Risk aversion and credit ratings: Why Africa is paying more for debt

The African Union is in the process of setting up an African Credit Rating Agency, in part to challenge perceptions of the continent, and how risky it is to invest. But creating a separate system won’t solve Africa’s problems, James Mwangi, the CEO of Equity Bank Group Holdings, told Devex. “A parallel market is not a solution, because you want to plug into global markets,” said Mwangi, whose organization is one of Africa’s largest financial institutions. Those global markets are necessary, he said, in order to attract more capital to the continent. But to access them, Africans must educate the ratings agencies. Distorted perceptions of risk have led to higher rates and more expensive borrowing for African nations, putting them at a disadvantage and limiting growth, Mwangi told Devex during an interview in the Pro Lounge at Devex World. “When people don't understand a risk, they avoid [it],” he said. “And broadly, rating agencies have not had significant data on the continent. They have not fully understood the nuances of those markets.” The result? Prices, he said, have been distorted by “risks and perceptions and stereotypes” which do not accurately reflect reality. More data about country and private sector borrowing is needed to help the credit rating agencies more effectively analyze risk, he said. “Because we don't know about the risk we put a premium on risk pricing, and consequently, Africa has been paying significantly higher, yet the projects being financed are expected to compete globally so essentially, you disadvantage an entire continent in terms of global competitiveness,” Mwangi said. Addressing some of these underlying economic challenges, financing availability and debt are all critical to growing markets and tackling unemployment on the continent, said Mwangi, who was recently appointed to the World Bank’s new High-Level Advisory Council on Jobs. Mwangi also discussed a new Equity Bank of Kenya initiative to expand services to refugee camps in the country, in part through a risk-sharing deal with the International Finance Corporation, which is one of its biggest shareholders. The bank has been working with the UN Refugee Agency, to deliver social payments to millions of households and will expand lending in those refugee communities, including small loans to start businesses. While Equity Bank wanted to expand it was concerned about the risk, which is where IFC comes in. Along with new lending, the bank will also provide financial literacy and entrepreneurship training to refugees and the surrounding communities, Mwangi said. “It’s not just financial access. It’s integration within communities. It’s sustainable livelihoods supported by the real economy,” he said, adding that if this model of expanding services in refugee camps is successful then Equity Bank Group plans to scale it across the seven countries where it operates.