Backbone of the African banking system: development finance institutions

With patient capital and high risk tolerance, they hold the largest portfolio in Africa, directing significant resources to enable the continent’s banks and private investors to finance business growth.

According to our data from Asoko Insight, the 15 European DFIs, the International Finance Corporation (IFC), Canada’s FinDev and the United States Development Finance Corporation (DFC), have deployed over $48 billion alone. in Africa between 2015 and the first quarter of 2021.

Source: Asoko Insight

Growing trends

Several trends are fueling the continued growth of their business, including support for funding requests needed to respond to the Covid-19 pandemic, the continued momentum to close the persistent infrastructure gap in Africa and an increased focus on impact investing that meets environmental, social and governance (ESG) criteria.

In addition to these market drivers, Africa’s role on the global stage is driving a broader geopolitical dynamic that has seen international partners increasingly look to investment to cement their role in growth. future of Africa.

Recent years have seen DFIs gradually move up the value chain by taking direct stakes in private companies, CDC, Finnfund, FMO, Proparco and IFC being among those who illustrate this trend.

Concentration of investments

That said, a review of the distribution of DFI investments since 2015 by sector shows a continued concentration of deals in the financial services space – accounting for nearly a third of the nearly 500 deals recorded – confirming that development finance brings essential support for the development of the continent. banking system and is the backbone for the growth of private equity and venture capital.

This funding ultimately helps keep Africa’s engine of small and medium enterprises running, and has been particularly crucial since the onset of the coronavirus pandemic.

At the start of the pandemic in 2020, the Center for Global Development highlighted the need for DFIs to prioritize the creditworthiness of local financial institutions, while the Overseas Development Institute urged OECD governments to reallocate aid budgets to DFIs, which were best placed to provide countercyclical support.

Focus on impact

The impact of this financing ripples outwards and today DFIs directly or indirectly support more than six million African jobs. Impact is at the heart of DFIs’ mandate.

In a conversation with Asoko earlier this year, Benson Adengua, UK CDC’s Head of Office and Coverage in Nigeria, said: “As a development finance institution, we consider impact in everything we do. We use a very broad definition of impact which covers the direct and multiplier effect of an investment on the economic growth of the market.

This focus on impact investing has increasingly aligned with broader trends that have investment criteria focusing on sustainability, gender parity and inclusive economic growth.

Climate crisis

Addressing the climate crisis is high on this agenda and is reflected in the large number of investments in power and utilities made by DFIs. These companies often require long-term financing with a high risk appetite, DFIs are essential to the foundation on which Africa’s infrastructure will be built.

At least half of these deals are for renewable projects, including Kenya’s Lake Turkana Wind Project, the continent’s largest wind farm and Kenya’s largest private investment, which is being funded by a consortium comprising three European DFIs.

Agriculture

Agriculture is another key area of ​​interest for Africa as it seeks to ensure its resilience to climate change and improve its ability to feed its population. As our data shows, DFIs have always been active in this space, with agribusiness accounting for the third highest number of deals with 10% of deals. the sector continues to attract considerable attention, with a coalition of DFIs committing over $17 billion to improve food security in Africa in early May.

These general objectives go hand in hand with the scale of DFI financing, which covers three-quarters of the continent. Investment hotspots at each of the four corners – Egypt, Kenya, South Africa and Nigeria – are the top destinations for DFI-backed deals, together representing 45% of the total.

This concentration reflects the developed financial services and entrepreneurial ecosystems in these markets, allowing relatively easier access to data on private sector rising stars to support investment flows.

At the end of the line

DFIs were the primary source of investment capital pre-Covid, pretty much the only one during it, and therefore are emerging as an even greater force. While the long-term and impact-conscious nature of capital is well aligned with Africa’s development needs, it is also a sign of an underdeveloped business investment ecosystem.

As Africa’s economy gradually recovers from the pandemic, the balance between FDI and “commercial” money will be an interesting metric to watch for the region’s global competitiveness.

Rob Withagen is co-founder and CEO of Asoko Insight, Africa’s leading business data and engagement platform, providing global investors, multinationals and development institutions the most effective route to discover, screen and engage their target universe of African companies. Learn more at www.asokoinsight.com.

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