Asset quality remains a concern this year for many banks, especially for loans to small and medium enterprises.
According to the European Investment Bank (EIB)’s annual survey of banks in Africa in 2022, supported by Making Finance Work for Africa, aside the rising non-performing loan figures, there are significant shares of loans under moratoria or restructuring.
The EIB underscored that Banks’ concerns about asset quality deterioration suggest that the size of the problem may be bigger than official data suggest and, correspondingly, that non-performing loan ratios are likely to increase in some countries as support measures are wound down and tough global economic conditions persist.
Banks expect to see increased credit demand, and they also plan to expand their own operations, which in turn requires an expansion of their funding. The share of banks planning to expand lending operations is somewhat higher in the survey for 2022 compared to 2021. Despite clear concerns about asset quality, the mood that seems to characterize the sector is one of “cautious optimism”.
Banks weathered the pandemic well, showing the resilience of the sector. However, the war in Ukraine is leading to new concerns. With central banks in many countries raising domestic interest rates and bond funding becoming more expensive due to tighter global financial conditions, there has been a significant increase in banks worried about funding costs. This hardly featured in the survey last year, when banks were mainly concerned about the impact of the pandemic on asset quality.
“The slowdown of the global economy and the tightening of financing condition amplify the economic problems facing Africa. As public sector debt servicing costs are increasing, there is a risk of crowding out for the private sector. Investment needs remain however significant and countries in sub-Saharan Africa will need to keep focus on limiting the effects on private lending.
“It will be crucial to maintain access to finance for companies during a global downturn. The region has a strong partner with the European Investment Bank. We have been investing in Africa since 1965 and in 2021 alone, the EIB signed agreements for investments benefiting operations worth €2 billion in sub-Saharan Africa under a dedicated ACP Investment Facility.”
EIB Chief Economist, Debora Revoltella
Banks are stepping up efforts on gender lending
The survey revealed that progress is being made to increase access to finance for women as 70% of the banks surveyed have a gender strategy in place and sponsor women and gender-focused initiatives in the community, an increase of 10 percentage points on the share in the 2021 survey.
When it comes to women and asset quality, four in ten banks found that non-performing loan rates for women-led businesses were lower than the average rate of their loan portfolios. In some countries, the difference was even greater. For example, in Nigeria, 71% of banks observed lower non-performing loan ratios for women, as did 50% of banks in Kenya.
Accelerating digital transformation
The pandemic led to an acceleration in the rate of digitalization of the banking sector, as banks were forced to use digital channels to reach customers.
Ninety percent of banks agree that the pandemic has accelerated their internal digitalization transformation and 70% said they increased the range of digital services available to customers.
However, there are constraints to increasing digitalization, with three-quarters of banks ranking cybersecurity risks as the biggest issue. The rapid growth of the FinTech sector has been another catalyst for increased digitalization.
The entire FinTech ecosystem in Africa has grown to more than 1 000 active companies in April 2022, up from 450 in 2020. Of these, 80% are homegrown and 20% come from outside Africa. Payments and lending services are still the dominant products, but the sector has diversified. The increasing competition from this sector is a key concern for banks, with more than half of banks listing it among their top three issues.
Private capital
African private capital markets had a strong year in 2021. Fundraising reached pre-pandemic levels, following a significant fall during the pandemic.
Private investment, which had remained quite resilient during the pandemic, grew by 48% annually to reach $6.3 billion, surpassing the previous peak of $5.4 billion set in 2014/2015.
The increase in investment in 2021 was driven largely by the venture capital side, which saw deal value increase from $485 million in 2020 to $3.23 billion in 2021. Roughly half of this investment was in FinTech.
Nigeria was the largest market for private equity/venture capital investment in 2021, followed by South Africa. Private equity is also contributing to the growth of green financing. There has been a surge in fundraising for climate-focused investing in recent years. However, like green financing, tougher market conditions in 2022 mean the record volumes seen in 2021 are unlikely to be repeated.
The survey titled ‘Finance in Africa in 2022: Navigating the financial landscape in turbulent times’, is the seventh report in this series. It surveyed 70 banks in sub-Saharan Africa between April and June 2022 to understand how the war in Ukraine is impacting banks and to learn their views on climate lending, gender lending and the accelerating digitization of the sector.
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