While COVID-19 has prompted major change in the way business is conducted, financial institutions in Africa remain resilient and have largely embraced digitalisation. However, research shows that the pandemic will impact private sector financing and access to finance for small businesses.

This is according the Finance in Africa 2021 report, released by the European Investment Bank (EIB) in collaboration with Making Finance Work for Africa (MFW4A).

The report surveyed 78 leading banks and financing institutions active across Sub-Saharan Africa to examine the impact of the pandemic on banking and business lending, investigate how Africa’s financial sector is harnessing the digital revolution and detail the challenges and opportunities of green finance for banks.

Thomas Östros, European Investment Bank Vice President, said, “Africa’s banks are crucial for ensuring access to finance which is essential for private sector growth and climate action. They also understand the unprecedented challenges triggered by the COVID-19 pandemic. The feedback from 78 leading African institutions contained in the Finance in Africa 2021 report is invaluable. It shows both the resilience of Africa’s financial sector and enthusiastic engagement to embrace digitalisation. At the same time, the report indicates future risks that could hinder financing for business growth, renewable energy and recovery from the pandemic. I look forward to discussing how the EIB can further strengthen cooperation with African banking partners in Kigali and Nairobi next week.”

The report explores how access to finance provided by banks, microfinance and private equity sectors have been affected and what long-term trends may impact private sector investment.

Abdelkader Benbrahim, MFW4A Partnership Coordinator, added: “The COVID-19 pandemic has already prompted major changes in how business is conducted, and has accelerated digitalisation trends that were already under way before the crisis but that were slower in adoption. This has 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 contribute to its mitigation, for example by including environmental risks in their credit and investment process, or by incentivising clients for green investments. With this unique report, we aim to capture how the African financial sector has rapidly adapted to the COVID-19 pandemic, pointing to continuing challenges and highlight exciting opportunities for climate finance and digitisation.”

Impact on private sector financing

The detailed analysis of the impact of COVID-19 on financial intermediaries backed by a survey of bank lending across the continent concluded that Africa’s financial sector has remained stable but that private sector financing may recover slowly, with small business and micro-entrepreneurs being the hardest hit.

The survey suggests that nearly 50% of African banks are most concerned about the quality of existing assets and more than 20% are most concerned about a reduced demand for financing and an increase in the risk of future lending.

African financial sectors have displayed remarkable resilience during the COVID-19 crisis and a liquidity crisis in the banking sector was averted, as most banks were well capitalised before the crisis and policymakers reacted fast.

However, lingering impacts may set back financing during the recovery. Firms across Africa have been badly affected by the crisis and the banking sector asset quality is likely to fall once support measures are withdrawn.0

Access to finance by small business

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, with 55-56% of African banks identifying credit history and collateral as major or severe constraints to financing smaller businesses. Few reported these challenges for larger corporates.

African financial institutions grasping opportunities for digitalisation

The rapid adoption of mobile money has been a key driver of financial inclusion in Africa. Digitalisation of African financial services was initially driven by new entrants into Africa’s financial sectors, but the report reveals that the Sub-Saharan African banks are now expanding their digital offering.

This digitalisation drive is accelerated by the pandemic, which the banks believe will be permanent.

African banks recognise climate change risks and climate finance opportunities

The survey reveals that African banks are increasingly aware of the need to address risks posed by climate change, and are beginning to take advantage of opportunities in green finance.

54% of surveyed banks were already viewing climate as a strategic issue, and just over 40% have staff working on climate-related opportunities. Other financial institutions, including microfinance, private capital and insurers, are also filling market gaps in green finance.