# **Box 6: Regional Perspectives**

<u>Sub-Saharan Africa</u><sup>16</sup>

## **Major Trends**

Overall, median lending rates and lending-deposit spreads declined in the Sub-Saharan Africa (AFR) region while both indicators remained above the global medians for developing countries. Median nominal lending rate in the AFR region stood at 11.6% in 2017, down from 18.6% in 2003, a much larger decline than in median country inflation (0.9 percentage points). The decline in median country lendingdeposit spread (-2.7 percentage points) was the highest among the World Bank regions, but nevertheless it remains above the global median of developing countries. In 2017, the top-3 countries in the region with the highest lending rates were: Madagascar (60%), Malawi (39%) and The Gambia (29%). In terms of lending-deposit spreads, Madagascar, the Democratic Republic of Congo, and SãoTomé and Príncipe have the highest spreads.

## **Major Challenges**

The challenges facing the region are multidimensional ranging from a more challenging macro-financial environment, acute banking system distress in some countries, and structural obstacles. There has been a rapid build-up of public debt levels across a wide range of countries in the region since the Global Financial Crisis and the commodity prices shocks, with an increased and material reliance on domestic (primarily banking) sources of funding putting upward pressure on interest rate and crowding out private sector lending. Even though the debt to GDP ratio of the median country at 35.2% of GDP in 2016 is still some 91⁄2 percentage points of GDP lower than in 2003, it is substantially above post-HIPC levels. Some countries are experiencing wide banking system distress with the government actively engaged in resolution. The very challenging operating environment for many banking systems in the region (e.g., relatively small scale, costly contract enforcement, low recovery rates, deficient telecommunications and power infrastructure, costly security provision) is reflected in the very high cost-to-income ratio (92.5% in 2017).

## **Policy Overview**

The region has seen a variety of responses to the high interest rate challenge from building and strengthening credit contracting infrastructure, to government/central bank provision of credit and guarantees to specific sectors, and to the use of interest rate caps. Credit reporting systems have started operations recently in various countries; collateral registries (including for moveable assets) are being put in place. However, the effects of these initiatives will take time to manifest in lower rates as borrower coverage and lender reporting is still limited, better infrastructure is required to support efficient consultation of registries (e.g. digital access) and the quality of information (e.g. inclusion of positive information) slowly improves. Government interventions aimed at lowering borrowing cost have included the provision of public credit guarantees, subsidized credit to specific sectors which in some cases is having a seriously distortive effect with quite limited transparency in operations.

16 This regional section is based on substantive inputs provided by Mariano Cortes (FCI-AFR), and Philip Schuler (MTIAFR).

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