The end of the summer in the Northern Hemisphere coincides this year with heightened expectations related to two major upcoming events. Both have been announced, but their outcome and potential consequences are uncertain: the November elections in the US and the Federal Reserve’s cut in interest rates.

The Fed and chairman Jerome Powell have recently been pretty clear: the cut—or cuts—are coming. The remaining questions are, how much and when?

The winner of the US presidential contest is hard to predict, but both major parties have generated plenty of surprises in the last few months concerning the candidates and their agendas. In a year when many major democracies are running elections and several key central banks have already lowered their interest rates, what happens in the US has consequences worldwide. Recent turbulence in the global financial markets signals precisely the magnitude of what is at stake and its potential repercussions.

In this issue, together with the announcement of this year’s Best Digital Banks and the annual Best Innovation Labs selections, we are focusing on another vital issue. Our cover story on the US-China confrontation over artificial intelligence examines the critical and very current duel between the two superpowers, detailing the specific areas of confrontation and the different approaches the two nations are taking.

Our focus is also on the potential consequences of this AI competition; we offer potential scenarios for both the near-term and long-term future. Predicting a winner is of course more difficult, but clearly the issue will become more and more relevant worldwide. Overall, we offer a rare insight into what is often—and wrongly—considered primarily a commercial war between tech giants in the US. This duel has a global nature beyond ChatGPT and its competitors.

Andrea Fiano | Editor at Large
afiano@gfmag.com

This summer issue of the magazine coincides in many parts of the world with very high temperatures and the consequences of a long season of political elections that has touched India, many countries in Europe and the European Parliament, and in November will reach the United States. The political tension continues to rise in the US, especially since President Joe Biden’s withdrawal from the presidential race and his endorsement of Vice President Kamala Harris. All this, in turn, affects decision-making at every level. Major decisions in companies and financial institutions are on hold, awaiting election results. Needless to say, corporate life goes on.

This month’s cover story focuses on the future of banks, with an eye, as is our style, to the global picture, not just the regional one. Commercial banks’ traditional role faces challenges resulting from strict regulation and changing technologies, but this also represents an opportunity. The increasing role of nonbanks, digital-only banks, and different nonbanking intermediaries has forced many banks to change their priorities. And yet, this offers some of them, particularly in advanced economies, an opportunity to shine in different market segments.

In this issue, we also present two of our key awards: Treasury and Cash Management and Sub-Custody. There are some repeat winners and, as often is the case, some new names. There are winners for some categories reflecting recent trends and developments in a sector that deals with major developments in payments, supply chain diversification, inflation, and geopolitical risks.  

In addition, the sub-custody awards allowed us to look deeper into the changing role of corporates in dealing with their sub-custodians. The result of Anthony Noto’s research on the subject is quite surprising and interesting.

Andrea Fiano | Editor at Large
afiano@gfmag.com

Is there a link between freelancing or outsourcing and the world of innovation? This question came to mind after reviewing the two key topics in this month’s issue. And the answer is definitively “Yes.”

Freelancing and talent outsourcing—the topic of this month’s cover story—are growing, becoming increasingly global, affecting different sectors, occupations, and ranks. The growth of freelancing is happening in advanced and developing economies, small and large countries, and new and traditional jobs, and has attracted increasing attention from regulators. This trend, which is not new but has expanded enormously in the last few years, has been made possible by multiple innovations. It applies to traditional and nontraditional companies, even virtual ones, so much so that many of us will be surprised by some of the details and statistics offered in the story by Bill Hinchberger.

Our annual Innovation Awards, which we present in this issue, offer a preview of financial services’ present and future. We celebrate banks and fintech companies for their specific innovations, but also their comprehensive effort on innovation, and we also recognize the best in these areas region by region. Artificial intelligence (AI) is now and, for the time being, the dominating theme for all involved. However, the offerings presented here are all focused on solving specific problems, not potential ones. As a result, our awards selection presents some applications for AI in the supply chain, logistics, data science, machine learning, marketing and talent outsourcing. And solve specific issues related to cash flow, liquidity management, and supply chain efficiency.

Again, as in the case of freelancing, innovation is global in scope, but the winning solutions come from very different regions of the world and financial institutions or fintech companies of all sizes. It is worth repeating: innovation is key to growth.

