Africa Banking Sector Outlook in 2020

Published on 10th March 2020

The fifth full edition of the European Investment Bank’s study of banking sectors in Africa casts light on recent developments in the continent’s banking sectors and the policy options for all stakeholders. The chapters devoted to banking sector development in each sub-region have been enhanced compared to earlier editions, with greater focus being placed on micro, small and medium-sized enterprises (MSME) and on financial inclusion. Another objective of the 2020 edition of this study is to contribute to the EIB’s Africa Day on 27 February 2020 in Dakar, Senegal, in partnership with UN Habitat.

In Africa, real GDP growth is set to remain relatively resilient despite persistent uncertainty in the global economy. Economic growth is projected to accelerate moderately in 2020, due to strengthening demand, but it is expected to be held back on a longer-term basis by the slowing pace of reforms. The population growth rate means that GDP per capita will increase less than needed to ensure fast convergence with middle- and high-income economies, to make a significant dent into poverty and create enough jobs for the growing labour force. Inflationary pressures have eased and the average current account and government deficits are projected to decline, reflecting the recovery of commodity prices since their 2016 low and, in some countries, fiscal consolidation.  The average debt situation of African countries shows signs of stabilisation, but there is a high risk of debt distress in several countries due to the high level of government debt, particularly non-concessional debt, and rising debt-servicing costs. There is a significant degree of heterogeneity across countries regarding the pace of recovery, medium-term prospects and debt sustainability.

The economic performance of North Africa is improving. The economies of the region are expanding and GDP growth is expected to accelerate to 4.4% in 2020 and 2021. For some time, restoring macroeconomic stability was a primary concern for the national authorities. More recently, however, reforms to promote private sector development have been implemented.

In the WAEMU zone, the economic outlook remains resilient. Real GDP growth is set to increase to 6.5% in 2020 from 6.4% in 2019 and to average 6.8% over 2021-2024. Growth in private investment and an increase in agricultural productivity are expected to sustain economic activity over this period. There is a risk of fiscal slippages ahead of the forthcoming elections in several countries in the WAEMU zone.

The outlook for West African countries outside the WAEMU zone is mixed. The region’s largest economy, Nigeria, which accounts for two thirds of West Africa’s GDP, is expected to grow at around 2.5% in 2020. Growth rates are expected to average 2.6% over 2021- 2024. Ghana, on the other hand, is expected to grow at 5.6% in 2020, but faces a risk of fiscal slippage ahead of the 2020 elections. The main downside risks for the sub-region stem from significant uncertainty in the global economy and escalating trade protectionism, including in the region. The Nigerian economy remains highly vulnerable to any drop in oil prices.

There has been a notable acceleration in economic activity in the Central African Economic and Monetary Community (CEMAC) zone. Economic growth is projected to reach 3.0% in 2020 in the CEMAC. The IMF programmes agreed with all countries in the region are bearing fruit but the improvement in the fiscal situation comes against a background of many external risks that might undermine a scenario of gradual acceleration in growth.

Economic growth is expected to remain solid across East Africa. GDP growth is expected to accelerate to 6% in 2020 and 2021, above the average of sub-Saharan Africa (SSA), as infrastructure investments across the region give an extra boost to domestic demand. Still, risks to the outlook are tilted to the downside, mostly stemming from potential external shocks.

Economic developments in Southern Africa in recent years have generally been characterised by low growth. Growth in the sub-region remained subdued during 2019 but is expected to pick up to 1.6% in 2020, although domestic and external risks to this outlook remain substantial. The high level of public debt leaves a number of states vulnerable to external shocks and reduces or even blocks access to external financing.

In line with the generally improving economic conditions in most African countries, the banking groups surveyed for this report are generally in expansionary mode, mostly thanks to organic growth but also due to greenfield and brownfield investments. Nevertheless, some groups are still in consolidation mode, especially in the short term. The banking groups report improvements in terms of loan origination and funding conditions. Non-performing loans (NPLs) appear to be coming under control in most banking groups but they are still on the rise in others. Efforts to comply with Basel II and Basel III standards are also reported. In terms of products and service focus, African banking groups are still emphasising investment in e-banking and mobile banking services. Some groups are also deploying or planning the development of fintech, with the main focus on facilitating mobile money, electronic transfers and back-office operations. A considerable proportion of groups are also investing in lending-related fintech, including data analytics and blockchain technology. The situation of African countries is also heterogeneous in terms of financial market development and the degree of advancement of financial inclusion.

