VISUAL SUMMARY INNOVATIVE FINANCE FOR PRIVATE SECTOR DEVELOPMENT IN AFRICA ECONOMIC REPORT ON AFRICA 2020 VISUAL SUMMARY INNOVATIVE FINANCE FOR PRIVATE SECTOR DEVELOPMENT IN AFRICA ECONOMIC REPORT ON AFRICA 2020 VisualVisual SummarySummary INNOVATIVEINNOVATIVE FINANCEFINANCE FORFOR PRIVATEPRIVATE SECTORSECTOR DEVELOPMENTDEVELOPMENT ININ AFRICAAFRICA ECONOMICECONOMIC REPORTREPORT ONON AFRICAAFRICA 20202020 Ordering information To order copies of this report, please contact: Publications Economic Commission for Africa P.O. Box 3001 Addis Ababa, Ethiopia Tel: +251 11 544-9900 Fax: +251 11 551-4416 E-mail: [email protected] Web: www.uneca.org © 2020 United Nations Addis Ababa, Ethiopia All rights reserved First printing December 2020 Title: Economic Report on Africa 2020: Innovative Finance for Private Sector Development in Africa Development in Africa Language: English Sales no.: E.20.II.K.2 ISBN: 978-92-1-125139-5 eISBN: 978-92-1-005124-8 Print ISSN: 2411-8346 eISSN: 2411-8354 Material in this publication may be freely quoted or reprinted. Acknowledgement is requested, together with a copy of the publication. The designations employed in this publication and the material presented in it do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations Economic Commission for Africa concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. Cover design: Carolina Rodriguez, Dilucidar. ii 2020 Economic Report on Africa | INNOVATIVE FINANCE FOR PRIVATE SECTOR DEVELOPMENT IN AFRICA CONTENTS Lists of Figures, Tables and Boxes . v FOREWORD . viii. ACKNOWLEDGEMENTS . xi ABBREVIATIONS . xiii . EXECUTIVE SUMMARY . .xvi . Recent economic developments . xvi Innovative finance for African business . xviii Corporate banking . xx. Financial markets . .xxii . Equity markets . xxiii . Debt markets and the private sector . xxiv. Other opportunities for private financing . xxv Long-term financing for sustainable development . .xxvi . Infrastructure financing . .xxviii . Leveraging financial technology . xxxi . Financial regulation to support private sector development . xxxiii KEY RECOMMENDATIONS . xxxv . CHAPTER 1 Recent Economic and Social Developments in Africa . 1 Recent global economic performance and its implications for Africa . 2. Recent economic developments in Africa . 6 Socioeconomic development and implications . 11. Financial sector performance . 14 Financing opportunities for sustainable development in Africa . 19. Conclusions and policy implications . .21 . ANNEX . 22 CHAPTER 2 The Private Sector in Africa . 27 Private sector development in Africa . 29 Private sector in agriculture-based economies . 30. Private sector in extraction-based economies . 32 . Private sector in manufacturing-based economies . 34 Private sector in service-based economies . 36. Challenges to private sector development . 38 What solutions for financing private sector development in Africa? . .44 . The potential role of the African continental free trade area in private sector development . .49 . Conclusion . 51. Contents iii CHAPTER 3 Accessing Financing from the Corporate Banking Sector in Africa . 57 An overview of retail and corporate banking . 59 . The African banking sector . 61. The banking sector and financing of the real sector . 67 Implications of COVID-19 for the African banking sector . 69 Conclusion . 70. CHAPTER 4 Tapping into the Potential of African Markets . 73. Equity markets in Africa and opportunities for the private sector . 75 Debt markets in Africa and the need to crowd in the private sector . 81 Other opportunities for private financing . 85 Financial market products for industrialization . 89. Threat of COVID-19 to African financial markets . 92 Conclusion . 93. CHAPTER 5 Long-term Financing for Sustainable Development in Africa . 97 Sustainability bonds . 99 Development banks . 110 Institutional investors . 113 Conclusion . .116 . CHAPTER 6 Leveraging Global Innovations in Financial Technology in Africa . 119 Crowdfunding, crowdinvesting and crowdlending in Africa . .121 . Electronic payments and e-commerce . .125 . Insurance . .129 . Fintech for private sector growth . 130. Conclusion . .132 . CHAPTER 7 Regulations to Support Financing in Africa . 135 . Overview of financial regulation in Africa . 137 Financial innovation and regulatory challenges . 142 The future of financial regulation and need to support private sector development in Africa . 145 . Africa’s financial policy responses to the COVID-19 crisis . 149 Conclusion . .151 . iv 2020 Economic Report on Africa | INNOVATIVE FINANCE FOR PRIVATE SECTOR DEVELOPMENT IN AFRICA CHAPTER 8 Conclusions and Policy Recommendations . 153. Africa has a high economic growth trajectory, but COVID-19 has unleashed non-trivial uncertainty . 