Global bank capital\u00a0rules and\u00a0outdated\u00a0perceptions\u00a0of African risk continue to\u00a0inflate the cost of\u00a0financing productive assets\u00a0across\u00a0the continent and discourage investment, the head of the African Finance Corporation (AFC) has said.<\/p>\n
Speaking at the Royal African Society\u2019s 125th anniversary event at the London Stock Exchange on July 22, AFC president and chief executive Samaila Zubairu said African finance opportunities continued to be judged on perception rather than evidence., despite improving credit fundamentals.<\/p>\n
\u201cThe\u2026 question is why does our financial architecture still price African opportunity as though the evidence hasn\u2019t changed?\u201d he said.<\/p>\n
\u201cRisk should be priced on evidence, not perception. Too often, Africa pays not for actual risk but for what I call a prejudice premium. That is the difference between perception and lagging. evidence.\u201d<\/p>\n
Zubairu criticised the global Basel framework on capital requirements for banks, arguing they incentivise lenders to invest in US Treasuries and other OECD sovereign debt over productive assets in Africa. He said equity investments in projects such as power generation or pharmaceutical manufacturing could require banks to hold capital equivalent to 250% to 400% of the investment.<\/p>\n
\u201cA bank is rewarded for financing government securities several miles away, but penalised for building\u2026 antimalarial drugs right next door,\u201d he said. \u201cThe rulebook is producing exactly the behaviour it has been designed to produce. If we want different outcomes, we need different incentives.\u201d<\/p>\n
He also argued that political risk and contract frustration insurance premiums did not reflect underlying levels of risk.<\/p>\n
\u201cThe tools we use to manage risk\u2026 the premiums we pay are so high compared to the actual risk,\u201d he said.<\/p>\n
Some African countries have struggled with high sovereign debt loads in recent years, including defaults and subsequent restructurings in Ghana and Zambia. Senegal has recently faced heightened scrutiny after an audit uncovered previously undisclosed public debt, prompting the suspension of its IMF programme.<\/p>\n
Citing data from the Global Emerging Markets Risk Database, Zubairu said African sovereigns had among the lowest default rates and the highest recovery rates, repaying 95 cents of every dollar on average following a default.<\/p>\n
He estimated that between US$600bn and US$800bn of capital remained unallocated because of the continent\u2019s perceived risk.<\/p>\n
To address these issues, Zubairu called for a dialogue within the next 90 days between institutional investors in London and the New African Financial Architecture for Development (Nafad), to design mechanisms that would allow capital to \u201cprice African opportunity fairly\u201d.<\/p>\n
Nafad was launched by the African Development Bank Group this year to help close Africa\u2019s estimated US$400bn annual development financing gap by mobilising more domestic and private capital. It seeks to channel institutional capital pools, such as pensions and insurance, into productive investments while expanding guarantee and risk-sharing mechanisms to crowd in private investors.<\/p>\n
Zubairu said the initiative represented an opportunity to reshape how African opportunity is financed. \u201cIf we are serious about building competitive African economies by 2050, we must build a financial architecture capable of supporting them \u2013 one that rewards evidence over perception and prices political and country risk fairly,\u201d he said, citing the need for infrastructure such as industrial parks, power plants and ports.<\/p>\n