Africa badly needs long-term finance. But to properly develop, long-term finance markets need data and in-depth data analysis. For years, this sort of market intelligence barely existed. But the work of the Africa Long-Term Finance Initiative gives hope that things are changing.
Why is long-term finance important?
The simple answer: sustainable growth. Longer-term investments support growth and development by reducing costs. That increases productivity and competitiveness and creates jobs – particularly for the 12 million young Africans joining the workforce every year.
But there are significant long-term finance gaps across African economies, especially in the infrastructure, housing and enterprise sectors. These industries are crucial to the continent’s economic recovery from Covid, but businesses in these sectors often find they’re asked to repay loans before the investment has had a chance to yield a return.
Long-term finance is also necessary to accelerate Africa’s green transition, as industries and governments seek to reconcile economic development with climate change mitigation and adaptation.
How can data help?
One of the main reasons for the dearth of long-term finance in Africa is a lack of investor confidence. Investors feel exposed to liquidity and interest rate risks, and thus lack the appetite to provide anything more than short-term money.
This is largely due to a lack of market intelligence. Historically, there have been few – if any – benchmarks or indicators to go on when it comes to the performance of long-term finance in Africa. Without this knowledge, investors are reluctant to provide the necessary finance, for the necessary length of time for many businesses and projects to grow.
The deepening of domestic financial markets, with increased provision of financial products and services for all levels of society, is crucial to increase the availability of finance and deploy it more efficiently, and also to reduce exposure to foreign exchange risk – and this process requires accurate data, too.
What is the Africa Long-Term Finance Initiative?
In 2017, a number of institutions, including FSD Africa, came together to fix this lack of market intelligence by launching the Africa Long-Term Finance Initiative.
The initiative’s objective is to close the financing gaps in the infrastructure, housing and SME sectors. The ways it does this is by improving market intelligence through collecting data, operating a country-comparison LTF Scoreboard, summarizing the data in regular reports on key findings, and providing in-depth country diagnostics
These products enhance transparency and provide benchmarks to assess the comparative levels of long-term finance markets across the continent. The Africa Long-term Finance Initiative Scoreboard presents data using different benchmarking techniques, providing a more detailed picture than a simple comparison of country averages. The country diagnostics provide additional country-specific quantitative and qualitative analysis, complementing the data presented in the Scoreboard.
In turn, these outputs are helpful to inform policymakers, the private sector and donors about the availability of long-term finance, boosting investor knowledge and confidence – and thereby catalysing new partnerships that strengthen focus on what’s needed to increase the availability of long-term finance.
In addition, by enabling comparison between countries, the LTF scoreboard is creating positive competition among national stakeholders, and further driving the availability of long-term finance.
The green finance opportunity
Long-term finance is closely linked to the green transition in Africa. Countries like Kenya, Nigeria and South Africa have taken the lead in creating programmes for green bonds, which tap into domestic and international capital markets to finance green projects.
The success of these initiatives and the increasing global demand for green investments have led other countries – like Ghana – to follow suit in considering green instruments as a way of attracting long-term finance.
Driving recovery through data
The economic impact of Covid-19 means it’s more urgent than ever to respond to the investment needs of African businesses. The progress made on market intelligence by the Africa Long-Term Finance Initiative is therefore particularly timely. By equipping and emboldening investors, it’s hoped that the initiative’s work will be the first building block in the development of a strong long-term finance market to power sustainable growth in Africa.