Africa banks maintain resilience amid difficulty, EIB survey shows

PHILLIP ISAKPA

A new report by the European Investment  Bank (EIB) based on a 2023 survey of Banking in Africa has found that banks on the continent have continued to show resilience despite operating in what the EIB described as “ a difficult environment.”

The report titled “Uncertain Times, Resilient banks: African Finance at a Crossroads” released under the EIB’s eighth annual Investment in Africa report and covering the continent’s banking system, found that banking in Africa continues to show resilience and a desire to support private-sector development despite operating in a tough environment.

“Key banking indicators, such as capital ratios, profitability and non-performing loans, have not deteriorated despite the challenges the region is facing,” the EIB report noted.

This resilience, according to the report, may rightly be attributed initially to pandemic support measures to bolster the continent’s banking system, but it said such measures have been wound down, and that “most key bank metrics remain solid.”

The survey result also showed that African banks’ concerns have changed over time. For instance, while at the onset of the pandemic the primary concern of the banking sector in Africa in 2021 was asset quality, while still remaining an issue for some banks, new concerns emerged in 2022 “against the backdrop of rising inflation and higher domestic interest rates, which caused worry about local currency funding costs,” the report noted.

The report noted that these concerns have remained notwithstanding rising bank profits from higher net interest margins. 

In the EIB 2023 survey, however, it found that “banks are mainly concerned about the cost or availability of funding in foreign currency,” which it stated mirrors the situation in sovereign debt markets where much of the debt is issued in foreign currencies like the US dollar.

The profits being made by banks in the continent, according to the survey result, are, however, being driven by more positive than negative factors with two of the biggest drivers being higher interest rates and higher business volumes. 

The report also stated that issues with asset quality, a reduction in asset values and staff costs have been the biggest drag on profits as about 80 percent of banks expect profits to be higher in 2023 compared to 2022.

With 33 banks involved in the exercise, half of those that responded to the 2023 EIB Banking in Africa survey, say they wish to grow their lending operations at a faster pace over the next 12 months, but at the same time, the result also shows that banks are also exercising caution as credit standards expected to tighten. 

“Funding could also be a constraint for banks wishing to expand their operations,” the survey also found.

For this year’s survey, the report developed a financial conditions index for Africa based on individual indices for Nigeria, South Africa, Egypt and Kenya, Africa’s leading financial markets. 

The report noted that the index shows that financial conditions improved after the initial shock of the pandemic, mainly because of lower interest rates and resilient stock markets.

“However, from mid-2021, a significant tightening in credit occurred as inflation increased, leading to a reversal of monetary policy and causing African exchange rates to weaken. This deterioration suggests increased difficulty in accessing finance,” the report stated.

The survey report also found that public lending was crowding out private credit. It explained that “crowding out occurs when banks choose to put their money in public debt rather than lend to the private sector.” 

According to the report, the so-called severity of crowding out index, which was updated in this report, “indicates that bank holdings of public debt grew in Africa since the beginning of the pandemic, putting pressure on lending to the private sector.” 

The severity of crowding out, the report stated, “was also driven in recent years by a recovery in gross domestic product growth from pandemic lows, which has fueled the private sector’s demand for credit,” noting that crowding out pressures are highest in East Africa and lowest in North Africa.

Also reported is the rapid growth of the public bond markets in the continent with outstanding sovereign debt in sub-Saharan Africa, excluding South Africa, being more than 20 times higher in 2021 than in 2010 and seven times higher in North Africa.

“Hard currency sovereign bonds issued by sub-Saharan African economies are held by overseas investors, which makes these investments more prone to the flight of investors searching [for] less risky assets. Sub-Saharan African debt is predominantly issued in US dollars, which accounts for 83% of all hard currency government bonds in the region,” the report explained.

Also reported based on the survey is the fact that there was increasing loans to women as it shows that 65 percent of banks currently have a gender strategy in place, and another 19 percent plan to implement one soon.

Specifically, it found that women make up 29 percent of the workforce in sub-Saharan Africa, and 33 percent of firms are female led, revealing a significant gender gap. 

“Female-led firms employ more women than male-led firms. The data show that well-managed enterprises are more likely to be led by women. Female-led firms tend to invest in innovation, export goods and services and offer employee training. In addition, over half of the banks sampled in the survey report a lower rate of non-performing loans among businesses led by women than men. Female-led firms also have marginally lower rates of bankruptcy and were less likely to close as a result of the pandemic, despite being as badly affected as male-led firms,” the report pointed out.

The survey also provided the environment under which banks in Africa are operating in the face of rising climate risks, for which it noted that “as climate risks grow, it is important to understand the scale of the risks facing the financial sector,” with a review of the climate risk on bank balance sheets and analysis of the exposures of domestic banks in 21 African countries to sovereign debt, household debt and debt from various industrial sectors. 

It explained that out of the 21 countries studied, 13 have banking sectors that are highly exposed to physical risks, meaning that physical risk is a greater concern for banks in Africa than the green transition, as emissions in many countries are already low.

The result of the survey found that 59 percent of banks already have a climate change strategy and a further 22 percent plan to introduce one. 

Also, 65 percent of banks currently consider climate risk when evaluating new clients or projects, with an additional 23 percent planning to follow suit.