Andrea Fiano | Editor at Large
afiano@gfmag.com

Foreign Direct Investments (FDI), the topic of this month’s cover story, is often an unreliable economic indicator. Data about FDI is reported usually with delay, and it is hard, if not impossible, to understand which specific sectors are receiving the investments in a given country. Add to that the distortions of investments moving from one country to the other, while the funds originally come from a third country that has initially invested— or “parked” the money— in the first country.

Having said all that, one wonders why these data are still interesting and offer many indications of economic trends worldwide. In the cover story written by Deborah Ritchie, for example, we see how nearshoring and friendshoring have caused some sizeble direct investments moves within Asia, from China to the Americas, and to Mexico. We can also see why there are some signs of recovery in certain countries and regions based on the recent global trend of decreased FDI. Or, in other words, we are offered some indications of economic trends that have just started to show concrete signs of relevance. FDI data often also reflects the effect of global geopolitical tensions better than many others and can become an early indicator of major economic transformations.

In this issue, we also recognize the Best Banks in the world with our annual awards. As usual, we celebrate big and small banks that outperformed their competitors in all countries and regions, no matter the economic conditions. This year, the global banking sector managed to overcome major contagion risks due to the failure of banks in Europe and the US, presenting record profits in many regions.  As a result, banks’ resilience and some significant M&A activity became one of the year’s key trends in the banking sector.

Andrea Fiano | Editor at Large
afiano@gfmag.com

One of the advantages of  being a journalist is the unique opportunity of spotting trends, even potential ones, before they become mainstream. In this issue, we bring to light two clear examples of often unnoticed trends. One pertains to the investment banking sector, and the other to the future of environmental, social and governance (ESG) regulations and new financial instruments.

A simple look at the situation around the world would miss significant details in each case. For investment banking, the analysis we did to assign our annual awards in the sector, according to different geographies and financial instruments, shows that while the market overall has a tough 2023, there are segments and countries where growth was significant. And there are—no surprise—outperformers among the banks. Add to that the emergence of some new players on the advisory side, and the strengthening of some existing players, and you understand that summarizing 2023 as simply “a poor year for equity issuance and M&A” is entirely inaccurate and incomplete.

In the case of ESG, the surprise presented in our cover story is different. We looked at Asia to understand whether the trends around ESG follow the political backlash registered in the US with a drop in issuance of specific sustainability financial products or follow the European lead,  where ESG criteria still top the agenda for many corporates. In Europe, specific sustainability product issuances are at record levels and keeps growing. And in Asia? Issuance is at record levels and grows probably more than in the rest of the world, and regulation is also growing fast in most Asian markets. Environmental, social, and governance issues are still at the center of corporate life worldwide, and there is no sign of political backlash outside the US.

Andrea Fiano | Editor at Large
afiano@gfmag.com

One of the not-so-secret dreams of journalists is to report trends before they become public knowledge. Our cover story on Silver Power this month may not represent a revelation, but it does offer an unusual look at an often-discussed social issue. The author, Charles Wallace, explores the demographic issue of aging populations around the world not just as a growing source of problems for many countries—as it certainly is—but also as representing new markets, new wealth, and an underutilized talent pool. This inescapable trend is forcing many corporate executives to revise their long-term strategies. Many companies around the world have already redirected production with the aging population in mind.

 After all, the members of the Silver Set hold huge spending power. The population over 60 will nearly double its size between 2015 and 2050, according to the World Health Organization, and some countries are already experiencing the over-80 cohort as the fastest growing population segment.

This issue presents a wealth of stories, starting with a rich supplement focused on Latin America that touches on the varying realities of South America, Central America and The Caribbean, along with a country report on Kuwait and one on Nigeria.

Many of this month’s stories can be seen through the “filter” of demographics: Nigeria has significant growth prospects, as do many Latin American countries, due to the relative young age of many of their citizens. Our report on private banking also touches on generations, the great transfer of wealth from the Baby Boomers to their progeny. What will it mean for the private banking industry? Last, but not least, in this issue we present our annual Sustainability Awards: a topic which tops interegenerational agendas worldwide.