Financial inclusion in North Africa is more advanced than in many other regions on the continent. The financial sectors in the region are dominated by banking activities. Banks, in turn, are well developed, and some have a pan-African vision. The sub-region’s banks have started to offer non-financial services to SMEs, micro-firms and start-ups, which can improve the management practices of firms, and thereby promote entrepreneurship and innovation. Access to finance can be further improved by reforming the institutional framework governing secured lending and by developing non-bank finance. Reform of secured transaction frameworks would benefit both banks and firms. Such a reform would make it easier for firms to pledge movable assets as collateral. This would help SMEs in particular, as they are more likely to lack high-quality collateral.

Despite improvements in the soundness and stability of West African banking systems, access to finance remains a challenge across West Africa. The banking sector in the West Africa Economic and Monetary Union (WAEMU) remains sound and profitable, while Basel III capital requirements are being implemented. The profitability of Nigerian and Ghanaian banks remains adequate, thanks to high interest rate spreads and high yields on government securities. Soundness and stability are also improving in these markets, with non- performing loans declining and capital adequacy improving. Progress has been particularly marked in Ghana, where the central bank led a process of reform and consolidation, reducing the fragmentation of the banking sector. Access to finance is still the most commonly cited constraint in more than half of the countries in West Africa, followed by political instability and practices in the informal sector. Banks consider lending to SMEs highly risky and ask for significant levels of collateral, while a significant portion of their investment is allocated to government assets.

The balance sheet activity of the banking sector in the CEMAC zone has improved significantly, owing to the economic recovery. However, the quality of the zone’s credit portfolio still calls for vigilance. The sector’s prudential situation has improved slightly, thanks to banks’ capitalisation efforts. The regulatory and prudential arsenal continues to be changed and adapted but the banking sector continues to be predominant in the financial activity of all CEMAC countries. Businesses are using banking services less in CEMAC countries than in the rest of Africa. Some efforts are expected to strengthen banking infrastructure in the zone that will, in turn, ease SMEs’ access to corporate financing. On the other hand, financial inclusion is experiencing very strong growth in CEMAC countries, thanks in particular to the advent of mobile banking, even though there is still significant room for improvement. In the Democratic Republic of the Congo (DRC), although banking activity is developing well, the quality of assets calls for caution. Bank account penetration still has a long way to go to contribute to the country’s economic diversification and to make growth more inclusive. A series of regulatory reforms could lead to profound changes in the sector.

The financial sector in East Africa remains stable. In the past two years, a favourable economic outlook and regulatory developments have underpinned the performance of the banking sector in East Africa. The improvement in economic activity in 2018 and 2019 dispelled some of the fears that followed the deceleration in previous years. Going forward, the performance of the regional banking sector will continue to depend on the extent to which the banks address not only the downside risks to the economic outlook, but also the challenges related to regulation and digitalisation. Financial inclusion has improved more significantly in East Africa than in other regions, but access to finance still remains the main bottleneck for companies throughout the region, although less so in the bigger economies. This is particularly the case for SMEs and micro-enterprises. In some countries, the fact that the local banking sector is keen to mainly lend to the public sector is resulting in less finance available for the private sector. Mobile accounts and financial inclusion are improving unevenly across the region. Despite generalised access in countries such as Kenya, in some countries still less than 5% of the population uses digital banking or payment systems.

Southern Africa’s banks generally have good capital and liquidity positions, which are closely linked to their conservative risk appetite and management. Although banking sectors vary widely across the region, some themes of recent years cut across borders. Firstly, the weakening of government finances in several countries puts pressure on the sector as banks have had to fund budget deficits, sometimes at the expense of lending to the private sector. Secondly, the weak economic performance has fed an increase in non- performing loans in most markets. Thirdly, banking supervision and regulation are improving. Fourthly, concerns regarding anti-money laundering and combating of terrorist financing have triggered a decline in international correspondent relationships, which has reduced the region’s access to the international financial system. The outlook for the banking sector is generally positive, reflecting the cautious recovery, but SMEs will continue to face bottlenecks when looking for financing due to high interest rates and strict collateral requirements. Larger firms typically find it easier to arrange credit, and the difference with respect to smaller firms is particularly pronounced in Lesotho, Malawi, Namibia and Zambia. Credit constraints are loosely linked to the development of the financial sector, as countries such as Botswana, Mauritius and South Africa have a lower share of credit-constrained firms. This link is confirmed when considering the population’s access to finance.

