African finance has so far proved resilient to the challenges brought by Covid-19, although future business investment is threated by reduced demand and asset quality.
A new study also finds that African banks are harness digital technology and scaling up green finance: 80% of African banks consider climate risk for loans, and 42% of them have staff focused on renewable energy financing.
The European Investment Bank (EIB) has published an 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,” says Thomas Östros, vice-president of European Investment Bank. “They also understand the unprecedented challenges triggered by the Covid-19 pandemic.
“The feedback from 78 leading African institutions contained in the Finance in Africa 2021 report shows both the resilience of Africa’s financial sector and enthusiastic engagement to embrace digitalisation. At the same time, the report indicates future risks that could hinder financing for business growth, renewable energy and recovery from the pandemic.”
The Finance in Africa 2021 report 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. It 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.
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 a 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 capitalised 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 business to be impacted by pandemic
Despite progress, small firms and micro-entrepreneurs remain underserved and vulnerable to losing access to finance if lending recovers slowly. Lending to smaller firms remains constrained by structural barriers, with 55% to 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 digitalisation
The rapid adoption of mobile money has been a key driver of financial inclusion in Africa.
Digitalisation 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 recognise 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.
Fifty-four percent 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 EUR5-billion of new financing to support more than EUR12-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 business recover from Covid-19 challenges, accelerate climate finance, improve access to finance by female-led business and enhance financing for rural small holders.