Andrea Fiano | Editor at Large
afiano@gfmag.com

This issue reflects a different approach, and to some extent a different content, than usual. We decided to focus most, but certainly not all, of this issue on  trade finance. Not just for our annual Trade Finance and Supply Chain Finance awards but for much more. Trade finance is the subject of a lengthy interview with seasoned experts Michael Vrontamitis and Daniel Cotti of T3i, and our monthly Global Salon, which had another expert as a guest speaker: André Casterman. He is currently a consultant after having a long experience at Swift, and is involved in many key cross-border projects in this area.

This approach, the deliberate choice to focus even more than usual on a single topic, brought a first result for our editorial team and your editor: We did not simply learn much more about trade finance and the critical issues relating to the sector, but also saw how much this topic touches our other key areas of coverage. Trade finance is influenced by many external factors, and has a global relevance in many different areas. In other words, the present and the future of trade finance are strictly connected, to mention just a few areas, with its innovation and with regulation. At the same time, trade finance evolves and trasforms itself also as a result of geopolitical tensions and developments around the world.

This topic is tightly intertwined with digitalization and the increasing use of artificial intelligence. New technologies and applications could democratize trade finance, expanding the reach of small and medium enterprises (SMEs), which typically have had harder times getting their trades financed. That is why experts often describe the industry’s current state by talking about an upcoming disruption or massive transformation of this sector. We hope you will enjoy the deeper focus of this issue, and find it, as we did, both enriching and thought-provoking!

Andrea Fiano | Editor at Large
afiano@gfmag.com

Global Finance: What were the main changes for trade finance in 2023?

Michael Vrontamitis: Last year, the United Kingdom marked a significant milestone by approving the Electronic Trade Document Act, making it the first G7 nation to enact this crucial legislation. This move aligns with the recommendations proposed in 2017 by the United Nations Commission on International Trade [UNICITRAL] through its Model Law on Electronic Transferable Records [MLETR].

Prior to the UK, only six countries—Papua New Guinea, Belize, Kiribati, Bahrain, Paraguay and the Abu Dhabi Global Markets in the United Arab Emirates—along with Singapore, had adopted laws in line with the MLETR.

Regarded as one of the most important laws ever approved despite being largely unknown to the wider public, the UK Electronic Trade Document Act represents a landmark moment for international trade. This legislation transforms essential documents, such as the bill of lading [a bearer tool for consigning goods], as well as bills of exchange and promissory notes, into digital assets. Digital signatures replace traditional “wet ink” signatures, making international trade more accessible, cost-effective and secure. This act will provide a pivotal foundation for the advancement of digital trade.

Several other countries, including India, China and Japan, have demonstrated keen interest in the MLETR and are studying its potential adoption. Other nations are in advanced stages of adoption, such as Germany, France and the United States [similar laws have already been enacted in 11 states, with 17 others considering them, including New York]. The year 2023 held particular significance, as a major economy—the UK—spearheaded this transformative movement, offering momentum on the international stage.

GF: What are some other important themes?

Vrontamitis: In 2023, the second significant theme was the rise of generative AI. While still in its early stages, I believe that generative AI will play a crucial role in advancing the digitalization of trade finance. The key factor for digitalization is adoption, and AI is poised to make this process more cost-effective and efficient than ever before. Tasks that once took 18 months for adoption can now be accomplished in a significantly shorter time frame, showcasing the transformative impact of artificial intelligence.

The third and final noteworthy theme in 2023 spanned various product sets globally, highlighting a reduction in the number of unprofitable ventures.

GF: Was this part of a consolidation process?

Vrontamitis: There were a lot of good digitalization initiatives that were able to generate positive cash flows, but eventually investors got tired of funding them. We saw actual bankruptcies. By 2023, the spotlight shifted toward sustainable ventures, a transition that is still unfolding. We anticipate the disappearance of several ventures in the coming months and years as investors will re-evaluate the created value and make tough decisions.

GF: Could you elaborate on the reasons behind these bankruptcies?

Vrontamitis: If you go back to 2018 or 2019, everybody was asking, “What’s your blockchain project?” And if you had a blockchain project, you could raise a lot of money. These projects are now folding because in most cases they weren’t solving real problems. The second reason is that they often picked the technology before they picked the problem. Most of the ventures just failed on all those on those parts.

