Africa today stands as the world's youngest continent, boasting a growing population and several rapidly expanding economies. However, it also faces significant challenges, particularly in the realm of banking and finance. Global Finance recently engaged with representatives from three financial institutions - two development banks and one commercial bank - to delve into the role of banking in Africa's economic growth.

Unraveling Africa's Banking Landscape for Sustainable Growth

Challenges in Attracting Foreign Banks Back

In many African markets, there is a growing recognition of the need for regulatory reform. Countries are aware that only a robust and well-managed banking system can attract back outside investment. For instance, in Ethiopia, the central bank recently promulgated new regulations, making the foreign exchange market more competitive and expected to drive investor interest. The IFC, along with its World Bank counterparts, is actively providing support to these reforms to strengthen the financial sector.However, the trend of foreign bank exits continues. A European commercial bank recently left South Africa, highlighting the global cost of business in terms of Africa. Global regulations have become burdensome, creating strong disincentives for international banks to serve low-rated jurisdictions. This requires more attention as globalization, which has improved connectivity over the years, is now seeing a pullback.

Domestic Banks' Struggles and Opportunities

Over the past 20 to 30 years, pan-African banks have witnessed significant growth. They are getting stronger and more bold, with some choosing to exit other emerging markets to consolidate their pan-African positioning. But a major challenge is access to medium to long-term funding. Africa's growth agenda depends on creating long-term assets in infrastructure, industry, and the corporate sector. The lack of savings in Africa compared to other regions like Asia, where savings rates are 30% to 45%, poses a significant hurdle.

Development of Capital Markets in Africa

Capital markets in many African economies are still in their infancy. Privatization is helping to kick-start the sector in some cases. For example, in Angola, the state has sold state-owned companies, providing confidence. In Ethiopia, an equity market is set to launch in November, recognizing the potential of capital markets for long-term financing.The IFC is focusing on capacity building for issuers and the framework around capital markets. They are working closely with authorities like the Ethiopia Capital Markets Authority to launch a capital markets framework. In Tanzania, NMB Bank and CRDB Bank have anchored bond issuances focused on sustainability and climate finance.Despite the growth in the number of stock markets on the continent, they are generally not deep or active. The South African exchange combines equity and debt instruments, providing some stability. But the underlying issue remains the lack of enough firms with listings. In Angola and Ethiopia, state-owned entities are moving to list, but it will take time to build critical mass.

Climate Finance and Its Importance

Climate finance is a high priority for Africa. The IFC has committed to aligning 100% of new investments from July 2024 with the Paris Agreement. In South Africa, between 2020 and 2023, they deployed about $1.6 billion in climate finance and supported the green building industry. They are also working with the Johannesburg Stock Exchange and the Banking Association of South Africa to raise awareness and attract banks to climate finance.In smaller markets, efforts are being made to raise awareness. Financial institutions now view climate finance as a significant business line, not just a CSR activity. The climate finance gap in Africa is in the hundreds of billions of dollars per year, and there is a clear demand for financial institutions to support it. But banks need to have the right credit perspective and incorporate climate risk assessment into their lending portfolios.

Economic and Market-Centered Cooperation

Africans have realized the importance of integrating their economic space in the face of global uncertainties. Treaties like the African Continental Free Trade Area aim to create a more attractive investment environment and enhance resilience. Small countries are pushing for combined capital markets and subregional arrangements for easier travel and trade.Energy is critical to this cooperation, especially in the context of the climate agenda. Green hydrogen and new technologies offer opportunities for countries like Namibia, Mauritania, and Senegal. But industrialization and diversification of economies are essential for sustainable growth.In conclusion, Africa's banking and economic landscape presents both challenges and opportunities. With the right support and efforts, the continent can overcome its hurdles and achieve sustainable growth.