African Banks Face High Currency Risk Exposure, Report Finds

A recent report reveals that 69% of African banks consider themselves significantly exposed to currency risk, stemming mainly from the imbalance created by securing funds in strong foreign currencies while issuing loans in local currencies.

Around 60% of African banks view financial products designed to mitigate exposure to exchange rate fluctuations, such as forward contracts and currency swaps, as costly, according to a report released on April 23 by the Making Finance Work for Africa Partnership (MFW4A). The latter is an initiative launched in 2007 by the G8 to support the development of financial systems in Africa.

Titled "FX Risk in the African Banking Sector: Survey Report," the study is based on a survey conducted between July and December 2023 involving 31 banks and 5 non-banking financial institutions (NBFIs) across various sub-regions of the continent (19 in West Africa, 7 in Southern Africa, 6 in East Africa, 3 in North Africa, and 1 in Central Africa).

Of these institutions, 69% acknowledge significant exposure to currency risk, primarily stemming from the asymmetry created by securing funds in strong foreign currencies while issuing loans in local currencies.

These banks procure funds in US dollars and/or euros from international investors, multilateral financial institutions, or development finance institutions (DFIs), while their loans are primarily denominated in local currencies.

The majority of surveyed institutions (58%) extend loans denominated in both local and foreign currencies, while 36% lend exclusively in local currency and 6% only in foreign currencies. The latter operate in countries where the economy is heavily "dollarized," such as South Sudan and Somalia...Read more on Ecofin Agency

Source: Ecofin Agency