Daniel Cotti: The trade industry is currently undergoing a significant and prolonged transformation, with trade digitalization unfolding as an evolutionary rather than a revolutionary process. Over the past few years, we’ve learned six crucial lessons:

1. Blockchain is not a one-size-fits-all solution.

2. Horizontal solutions are currently lacking.

3. Profitability requires more than just technology.

4. Partnerships are essential for fortifying horizontal layers.

5. People play a pivotal role.

6. Legal frameworks are progressively favoring digitalization.

For meaningful mass participation, a widely accepted digital framework instilling confidence among all parties is imperative. Without it, only a handful of trailblazers will explore innovative approaches.

The pieces of the puzzle are beginning to fall into place. Michael and I see significant developments in crucial aspects such as the legal framework and new technology. The market recognizes that conquering the world alone, reminiscent of the days of Marco Polo or Christopher Columbus, are outdated. Success now hinges on cooperation, collaboration and bringing the right parties together to create value added to end-to-end solutions.

GF: What’s involved when we talk about the digitization process of trade finance?

Vrontamitis: When we talk about digitalization in trade finance, we must consider at least three different buckets. Bucket one is what I would call documentary credits, or traditional trade finance. Bucket two is guarantees and securities. Bucket three would be invoice financing, supply chain finance and open account finance.

In the last bucket, invoice finance, there has already been a lot of digitization. In fact, most supply chain finance businesses are already digital have been digital from pretty much day one, in the early 2000s. The same is true in the receivable finance business. A lot of the receiver finance designed for large multinational corporates is already digitized. The truth is that a large chunk of trade finance has been already digitized.

The second bucket—the guaranteed space—is interesting because we haven’t seen a lot of digitizing and there is really an opportunity to do that; especially with digital vault services for Guarantee Vaults.

Then you have the whole traditional trade finance space—the first bucket—where essentially banks are receivers of information from shipping companies, logistics companies and clients. This is highly paper-intensive today, so we have different stages of evolution of digitization, For banks, is about being providing information electronically.

GF: What is your outlook for 2024?

Vrontamitis: Generative AI is poised to witness widespread adoption within financial institutions. This trend began gaining traction in 2023, and the coming year should see a significant surge in its utilization. Particularly in Europe and the United States, where advancements in this field are more pronounced, numerous players are likely to incorporate generative AI solutions into their operations.

Financial institutions will increasingly invest in and acquire Gen AI solutions, with the next 12 to 18 months being a critical period for implementing and leveraging the capabilities and toolkits offered by these innovative technologies. The adoption of generative AI is likely to bring about transformative changes within the financial sector, enhancing efficiency and decision-making processes.

GF: Is this set to increase the number of players?

Vrontamitis: Technological advancements are reshaping processes and enhancing capabilities, making them more cost effective. This democratization of technology enables smaller players to actively participate in the market. Simultaneously, larger players stand to gain substantial benefits, leveraging their extensive resources to navigate transformative changes and continually reduce costs—even through layoffs, if necessary.

In the realm of generative AI, early adopters among new market entrants are poised to secure a significant market share. The overall effect will be a surge in competition, fundamentally altering the landscape over the next 36 months. As technology continues to evolve, both established and emerging players will need to adapt swiftly to stay competitive in this dynamic environment.

GF: Can you anticipate what will be successful structures?

Cotti: The industry is grappling with the challenge of developing solutions that fully leverage the new legal framework and integrate it into business models with a sufficiently broad value proposition to encourage widespread adoption. The landscape of trade financing is incredibly fragmented, with numerous providers, thousands of fintechs, thousands of banks and millions of users worldwide. Given this complexity, the critical question remains: Which new solutions will have a substantial impact on the industry and attract significant volumes? It’s an open question, and as of now, there isn’t a definitive answer.

GF: What major risks might be in store for trade and trade finance in the next twelve months?

Vrontamitis: The landscape will witness the continued disappearance of technology companies in this space. Ongoing supply chain disruptions are a prevalent issue in the current market scenario, and this trend is expected to persist. Anticipating a decrease in inflation and interest rates, there’s a potential for increased risks and reduced costs in trade. However, global trade faces persistent risks, especially in key locations like the Suez Canal and the Panama Canal, posing challenges for the global economy.

The ongoing trend of nearshoring, driven by geopolitical concerns, is likely to persist as a negative factor impacting trade. On a positive note, the advancements in digitization and artificial intelligence offer avenues for productivity gains, potentially offsetting these challenges. While there’s hope that the positives will outweigh the negatives, the path forward is not without its complexities.