158 The private sector in Africa is the engine of growth and the pathway to sustainable development . 159 Banks are a major source of innovative financing in Africa and there are high expectations for pan-African banks . 160 . Rising African financial markets have great potential to finance high-growth firms . 161 . Long-term financing for sustainable development . .162 . Fintech is increasing private sector financing with varied financial services and products . 163. Policymakers must continue to improve the regulation of the financial service sector, including Basel III, and support innovative financing in the private sector . 164 LISTS OF FIGURES, TABLES AND BOXES LIST OF FIGURES FIGURE 1 .1 Global economic growth, 2015–2021 . 2. FIGURE 1 .2 Select primary commodity prices, 2017–2019 . 3. FIGURE 1 .3 Economic growth in Africa by regional group, 2015–2021 . 6. FIGURE 1 .4 Components of economic growth in Africa, 2018−2021 . .7 . FIGURE 1 .5 Evolution of the Economic Complexity Index in Africa, by subregion, 2013−2017 . 8. FIGURE 1 .6 Total investment, by subregion, 2015−2021 . .9 . FIGURE 1 .7 Total merchandise trade in Africa, 2017–2019 . 10 . FIGURE 1 .8 Multidimensional Poverty Index, 2007–2018 . 12 FIGURE 1 .9 Income shares of the top 10 per cent of the population, 2010–2017 . 13. FIGURE 1 .10 Credit-to-GDP ratio by African region . 14. FIGURE 1 .11 Net interest margins in select countries, 2017 . .15 . FIGURE 1 .12 Trend in bank regulatory capital to risk-weighted asset ratio . 16 Contents v FIGURE 1 .13 Trends in banking sector stability . 17. FIGURE 2 .1 Growth of value added in agriculture, manufacturing, industry and services . 31 FIGURE 2 .2 Top 22 African countries natural resource rent, 2016 . .33 . FIGURE 2 .3 Commodity-based (agriculture, and mining and fuels), manufacturing-based and service-based economies in Africa, by exports value . 37. FIGURE 2 .4 Main obstacles to businesses in Africa . .39 . FIGURE 2 .5 Main obstacles to the operation of businesses in Africa, by company size . 42. FIGURE 3 .1 Access to a credit line or loan from a formal financial institution is highest among large firms and lowest among small firms(Per cent) . 60 FIGURE 3 .2 The African banking sector is one of the fastest growing and most profitable in the world, 2019 . .61 . FIGURE 3 .3 Historical and projected growth of the African retail and wholesale corporate banking sectors (revenue pools before risk cost in billions of US dollars) . 62. FIGURE 3 .4 Map: The number of African cross-border banks had grown considerably by 2019 . 64 FIGURE 3 .5 Interbank lending is more expensive in African markets than in mature markets, 2014-2019Interest rates, percentage points . 66. FIGURE 4 .1 Market capitalization of the top four stock exchanges in Africa and other emerging markets . 77. FIGURE 4 .2 Initial public offerings by selected African exchanges, 2014–2019 . .78 . FIGURE 4 .3 Global corporate debt market capitalization (Per cent of GDP, 2019) . .82 . FIGURE 4 .4 African private capital fundraising, . .86 . FIGURE 4 .5 Global private capital fundraising, 2010–19 . 87 . FIGURE 4 .6 Share of African private investment deals by region, 2013–18 . .87 . FIGURE 4 .7 Evolution of assets under management in mutual funds in Africa, 2008–20 . 88 FIGURE 5 .1 Sustainability bond issuers, 2019 . 100 FIGURE 5 .2 Green bond issuances by region, 2007–19 . 101 FIGURE 5 .3 Infrastructure investment by international lenders and donors, national governments and the private sector in Africa . 108 . FIGURE 5 .4 Private sector financing in infrastructure, by sub-regions, 2018 . 109 FIGURE 6 .1 Blockchain wallet users have been rising globally, 2016–2019 . 124 . FIGURE 7 .1 Financial sector support measures put in place by African countries in response to COVID-19 . .150 . FIGURE 8 .1 Innovative financing for private sector development and SDGs . 156 . FIGURE 8 .2 The African Continental Free Trade Area (AfCFTA) . 157 . vi 2020 Economic Report on Africa | INNOVATIVE FINANCE FOR PRIVATE SECTOR DEVELOPMENT IN AFRICA LIST OF TABLES TABLE 1 .1 Return on assets and return on equity, by region, 2012–2017 . 16 TABLE 1 .2 Bank regulatory capital and non-performing loans ratios, by country(Per cent) 18 TABLE 1 .3 Africa’s infrastructure financing needs . 19 . TABLE 3 .1 Overview of major types of financing mechanisms from banks . .60 . TABLE 3 .2 The 10 largest pan-African banks in 2019 (US$ millions) . 63 . TABLE 4 .1 African stock exchanges with a market capitalization of more than $1 billion 76 TABLE 4 .2 Selected commodity exchanges in Africa . 85. TABLE 4 .3 Value and number and African private investment deals, 2013–2019 . .86 . TABLE 6 .1 Alternative