EIB report: Fintech companies in Africa triple in 2024

Africa's banking sector has showcased remarkable resilience in the face of adversity, with the sector experiencing solid growth primarily attributed to the rapid expansion of the fintech space. Colin Bermingham, a Senior Economist at the European Investment Bank (EIB), recently shared key highlights from a comprehensive report shedding light on the region's financial landscape. The EIB report highlighted significant trends and challenges shaping Africa's financial markets, as well as the pivotal role of digital finance, sustainability, and gender inclusivity. From the impact of inflation on credit costs to the surge in green finance initiatives, the discussion delved into critical aspects influencing the sector's trajectory. Let's delve deeper into the key takeaways from the insightful conversation with Colin Bermingham. One of the major challenges identified in the report was the constrained access to financial markets faced by governments and firms in 2023, resulting in difficulty securing financing. While 2024 witnessed a slight improvement in financial market conditions with some countries like Cote d'Ivoire and Benin regaining access to international markets, yields remained elevated compared to pre-pandemic levels. The report underscored the significance of enhancing access to finance as a critical driver for development in the region. The decline in bank finance to the private sector from 56% of GDP in 2007 to 36% in 2022 signified a pressing need for increased lending to support investment and economic growth. Furthermore, the conversation with Bermingham shed light on the impact of inflation on the banking sector, highlighting a scenario where banks operated in a high-interest rate environment due to central banks raising policy rates to curb inflation. While this led to robust profitability for banks, primarily driven by investments in government bonds, limited pass-through of increased interest rates to private sector lending raised concerns. The interview revealed a growing reliance on government bonds, thereby reducing funding available for private sector initiatives, indicating a need for a balance in monetary strategies to stimulate private sector growth. The discussion also delved into the evolving landscape of climate finance within the region, emphasizing the imperative for banks to intensify efforts in promoting green finance initiatives. While a substantial proportion of banks possess climate strategies, the report highlighted opportunities for deeper engagement and innovation in green lending products. The engagement of the private sector, including multilateral players, in climate fund mobilization was emphasized as a critical factor in advancing sustainable finance practices and addressing climate change challenges. Moreover, the conversation touched upon the rising trend of advancing funds to female entrepreneurs as a means to bridge the gender gap and foster economic empowerment. With over 70% of banks implementing gender strategies and noting improved loan performance for female-led firms, there exists a compelling business case for enhancing financial support to this demographic. The data revealed that female-led firms exhibited superior management practices, innovation, and export orientation, making them attractive prospects for banks seeking to diversify their loan portfolios. In the realm of innovation and digital finance, the discussion highlighted the transformative impact of fintech on financial inclusion and the evolving digital landscape of African banks. The rapid growth of fintech firms, exceeding 1,250 active companies in 2024 from 450 four years ago, underscored the region's leadership in digital financial services. This surge in digitization not only enhances access to formal financial services but also fosters resilience to economic shocks, positioning Africa as a global fintech frontrunner. Looking ahead, the outlook for Africa's financial services sector appears promising, with ample opportunities for growth in underbanked segments. With credit to the private sector at 36% of GDP, significantly lower than other developing regions, banks have considerable room to expand lending to households and corporates. However, the report highlighted the need for a stable macroeconomic and regulatory environment to bolster financial conditions and enhance the sector's performance. By navigating challenges and capitalizing on emerging trends, Africa's banking sector stands poised to drive inclusive and sustainable growth across the region.