The New Year starts with renewed geopolitical tensions and wars, as well as near-term uncertainty about monetary policies—despite these factors, not necessarily pessimism. Going over the forecasts from major financial institutions and listening to their presentations, your editor felt a sense moderate optimism. And yet, much has changed in just a year concerning interest rates and growth predictions.

For example, the new reality of high-interest rates is still setting in for many businesses, even if 2024 could sign the beginning of lower growth in some key advanced and developing economies. The cost of debt for companies and sovereign governments is still high, and there is not a clear idea when—or how much—this may change.

This month’s cover story on private lending shows a booming industry attracting more interest from commercial banks. It focuses on the upcoming and growing risks for borrowers due to higher interest rates—and by extension for the lenders that serve them. Two other stories in this issue, with different angles, deal with specific niches within the financial sector: Gilly Wright’s on AI in Finance and our Salon with Sonny Singh, executive VP and general manager at Oracle Financial Services. Each story offers insight into key areas of growth (and risk) for financial services in the years to come, and on the ever-growing role of technologies like AI.

This issue includes also our annual Foreign Exchange Awards, named in honor of our late colleague Gordon Platt, who was our in-house expert on the sector for many years. The shifting winds of globalization make this a a very dynamic sector—trading solutions were key for most of our winners—while technology has evolved into a more precise tool for handling currency fluctuations and given a rocket boost to speed and capacity of executions.

Andrea Fiano | Editor at Large
afiano@gfmag.com

The discussion focused on the African economy and its banking system, both in terms of priorities and challenges, the growth of innovation and local fintech solutions. The recent exit of some foreign banks from the Continent, and the expansion of some strong local and regional banks into new territories were at the center of the conversation, as were the prospects for consolidation in the sector.

Global Finance: Let’s talk about the agenda for the African banking sector. What are the priorities and challenges?

Admassu Tadesse: African banking has been through quite a journey over the past couple of decades. It has strengthened. Now, the economies that underpin all the banks are going through new rounds of stress, and we really don’t know how far this new macroeconomic framework is going to last. African banks are exposed in the same way American banks have found themselves exposed, depending on the mismatch you might have in your books. I think the good thing is African supervisory regimes have really improved—regulators are more robust today than before. We’ve found very prudent responses being taken by most African countries over the past few years to deal with the shocks. And it’s a matter of recapitalizing those banks that need to shore up their capital, and it’s not just straight equity. It’s also hybrid capital, guarantees. So, I think financial institutions really reflect the wider economic climate.

Aliou Maïga: Since 2014-2015, there have been a series of global crises that have really impacted the continent. African economies were adversely impacted, including the financial sector. Banks had to first prioritize consolidating their risk management to ensure that their operations remained sound, and second, help maintain economic activity and support recovery. But due to ongoing crises—the war in Eastern Europe, volatile commodity prices—it is difficult to predict the path to recovery. Going forward, our hope is that the financial sector will support the development agenda, foster economic growth and value chains, create jobs and facilitate adaptation to climate change.

GF: Marc-Alexandre, your experience is of a commercial bank in Mauritius. For you, what are the priorities of the African banking sector at the moment? 

Marc-Alexandre Masnin: AfrAsia Bank was founded 16 years ago with the core mission of bridging Asia and Africa. We have clients in 160 jurisdictions and most of them are located in Africa. According to McKinsey, the net banking product worldwide is about $1.4 trillion, with the majority originating from Western countries and a smaller share from Asia. Africa contributes relatively little to this total although it accounts for 20% of the world’s population. This means we can expect new cash flows coming from this continent in the future, and second, if expectations regarding GDP growth materialize [Africa’s GDP is forecast to rise tenfold by 2050], the banking sector is poised for significant development. This is why we see great opportunities in developing proper value-added solutions for wealth management, asset management and investment banking. That being said, we do see some challenges and difficulties. One of them is the need to find the right talent as we expand our range of banking services. Secondly, there is a lot of catching up to do. We need larger players to emerge through merger and acquisitions to be able to offer a wider range of services.