This year’s report touches on three important thematic issues of cross-cutting importance in African countries. Firstly, the report explores policy options to finance urban development in the context of fast expanding African cities. Secondly, the financing of Africa’s agricultural value chains is discussed. Finally, the report examines how remittances can be harnessed to boost financial sector development.

Adopting a territorial and inclusive approach is key to unleashing the potential of urbanisation in Africa. The lack of effective urban planning has long been the root of the uncontrolled development of African cities and of higher investment costs for infrastructure and services. In particular, secondary cities are expected to play a special role in eradicating poverty, facilitating structural transformation and unlocking the potential of Africa’s agricultural value chains. Inclusive approaches that secure the involvement and buy-in of all stakeholders, including the population, can generate smart solutions, resilience, and cost and energy efficiency. Building climate change resilience in urban areas requires a holistic, comprehensive and multi-sectorial/dimensional approach. Social and affordable housing is a key sector for sustainable urbanisation and African authorities and local financial intermediaries have a critical role to play. Inefficient land allocation systems are fuelling conflict due to the general inability to properly allocate and manage land rights and interests. Successful African examples of land reforms and land title systems exist and can serve as a benchmark. They can have significant cross-cutting effects on the business environment.

Well-structured agricultural value chain financing can boost agricultural productivity, thereby supporting sustainable economic development in Africa. Agriculture is a key sector of economic activity in the region, as shown by its large contribution to GDP and its high employment share. Raising productivity along the value chain would help end hunger and malnutrition and meet growing food demands. It would also increase the incomes of the often-poor smallholder farmers and enable the export of products that are less price-sensitive and more profitable. However, a considerable financing gap holds back agricultural development as lending to the agricultural sector is often deemed particularly risky. The perceived high risks can be mitigated by well-structured agricultural value chain financing (AVCF). The success of AVCF depends in particular on getting the right expertise and partners, creating the right structures and procedures, tailoring financial products to the specific needs of farming activities, the upstream and downstream sectors of agriculture, training farmers and building trust, and fostering the smart use of digital solutions. These factors all help reduce risks and lower transaction costs, thereby making AVCF work for providers of finance and their users.

Remittances are already a crucial source of external finance for many African countries.

rthermore, the large numbers of African citizens living and working abroad, both on the continent and elsewhere, suggest that there is potential for remittances to become an even more effective driver of economic and social development on the continent. However, the impact of remittances depends on how they are used, and particularly on the extent to which they are channelled towards productive investment. This depends in turn on financial sector development. In some African financial sectors, the positive impact of remittances is hindered, the costs of remittance services are high and migrants are incentivised to channel funds through informal channels. Some measures to enhance financial sector development can boost the development impact of remittances. For example, developing payment systems and promoting competition in remittance markets could bring down the costs of sending remittances and encourage remitters to use formal channels to send funds. New technologies and the use of mobile money systems can also help bring down costs, but countries need to put the appropriate frameworks in place to facilitate the use of these technologies while at the same time mitigating risks.

The first part of this report represents a study of the banking sectors across Africa. The second part consists of thematic chapters that address transversal challenges and opportunities with regard to financing investment in Africa. Chapter 1 reports on the responses to a survey of banking groups in Africa. Chapters 2-6 examine recent trends in the banking sectors in, respectively, Northern Africa, West Africa, Central Africa, East Africa and Southern Africa. Chapter 7 concerns the opportunities and challenges associated with investing sustainably in Africa’s cities, to set the scene for discussions during and after the conference. Chapter 8 analyses how well-structured agricultural value chain financing can boost agricultural productivity, thereby supporting sustainable economic development in Africa. Chapter 9 discusses how remittances can become an even more effective driver of economic and social development on the continent. The study ends with a chapter summarising how the EIB has been investing in sustainable development across Africa since 1963, explaining the type of financial support and technical assistance offered by the EIB to financial sectors on the continent and briefly exploring the way forward.

By Debora Revoltella

Director, Economics Department, European Investment Bank

Courtesy: European Investment Bank

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