While in London, Idriss Linge, Head of finance at Ecofin Agency, was able to exchange with experts from moody's rating agency on the dynamics of banks and countries in sub-Saharan Africa. Ecofin Agency: Sub-Saharan African countries are increasingly moving towards the digital exposure of their financial systems. In your opinion, what implication can such an approach have in banking activity, especially since they tend to rely on the fees and commissions of their digital investments to diversify their income? Akintunde Majekodunmi: I would start with a bit of background. It is true that over the last two years or so, in sub-Saharan Africa specifically, and generally in Africa, we seem to have fairly moderate economic growth. As a result, banks are struggling to develop their loan portfolios, even in countries such as Kenya, Nigeria or South Africa. We have seen a contraction in loan growth or a very moderate growth in loans. The profitability of banks has therefore been quite limited over the last two years. Because things like fees and commissions from reduced loan growth, as well as interest income, have declined. 

Akintunde Majekodunmi (Vice President, Senior Credit Officer, Financial Institutions for Africa)

So we found that banks were increasingly trying to find different ways to generate revenue. They do this by investing more in digitalization, by investing more in their own fintech platforms or online banking. I would say that this trend is the one we are seeing across the continent. Some banking systems are more advanced than others. But as a general rule, the African banking system is increasingly digitalized. "I would say that this trend is the one we are seeing across the continent. Some banking systems are more advanced than others. But as a general rule, the African banking system is increasingly digitalized." The other observation we also make is that Africa is generally underfunded. Credit to the private sector is very low. As a percentage of GDP, it is actually less than 30% in most countries, with the exception of South Africa, where the credit-to-GDP ratio is 1.5 times, I think. Thus, fintech, digitalization, e-banking or electronic platforms, whatever you call them, allow banks to reach the unbanked or to gain more exposure to sectors such as retail or small and medium-sized enterprises. So what to expect? Yes! As you said, the commissions and fees of these services will generate more revenue, because the volume of digital transactions is very high. "So what should we expect? Yes! As you said, the commissions and fees of these services will generate more revenue, because the volume of digital transactions is very high. We're going to start seeing more ways to take out loans through a digital platform, or fintech, as we've started to see in Kenya with the small loans that people can get through MPESA and MShwari. Page 2 of 4 © 2019 Factiva, Inc. All rights reserved. Peter Mushangwe: Just one addition on this point regarding financial inclusion. As you rightly say, I think the other point concerns income from bank commissions, which may somehow come under pressure.

But this is mitigated by the fact that the increase in transaction volumes via digital will increase, now that several people, outside the banking system so far, can be affected. Just another point, the risk is that, if you talk to African bank executives, one of the fears they bring up for most of them is the risks associated with digitalization, because they are now exposed to cyber risk. "If you talk to African bank executives, one of the fears they bring up for most of them is the risks of digitalization, because they are now exposed to cyber risk. So from a management perspective, one of the concerns is how to deal with cyber-attacks and cyber risks and the banks themselves have started to invest heavily in this area. Ecofin Agency: In this changing environment, Moroccan banks have aggressively entered new markets in sub-Saharan Africa. In this context, they have mobilised more capital to strengthen their equity and cope with new risks. Do you think that this improvement in the capital of Moroccan banks can be enough? Akintunde Majekodunmi: We know that Moroccan banks have developed increasing exposure to sub-Saharan Africa. And we've seen that this leads to pressures from an asset quality perspective. We saw these pressures when we reviewed the consolidated accounts of Moroccan banking groups, specifically because of their exposures to sub-Saharan Africa. Now it must be said that this is a common trend. We often see banks expanding locally or internationally facing these problems because, they are not fully aware of the risks and challenges specific to each banking system, or... there is simply more risk in the foreign banking system than in the country of headquarters. And it is this last point that we have seen with Moroccan banks and you can see it on non-performing loans. "There is simply more risk in the foreign banking system than in the country of headquarters. And it is this last point that we have seen with Moroccan banks and you can see it on non-performing loans. Is the capital accumulation we have seen recently sufficient to mitigate this deterioration in asset quality or height and asset quality risk? I'm not sure. But all I can say is that yes, pan-African expansion geographically diversifies your revenue streams and opens up new markets and new business opportunities for you. But there is also the risk of new challenges. And this is what we are noting with moroccan banks, but also Nigerian, South African and Kenyan East African. Ecofin Agency: Some sub-Saharan African countries are struggling due to the sluggish international trade environment and mixed economic performance. In such a context, could the countries of this region rely on their local financial sector, in case they wanted to finance their budget? If not, what options do they have? Kelvin Dalrymple: Africa needs to be broken down into four distinct subregions. West Africa, Central Africa, Eastern and Southern Africa. Our analysis and research has shown that these regions are developing at different rates. So we found that East Africa is developing faster. Thus, the East African Community comprising countries such as Tanzania, Ethiopia, Rwanda, Uganda, shows a growth of about 6% to 7% per year thanks to a strong agricultural production as well as many constructions and certainly many investments in infrastructure.