Heba Abdel Latif: Africa is the continent that is most vulnerable to climate risk, so yes, we have great potential for GDP growth. But how will you make sure it is sustainable? When we did our first green bond, we had to change our DNA at the institutional level. Our senior management is now extremely aware of climate issues. We’ve also changed the way we assess the risks. The second thing is, African banks are growing much faster than banks in developed financial markets. They’re actually quite robust, and for us it is very important to get the credit to the small and midsize businesses because that is really the engine of growth. We are betting on digitalization—finding arrangements with fintechs and telcos. The third thing that is very important is, how do you educate people about financial services? About investing in things other than real estate or gold?

GF: Recently we have seen a massive exodus of foreign banks, and local ones stepping in. How has the weight of African banks changed? Do we expect African giants to emerge?

Abdel Latif: In the late 1990s, we could take uncovered project finance debt from international banks for Egyptian projects 12-15 years in US dollars. We cannot do that anymore. So, I think the role of export credit agencies is really vital if we are to get the financing for the capex requirements of clients. What is really heartening for me is to see, for example, South Africa’s Standard Bank opening a representative office in Egypt, because so far pan-African banks were not putting Egypt into their regional strategies. But at the same time, I think if we are to follow the South African model, we need to have deeper capital markets, deeper ability to fund our requirements and do our projects in a more insular world where capital, except for climate finance, may not be so easily available.

Masnin: Most European and US banks decided to exit from local markets, creating opportunities for locally based banks. Traditionally, rich African clients used to consider Monaco, Switzerland or Luxembourg as the right places to manage their wealth from. However, the landscape has evolved, and these jurisdictions are now less inclined to serve African wealth, prompting clients to consider alternative options. Among these alternatives, Dubai and Singapore stand out as major financial centers outside of Europe and the US. Additionally, Mauritius emerges as a compelling choice. Mauritius boasts investment-grade status, no exchange controls, it’s on the whitelist of the OECD and the FATF. On top of that, it has a longstanding track record of 30 years as a jurisdiction for financial services, supported by mature regulations.

Tadesse: It’s not just a recent phenomenon. It actually started several years ago, long before you had the more systemic megatrend that is happening now. It’s like the coin that has two faces: There’s one face of the coin that will clearly point to opportunity because it means obviously there’s less competition, but then the flip side of that same coin is you’ll have economies that will have much less service and much less efficiency. It cuts two ways. I think if you’re a bank like us—investment-grade rated with access to global finance, although not as easily as before—you have a lot more demand and you’re in a better market position. But for the African continent as a whole, the problem is you have much less service and you have much less financing.

GF: Does the exit of some of the foreign banks open more room for local banks? Are there countries that will suffer because of these exits, or is just a readjustment?

Tadesse: At an aggregate level, Africa has always been underserved. We’ve never had enough service, not enough financial intermediation. I think you will start to see banks coming in from the Gulf Cooperation Council [GCC]. Moroccan banks have already got quite a footprint in West Africa and are making their way across the rest of Africa. I think the usual suspects from Asia will bolden up and come to close the gap. Chinese and Indian banks also will pick up. I mean, infrastructure had its run; now the financial institution space has a lot of openings and it’s actually a very attractive segment to step into the African economy. It’s hard to imagine that people will just walk away from a continent that is on its way to doubling and tripling in size, both in terms of population and GDP.

Maïga: Let’s go back in history. Most of our countries were colonized, so the first banks were colonial banks in terms of their ownership, which catered to a small population and corporates from Europe. This was the case until the early 1990s. Part of banking is to service corporates. But really the bulk of it is consumer business is SMEs and households, and you can’t run consumer business from a distance. You have to be close to the clients. So, I would say there are a few areas that I would look at in terms of the movement of large foreign groups outside of Africa. The most obvious one is correspondent banking, which will remain in Europe mostly because it is by definition international. For corporate banking, I think it will either remain with foreign banks or a combination of foreign and local lenders, depending on the company. Retail, however, will remain a domestic business. Banks like Nigerian banks that were created in the early 2000s have now become dominant players because they understand the region much better.

Abdel Latif: It ultimately forces the domestic and pan-African banks to really change their business model. And if we don’t rise to the challenge of educating people to mobilize and save, but also develop domestic capital markets to be able to mobilize the wealth in Africa to fund Africa, then these exits leave a big gap, right?

Maïga: True, African banks don’t have the capital to finance very large projects.

GF: Should we expect more consolidation in Africa’s banking sector?

