Project

Finance in Africa 2024 - Chapter 3: Banking sector trends in sub-Saharan Africa

European Investment Bank

DOI: 10.26303/wm2x-z973

What is it about?

Banks in sub-Saharan Africa have seen profits grow in recent years, driven by a high interest rate environment, although the spread between commercial bank loan rates and deposit rates has narrowed in many countries. However, banks changed their asset mix and grew their bond portfolios – predominantly government bonds – much more quickly than their loan portfolios. In addition, the spread widened between yields on government bonds and interest rates on bank deposits.

The chapter shows that large firms benefit from more advantageous terms on loans: 59% of loans to small and medium-sized enterprises had a repayment period of two years or less compared with just 34% of loans to large corporates. Small firms often face greater obstacles than large firms when accessing bank credit. The most binding constraints for small and medium-sized enterprises in obtaining loans are a lack of acceptable collateral and poor credit history.

Why is it important?

This chapter is based on the analysis of the European Investment Bank’s annual survey of banks in Africa. Banks are key clients of the European Investment Bank (EIB) in Africa, allowing us to direct funds to the private sector, typically to small firms. It is important for the EIB to understand the operating environment and financial performance of banks in Africa, to best target our interventions and maximise their impact.

The chapter shows that banks have enjoyed strong profits in recent years, as they pivoted towards greater lending to government. However, as the profit is driven by cyclical factors, profits may fall in the years ahead as interest rates normalise and governments reduce borrowing requirements. The chapter also shows the importance of supporting small and medium-sized businesses, which find it more difficult to access bank funding compared to larger firms.

Perspectives

Banks have enjoyed a period of high profitability in recent years, mainly by increasing their exposure to domestic government bonds. However, as inflation and domestic policy rates both start to fall, bank profits from this source will likely start to diminish.

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