for a third consecutive year in 2022. This means it will be harder for some people to get loans. There are also long-running barriers preventing some firms from getting bank loans, such as a lack of collateral and poor credit history, especially for small and medium firms. These issues show up year after year in our survey.

Progress is being made to make it easier for women to get loans:

• 70% of the banks surveyed have a gender strategy in place and sponsor women and gender initiatives in the community, an increase of 10 percentage points from the survey in 2021.
• Four in ten banks found that non-performing loan rates for women-led businesses were lower than those of businesses led by men. In some countries, the difference is even greater than four in ten. In Nigeria, 71% of banks have lower non-performing loan ratios for women, as do 50% of banks in Kenya.

The pandemic led to an acceleration in the digitalisation of the banking sector, as banks were forced to use digital channels such as emails and the internet to reach customers:

• 90% of banks agree that the pandemic has accelerated their internal digitisation;
• 70% say that they increased the digital services available to customers;
• however, there are constraints to increasing digitalisation. Three-quarters of banks rank cybersecurity risks as the biggest issue.

The rapid growth of the financial technology sector also has increased digitalisation at banks. The financial technology sector in Africa has grown to more than 1 000 companies in April 2022, up from 450 in 2020. Of these, 80% are home-grown and 20% come from outside Africa. Payments and lending services are still the dominant products, but the sector has diversified. The increasing competition in this sector is a key concern for banks, with more than half of banks listing it among their top three issues.

Despite all the issues that banks are facing, climate remains a top concern. Four out of five banks could soon have formal climate strategies. Banks are motivated to create new climate plans because they want to reduce the risks of climate change and increase green finance. Banks are doing more work to understand their climate risks. Almost 42% of banks were assessing how their loan portfolio could be hurt by climate change in 2021. In 2022, this climbed to 46%.

Nearly 70% of banks see climate lending as an opportunity to fight climate change. To date, only one-fifth of banks have introduced green lending products, meaning there is significant room to expand. Banks will need support in this area. About 60% cite a lack of expertise, data and tools to assess climate risk as reasons they are not getting more involved in green products. In addition, two-thirds of banks think that international financial institutions such as the European Investment Bank can help them expand green lending by providing training and technical assistance. This is a clear sign that global institutions can help increase green lending in Africa.