Maïga: I anticipate that strong banks will expand their geographical footprint and strengthen their expertise across corporate, SME banking and retail banking. We may also see more consolidation among banks, but this is harder to predict. At a country level, governments or regulators may decide to change the capital requirements for banks, which will then drive consolidation like we saw in Nigeria in the mid-2000s.

Abdel Latif: I expect to see consolidation. Because if we are very honest about it, why have a lot of the European banks left? Because the deteriorating credit risk of Africa has made them feel that they cannot afford to have the capital tied in. So given all the crises that are happening, there will definitely be an issue with capital adequacy, and I think this will force some consolidation.

GF: Moving on to innovation, what are the products or services with the biggest growth potential, and how do we foster innovation?

Masnin: Africa has one of the lowest levels of bank penetration worldwide. Paradoxically, the financial sector is highly digitized, with approximately 70% of transactions conducted through various digital apps. In terms of innovation in the retail sector, significant strides have been made, particularly in addressing day-to-day needs. However, there is still room for the development of advanced tools for high-value clients who seek digital investment solutions, brokerage platforms and wealth management apps. Such offerings are relatively hard to find among African banks, representing a crucial area for improvement. Innovation is very important, but so is human contact. Our clients demonstrate this need; they value having a proper, human, relationship manager available at all times. Mobile applications are great, but at one point you also want to talk to someone. 

Abdel Latif: Looking at Africa, I see a very strong entrepreneurial spirit—a lot of startups, fintechs and entities that are spurring innovation in the banking sector. I agree that we don’t yet have platforms for wealth management or brokerage, but the biggest chunk of the population doesn’t understand what a bond is or that they should invest in shares. So, I think there’s a lot that needs to be done from an education perspective first. Also, African banks generally have quite a high cost-to-income ratio, so a lot of innovation is going toward digitizing processes—getting rid of paper, streamlining trade finance and corporate payments.

Maïga: When you talk about finance, people think you are talking about credit, but actually in Africa we are referring to the exchange of cash. That’s why you have seen the emergence of so many fintech companies and telcos offering payment services. With regards to credit, things haven’t really changed. Additional innovation is required to bring down the cost of servicing particular areas of the economy and also derisking them to a point where banks can finance them profitably. One area that we are pushing a lot at IFC is agrifinance—specifically, companies that can assess and evaluate farms to a level where they can be eligible for financing from banks based on scoring criteria. This has the potential to completely change the reach and the scale of financing in Africa.

Tadesse: It’s no longer just mobile money and mobile banking. It’s all these payment systems that are coming online and how some of those will start interconnecting with infrastructure. You’ll be able to have renewable energy solutions like minigrids that will be tied up with fintechs. I think there will be very interesting developments on small-scale solutions. Historically, scale was everything, but now technology has changed everything. New business models are emerging.

GF: Are the banks investing directly in fintechs? What is the relationship? 

Abdel Latif: We have a private equity team investing in fintechs, but we also do collaborations. As a commercial bank, it’s not always easy to invest directly because of regulations, so there is a lot of collaboration, support at seed stage, training. We have also invested in data analytics to be able to work out the patterns to fund retail and small businesses in a simpler and more straightforward way.

Masnin: In our case, we are doing partnerships with existing solutions. We need to be efficient, and actually the advantage of entering the scene a bit later is that these solutions have already been developed and thoroughly tested.

GF: In terms of capital markets, what is missing? Where do African companies list? Are local markets relevant?

Abdel Latif: In Egypt, the balance sheet of local banks is very liquid. So it’s easy for Egyptian corporates to borrow at cheap rates, and ultimately there is no need to resort to the bond market. We don’t have a lot of international investors in the market either, partially because of the emerging frontier rating. Rates tend to be volatile; we don’t have an established yield curve, so that makes it extremely hard to price longer duration. Also, the bond market is not very liquid in Egypt because ultimately the banks are the investors. Disintermediation of the banks has not yet happened in Africa, and I think it needs to happen for capital markets to be available to support economic growth. There are huge opportunities, but nobody has really capitalized on it yet.

Masnin: With the exception of the Johannesburg Stock Exchange, most exchanges across Africa are relatively weak. Even in Mauritius, liquidity is scarce, and available funds are driven toward government issuances due to their perceived safety. The lack of diversified sources of financing is a big issue for most countries. On a positive note, one of our competitors successfully issued a bond on the London market, indicating there is appetite. But we need to promote Africa.

