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Africa

Banking Africa’s Corporate Sector

Africa’s corporate sector is grossly under-banked. The corporate sector will undoubtedly be the main driver of Africa’s growth over the medium term. This will require credit.

May 27, 2016 // 7:36AM

While domestic markets will remain constrained in particular to provide long-dated loans and other banking services, the external sector will likely play a key role. Banks’ cross-border claims on African corporates remain small, but the potential for increasing exposure to the African corporate sector seems considerable.

Cross-bordering banking has been in retreat since 2007. Total bank cross-border claims have declined from US$33 trillion in 2007 to US$27 trillion in 2015 (all bank data based on BIS Locational Banking Statistics). However, while claims on banks declined by one third, claims on non-banks have remained stable. The rotation away from banks is indicative of the transformation of the cross-border banking business. It was preceded by a massive expansion. Banks’ cross-border claims were up three times between 2000 and 2007. It seems fair to say that cross-border banking overshot a sustainable level on its way up.

Africa represents one of the fastest growing regions in the world. While sentiment has been dampened amid lower commodity prices, in particular oil, medium-term prospects remain favourable. In 2016-20, Sub-Saharan Africa is projected to grow by 4.8% per year compared with world growth of 3.3 percent (all economic data based on IMF World Economic Outlook).

In banking terms, the continent has been for a long time the domain of the multilateral and bilateral official sector, and still is to a large extent, but the commercial sector is moving in. Banks’ cross-border claims on Sub-Sahara Africa in 2015 represent only US$84bn or about 7% of Africa’s GDP compared with cross-border claims on all countries of 37 percent of GDP.

Africa has long been severely constrained for cross-border banking. Highly indebted prior to a series of debt relief initiatives it had limited banking prospects. The Highly Indebted Poor Country (HIPC) initiative by the IMF and World Bank has contributed to bringing overall levels of public sector indebtedness down significantly. This had been accompanied by similar initiatives by the private sector through the Paris Club. Africa’s debt adjustment was thus shared between creditors and debtors. Its troubled indebted past has led to re-calibrating cross-border banking relationships.

Recent cross-border banking trends in Africa have been defined by meeting pent-up demand and adjusting to Africa’s favourable growth prospects. Africa has managed to slightly expand its share in total bank claims. The global financial and economic crisis has thus not caused a reversal of Africa’s gradual restoration as a cross-border banking client. This illustrates Africa’s new relationship with the international banking sector and its potential for expansion. But Africa has a market share in total bank claims of only 0.3% in 2015 compared with its share in world GDP of 2.1%. The potential for expansion seems vast.

Banks’ cross-border claims on Africa, comprising claims on banks and non-banks, have increased by about 40% since 2007. However, the growth in banks’ claims differs significantly between countries. In Ethiopia, bank claims increased almost thirtyfold while they declined by half in Cote d’Ivoire. Cross-border banking penetration in terms of GDP varies equally with claims on Ghana representing 18% of Ghana’s GDP in 2015, in Congo they represent only 1% of Congo’s GDP. Actual banking opportunities remain highly dispersed.

Less supportive local and external conditions have upset the generally upward cross-border banking trend. With the decline of commodity prices and in particular oil prices since September 2014, cross-border banking has been in retreat somewhat. In leading oil exporters Angola and Nigeria, total bank claims on the bank and non-bank sectors are down 24% and 2%, respectively, since September 2014. However, cross-border claims on Angola’s non-bank sector are up 17% over the same period; they are down 7% in the case of Nigeria. The adjustment to lower oil prices varies significantly between countries and sectors.

The corporate sector in Africa dominates cross-border banking. Banks’ claims on the non-bank sector represent almost 60% of total claims. The non-bank sector has seen a relatively gradual expansion with claims up 70% from a low base between 2000 and 2007 and up 40% since 2007.

Africa’s corporate sector will likely rely on cross-border banking for some time. This includes export credits and long-term debt. While the public sector will seek increasingly try to tap local markets, the corporate sector will struggle to find similar opportunities. The deepening of local bank and capital markets may change this but it will take some time. The share of Africa’s corporate sector in total bank cross-border claims on the corporate sector is 0.4%.

The corporate sector seems to represent the biggest banking opportunity in Africa. Cross-border banking is likely to complement rather than compete with local banks at least in the short-term amid different success factors. Africa’s investment needs and opportunities to provide support to expand trade and facilitate cross-border investments is considerable.

However, traditional bankers may no longer be alone. The small and growing share of new currencies in cross-border bank claims may indicate that banking innovation is likely to play a key role. Claims denominated in currencies other than the dollar, euro, sterling, yen and franc increased sevenfold since 2007 albeit from a very low base. While South Africa is leading this incipient trend, others are likely to follow. It may be the best indication yet that new players and instruments are making headway in Africa.

Opportunities for banking the corporate sector in Africa naturally differ significantly. Banks’ cross-border claims on the corporate sector vary from 0.7% of GDP in Congo to 7% in South Africa and 13% in Ghana. If Africa’s banks were to achieve a share in cross-border banking similar to its share in world GDP, claims on the corporate sector would increase to US$620bn or 7 times current claims.

The cross-border banking potential in Africa will naturally depend in large part on local conditions. However, it will also depend on whether international and local bank regulation will not be unduly biased against banking in Africa. The partial retreat by international banks from traditional sectors like trade and project finance will need to be replenished. Africa represents one of the most formidable cross-border banking opportunities amid a substantial potential of further economic and financial integration with the rest of the world. While banks’ cross-border penetration will likely remain measured, prospects for further significant inroads are vast. Cross-border banking in Africa possibly represents one of the biggest banking opportunity in the world.

Africa Macro Policy & Government

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