(Ecofin Agency) – Under pressure from the financing needs of African states, banks are increasingly turning to public debt. This phenomenon, known as the crowding out effect, slows down access to credit for the private sector and raises concerns about increased risks for the banking system.
The crowding-out effect intensifies in East and West Africa
The crowding out effect – a phenomenon whereby banks favor investments in public debt over loans to the private sector – has intensified to the point of reaching record levels in 2023, notably in more than half of countries Africans. In East Africa, Southern Africa and West Africa, the situation is particularly critical. Local banks, under pressure from public debt, are allocating an increasing share of their resources to sovereign instruments, often perceived as less risky. This trend results in increased competition between the public and private sectors to capture bank financing, to the detriment of private investment.
In Central Africa, the bank portfolio in public debt increased to reach 24% of total assets compared to 2.6% in 2010. West Africa and Southern Africa follow this trend with increases of between 7% and 9% of assets. On the other hand, the decline in private credit is most marked in Southern Africa, where it reaches -12.1% of assets, compared to a reduction of 2% to 3% in Central, West and North Africa.
This preference of banks for sovereign assets reflects a financial reality: government bonds, although not very risky, offered high rates which meet the profitability requirements of financial institutions. For example, yields on sovereign debt have reached record levels: Ghana raised funds at a rate of 19%, and Kenya at over 12%. Compared to the rates of 5% to 8% offered by SME loans, these high yields reinforce banks’ preference for government bonds.
A financing gap of $194 billion for SMEs
The private sector is paying the high price for this phenomenon. The financing gap for SMEs in sub-Saharan Africa is estimated at $194 billion per year. SMEs, which represent 80% of businesses and 60% of jobs in the region, are the first affected by this reduction in access to credit. According to the EIB report, 57% of SMEs report that insufficient financing is their main obstacle to growth, while 45% face difficulties in accessing cash flow credits.
Particularly affected, the agricultural sector, an economic pillar in several countries, is seeing a large proportion of its SMEs facing a reduction in credits.
The challenge is also internal to banks, for whom credit risk remains a major concern. In 2022, around 27% of SME loans were considered non-performing, a rate which, although slightly decreasing, remains worrying. This level of non-performing loans partly explains the caution of banks with regard to credit to the private sector.
Fiacre E. Kakpo
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