Tadesse: The one other megatrend that’s really beginning to come through is a more diversified approach to financing. There seems to be willingness now to do more local currency financing, including in terms of international trade. We are beginning to see very interesting offerings coming through. We are collaborating with the World Bank to expand local-currency financing solutions to some of the infrastructure needs for African economies. Of course, local capital markets are not deep enough—I had to get a special waiver from a country where I tried to raise $25 million, which was the largest single local-currency bond ever issued in that economy. So, as much as we are moving toward local currencies, there will still be constraints in the smaller economies. But in South Africa, we’ve seen a tremendous story of very strong local currency solutions has been, and I think some of the bigger countries, like Egypt and Nigeria, will start to pick up steam in that direction.

Maïga: Capital markets reflect the economy. Today, many African capital markets are developing, but the lack of incentives for corporates to go public and list on the stock exchange as well as the high costs of transactions are a challenge. Many countries need to review the costs associated with issuing bonds if they want to make it work. Right now, capital markets are mainly used to issue government bonds, but I anticipate this situation will change because there is a lot of capacity being built in the financial sector. Many African companies are now big enough to float shares. And due to limited access to international markets, African countries will have to reduce the cost of companies going to the capital markets, which will unlock opportunities for domestic stock exchanges.

Abdel Latif: Also, to develop domestic capital markets that actually meet the financing needs of corporates, you need to move much higher up on the value chain in terms of manufacturing and industrial. That’s because there are huge capex requirements in these markets that are completely being sourced from overseas, and for that you need the currency. So, you need to build up your export capability together with building your manufacturing base.

GF: Moving to climate financing, how are you tackling this issue?

Maïga: Climate change has become a significant focus for IFC, to the extent that it’s now part of our DNA. We leverage the resources provided by donors and also tap into our knowledge base to assist countries in developing regulations and frameworks for climate financing. We work with banks to transfer knowledge that will enable them to build their climate financing capabilities and also provide funding. A great example of our work is our partnership with CIB—which started at the country level with the central bank—to develop a green taxonomy. We then worked with the bank to enhance its capacity in climate risk management and climate financing. This collaboration resulted in IFC financing the first green bond in 2021, and more recently we have added a $250 million facility to support their climate initiatives.

Abdel Latif: I think banks are liquid enough to fund climate finance requirements. But it’s more a question of incentivizing clients in terms of grants and incentives in terms of the government saying, we will subsidize interest with a tax break for green practices, or a tax cost for pollution. It’s very difficult to move without that.

Masnin: There is the big picture, and the small steps at ground level. You need countries to subsidize the transition in order to make significant progress. At the banking level, we are already offering green loans for initiatives such as hybrid cars and solar panels, providing borrowers with reduced interest rates. At the continent level, you have plenty of private equity firms supporting climate projects, but banks are not really getting involved.

Abdel Latif: As a commercial banker, mitigation projects are not hard to fund because there is a business case—you have the cash flows, you have the means to repay the debt, you do your analysis and you fund. It’s the adaptation projects we’re struggling with because those generally don’t generate a return that is financeable in a classic banking way.

Maïga: I think blended finance is really important, especially for climate investments. If you think of it, banks operate by utilizing leveraged capital. You can give a $100 million loan to a government for a project or give the same amount to leverage five times to $500 million. The potential for impact then increases significantly. In this case, the losses incurred are typically not as high as initially anticipated.

Tadesse: Capital markets are only developed appreciably in a handful of countries, so as long as ordinary finance is still very embryonic, so is climate financing. I think the most exciting part will be the innovations on the carbon credit side, which will naturally involve international partners and foreign investors. But it will be a little bit different this time because it’s not going to be debt driven. I think there’s going to be some very interesting developments around swaps—debt for nature swaps, debt for social swaps, debt for agriculture swaps—which will help reduce the debt burden a little bit in some African economies and have some of the benefits of the spinoffs being allocated to specific development sectors. It’s very early days but it’s now coming to Africa. Gabon was one of the first beneficiaries and is doing excellent work. It’s not yet really addressing the question of domestic capital or African capital rising up to the climate finance agenda, but it’s a growing industry.