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    By Nina Fenton, Claudio Cali and Ricardo Santos

    The EIB, in partnership with Making Finance Work for Africa, surveyed 78 banks in sub-Saharan Africa in early 2021 to see how they are coping during the COVID-19 pandemic and to learn their views on climate risk, green finance and digital financial services. This work formed the basis of our new Finance in Africa report. The report also provides an in-depth analysis of the state of play in the microfinance, private equity and venture capital sectors in Africa.

    African financial institutions have remained relatively resilient during the COVID-19 crisis. But lingering problems could set back financing during the recovery. For instance, almost half of the banks reported that their biggest worry was a deterioration of their loan portfolios. Another 21% were most worried about the increased risk of new lending. Meanwhile, small firms and micro-entrepreneurs remain underserved and could lose access to finance if lending recovers slowly.

     

    More digitalisation

    African financiers are beginning to take advantage of opportunities in digital and green finance. The pandemic has provided an impetus to accelerate digitalisation of many sectors. More work needs to be done to help banks expand green and digital finance, and to deal with the risks. International financial institutions like the EIB will continue supporting the public and private sectors to accelerate the development of a greener, digital and more inclusive financial sector.

    Opening the doors to green lending

    Below, we present our key findings on green finance. For a more in-depth analysis of African financial sectors, read the Finance in Africa report.

    Our survey found that close to 70% of banks in sub-Saharan Africa see green finance as an attractive lending opportunity. Nearly 55% actively look at climate change when making strategic plans. And more than 40% of African banks employ staff to focus on renewable energy. However, only around 10% have tailored their products to serve green finance.

    The search for green partners

    The European Investment Bank wants to make a big impact in development around the world. We are working more closely with African financial institutions that are interested in green finance. For example, in 2020, the EIB and the African Export-Import Bank provided $300 million for a COVID-19 recovery fund helping sectors hit hardest by the pandemic, reserving 25% of the capital for green projects. The EIB has also invested in the Development Bank of Southern Africa’s Climate Action Facility. This new tool aims to accelerate private sector climate investments in southern African nations.

    We joined with the Luxembourg government to create the Luxembourg-EIB Climate Finance Platform, which has invested in a number of funds in Africa and other locations to fight climate change. In 2021, the EIB announced a collaboration with the African Development Bank to expand a shared pipeline of investment projects, including those tackling climate change and supporting environmental sustainability.

    African banks are well aware that climate change will hurt their lending portfolios. The risks include more frequent droughts, which can hurt agriculture, and the loss of land to rising sea levels. Infrastructure will also need to be upgraded to cope with higher temperatures, and African economies that rely on oil exploitation or other high-carbon emission activities will need to replace lost revenues and jobs as the world transitions towards net-zero carbon societies.

    Most African banks have lent money to vulnerable sectors, based on the EIB survey, and they know that this poses a risk: 70% told us they consider climate risk when appraising investments, while 40% assess climate risk at a broader portfolio level. However, only 27% changed their lending terms based on climate risk, and the same proportion are helping clients to address climate risk and modify these investments.

    What is stopping Africa banks from doing more green lending?
    • Some bankers say clients aren’t (yet) asking for green finance
    • They also lack the knowledge to give loans in some sectors
    • They don’t have the tools to assess climate risk
    • They aren’t sure how to adapt their products to climate action lending

    So, how can the EIB work with African banks to boost climate finance? Many banks said there is a lack of demand for climate-related products. Some also mentioned a lack of employee knowledge or a lack of data, tools and models for understanding and assessing climate risk. Training for clients could increase demand for green products, and financial institutions might benefit from technical assistance to tailor their products to green opportunities. The adoption of green finance principles and strong transparency standards could make investors more willing to get involved in sustainable finance. It also could be good for African financial institutions to take advantage favourable financing terms from institutions such as the European Investment Bank.

    Sustainable finance is a challenge everywhere. The key to expanding green lending is to understand the local situations, share knowledge, best practices and success stories, and work closely with clients to solve their technical and financial needs.

    To learn how Africa’s financial sector will navigate the difficult path ahead, read the Finance in Africa report.

    Nina Fenton, Claudio Cali and Ricardo Santos are economists specializing in financial sector development at the European Investment Bank