HomeRegional NewsAfricaAnalysing how COVID-19 has changed access to finance in Africa

Analysing how COVID-19 has changed access to finance in Africa

The COVID-19 pandemic has prompted major changes in how business is conducted and accelerated digitalisation trends already underway before the crises across Africa’s financial structures.

The Finance in Africa 2021 report, released by the European Investment Bank (EIB), explores how access to finance provided by banks, microfinance and private equity sectors have been affected by the global pandemic and what long trends may impact private sector investment.

Abdelkader Benbrahim, Making Finance Work for Africa Partnership (MFW4A) Coordinator, said the changes have unlocked new opportunities for African financial institutions to innovate and drive financial inclusion. “African banks can also play an important role in society’s adjustment to climate change and contribution to its mitigation, for example by including environmental risks in their credit and investment process, or by incentivising  clients for green investments.”

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“With this unique report we aim to capture how the African financial sector has rapidly adapted to the COVID-19 pandemic, point to continuing challenges and highlight exciting opportunities for climate finance and digitalisation,” said Benbrahim.

The Finance in Africa 2021 report surveyed 78 leading banks and financing institutions active across sub-Saharan Africa to exampling the impact of the pandemic on banking and business lending. It also investigates how Africa’s financial sector is harnessing the digital revolution and details the challenges and opportunities of green financing for banks.

Written with the support of Making Finance Work for Africa, this is the sixth study of Africa’s financial sector by the European Investment Bank (EIB).

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 the continent’s financial sector has remained stable. But, it also found private sector financing may recover slowly, with small businesses and micro-entrepreneurs being hardest hit.

The survey suggests that almost half of African banks are most concerned about the quality of existing assets and more than 20% are most concerned about reduced demand for financing and an increase in the risk of future lending.

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Africa’s financial sectors have displayed remarkable resilience during the COVID-19 crises. A potential liquidity crisis in the banking sector was averted because most of the banks were well capitalised before the crisis happened and policymakers reacted quickly. Still, lingering impacts could set back financing during the recovery period.

Companies across various sectors in Africa have been badly affected by the pandemic and associated lockdowns. The inference is that banking sector asset quality is likely to fall once support measures are withdrawn.

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. Close on 56% of African banks identify credit history and collateral as major or severe constraints to financing smaller businesses. Very few report these challenges for larger corporates.

Digitalisation by banks is here to stay

The rapid adoption of mobile money has been a key driver of financial inclusion across Africa. The digitalisation of financial services in Africa was initially driven by new entrants into finance sectors, but this new report reveals that traditional sub-Saharan African banks are now expanding their own digital offerings. This digitalisation drive is accelerated by the pandemic which the banks believe will be permanent.

The survey shows that African banks are becoming more aware of the need to address risks posed by climate change and they are beginning to take advantage of opportunities in green finance. 54% of the banks surveyed said they view climate as a strategic issue and just more than 40% have tasked staff to work on climate-related opportunities. Other financial institutions – such as microfinance, private capital and insurers – are starting to fill market gaps in green finance.

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Last year along the EIB provided more than €5 billion ($5,659bn) in new finance to support from than €12bn 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 businesses recover from COVID-19 challenges, accelerate climate finance, improve access to finance by female-led businesses and enhance financing for rural smallholders.

EIB’s Finance in Africa 2021 report is available online.

Theresa Smith
Theresa Smith is a Content Specialist for ESI Africa.