50% of African Banks Are Concerned About The Quality Of Existing Assets

The European Investment Bank (EIB) published a unique analysis of the impact of COVID-19 on financing across Africa.

The Finance in Africa 2021 report surveyed 78 leading banks and financing institutions active across sub-Saharan Africa to examine the impact of the pandemic on banking and business lending, investigate how Africa’s financial sector is harnessing the digital revolution, and detail the challenges and opportunities of green finance for banks.

“Africa’s banks are crucial for ensuring access to finance which is essential for private sector growth and climate action. They also understand the unprecedented challenges triggered by the COVID-19 pandemic. The European Investment Bank is committed to supporting transformational private and public investment across Africa in close cooperation with financial sector partners.

The feedback from 78 leading African institutions contained in the Finance in Africa 2021 report is invaluable. It shows both the resilience of Africa’s financial sector and enthusiastic engagement to embrace digitalization. At the same time, the report indicates future risks that could hinder financing for business growth, renewable energy, and recovery from the pandemic. I look forward to discussing how the EIB can further strengthen cooperation with African banking partners in Kigali and Nairobi next week.” said Thomas Östros, European Investment Bank Vice President.

The Finance in Africa 2021 report, written with the support of Making Finance Work for Africa (MFW4A), is the sixth study of Africa’s financial sector by the European Investment Bank, the world’s largest international public bank, owned by the 27 European Union member states. The new report explores how access to finance provided by banks, microfinance, and private equity sectors have been affected and what long-term trends may impact private sector investment.

“The COVID-19 pandemic has already prompted major changes in how business is conducted and has accelerated digitalization trends that were already underway before the crisis but that were slower in adoption. This has unlocked new opportunities for African financial institutions to innovate and drive financial inclusion.

African banks can also play an important role in society’s adjustment to climate change and contribute to its mitigation, for example by including environmental risks in their credit and investment process, or by incentivizing clients for green investments.

With this unique report, we aim to capture how the African financial sector has rapidly adapted to the COVID-19 pandemic, pointing to continuing challenges and highlighting exciting opportunities for climate finance and digitization.” said Abdelkader Benbrahim, Making Finance Work for Africa Partnership (MFW4A) Coordinator.

The long-term impact of COVID-19 on private sector financing in Africa

The detailed analysis of the impact of COVID-19 on financial intermediaries backed by a survey of bank lending across the continent concluded that Africa’s financial sector has remained stable but that private sector financing may recover slowly, with small business and micro-entrepreneurs being the hardest hit.

The survey suggests that nearly 50% of African banks are most concerned about the quality of existing assets and more than 20% are most concerned about reduced demand for financing and an increase in the risk of future lending.

African financial sectors have displayed remarkable resilience during the COVID-19 crisis and a liquidity crisis in the banking sector was averted, as most banks were well capitalized before the crisis and policymakers reacted fast.

However, lingering impacts may set back financing during the recovery. Firms across Africa have been badly affected by the crisis and the banking sector asset quality is likely to fall once support measures are withdrawn.

Access to finance by small businesses to be impacted by pandemic

Despite progress, small firms and micro-entrepreneurs remain underserved and vulnerable to losing access to financing if lending recovers slowly. Lending to smaller firms remains constrained by structural barriers, with 55-56% of African banks identifying credit history and collateral as major or severe constraints to financing smaller businesses. Few reported these challenges for larger corporates.

African financial institutions grasping opportunities for digitalization

The rapid adoption of mobile money has been a key driver of financial inclusion in Africa. Digitalization of African financial services was initially driven by new entrants into Africa’s financial sectors, but the EIB Finance in Africa 2021 report reveals that the sub-Saharan African banks are now expanding their digital offering. This digitalization drive is accelerated by the pandemic, which the banks believe will be permanent.

African banks recognize climate change risks and climate finance opportunities

The survey reveals that African banks are increasingly aware of the need to address risks posed by climate change, and are beginning to take advantage of opportunities in green finance.

54% of surveyed banks were already viewing climate as a strategic issue, and just over 40% have staff working on climate-related opportunities. Other financial institutions, including microfinance, private capital, and insurers, are also filling market gaps in green finance.

Building on EIB engagement with African financial partners

Last year the EIB provided more than EUR 5 billion of new financing to support more than EUR 12 billion of transformational private and public investment across Africa.

This includes launching new targeted financial initiatives in collaboration with African banks and financial institutions to help businesses recover from COVID-19 challenges, accelerate climate finance, improve access to finance by female-led businesses, and enhance financing for rural smallholders.