And then we have West Africa which is much more heterogeneous. You have countries that are very dependent on oil, and you have others that depend on agricultural products and others that combine the two. "We have West Africa which is much more heterogeneous. You have countries that are very dependent on oil, and you have others that depend on agricultural products and others that combine the two." So it's a very contrasting picture. Sometimes this can help foster growth. And of course, in times of crisis, we will have the opposite effect as we have seen for Nigeria and Ghana. These countries have gone through a cycle of expansion and slowdown. And their growth rate is about 5%. Then we will go to Central Africa, to the CEMAC region. This region still tends to be very unstable due to changes in the prices of commodities, oil, precious metals and other types of commodities. Their growth rate is about 3.5% Finally in southern Africa. We have countries like South Africa, Botswana, Namibia Eswatini, Lesotho, Zambia, or Zimbabwe. These countries, although with similar profiles, are excessively linked to South Africa's economy, which has not performed very well in recent times. Therefore, this has not had a positive impact on the subregion. These economies are therefore either in recession or at very low growth. And therefore, the growth rate in this region is about 3%. But growth is not the only story in these economies that we want to focus on, there is also a fiscal policy challenge. Also in regions such as CEMAC, for example, monetary policy is common. But monetary policy itself doesn't really determine what happens. It is really fiscal policy that is essential to follow. "Also in regions like CEMAC, for example, monetary policy is common. But monetary policy itself doesn't really determine what happens. It is really fiscal policy that is essential to follow." Many African countries as a whole are struggling to improve income mobilization. They struggled with that goal. And it becomes a bit difficult because there is a very high demand and a lot of political pressure and yet very little means to invest in infrastructure, social services and a whole range of things. At the same time, they need to monitor current account transactions with the outside world. What we also note is that the expenses to be made are significant and cannot be eliminated. You have to pay for your schools, your roads, the service of your debt, the salaries and wages of civil servants.... So there is very little left for development in the social sphere, when all these expenses are taken care of, which is a big challenge. "You have to pay for your schools, your roads, the service of your debt, the salaries and wages of civil servants.... So there is very little left for development." So what happens when there is no convergence between revenue and expenditure? you have burgeoning deficits. And these deficits must be financed. They can be financed on the internal market or externally. In terms of national banking sectors in some of these regions, if we take that of a region like CEMAC, it is not always able to provide the financing that these member countries need and that is a challenge. Our research has shown that some countries faced with this dilemma choose to reduce their spending on either investment or operations. Ecofin Agency: To what extent are sub-Saharan African countries with a low investment rating, and rated by Moody's, exposed to exogenous factors? Let's give some context about these countries. Currently, Moody's evaluates 23 countries in sub-Saharan Africa. 23 of which only 3 have a higher quality of investment. South Africa, Mauritius and the third is Botswana. Below this level of investment, you have a wide range of rating levels. You have some that are of inferior quality to investment, such as Namibia, Senegal and Côte d'Ivoire. Then in the next circle which would be of the note B (speculative). Then you have a whole group of countries whose notation is between B1 and B3. As you may know, our ratings reflect the probability of a default. They range from Triple A, the highest level where there is virtually no risk of default, to level C which reflects advice not to invest and where none of these African countries are found at the moment. "Our ratings reflect the probability of a default. They range from Triple A to the highest level where there is virtually no risk of default, to level C which reflects advice not to invest and where none of these African countries are found at the moment. » Page 4 of 4 © 2019 Factiva, Inc. All rights reserved. If we focus on the group of countries located in the "B" rating level, it is necessary to say that it is not that they are not all stable or not. What we have seen is that there are countries, some aspects of the economy of which are strong, but which need to monitor several blocking factors. So we at Moody's try to give a very balanced view. Take Nigeria, for example. This country is of course endowed with many mineral resources in oil and gas. And we talk about it very favourably in our reports. But what is not known is that oil accounts for 10% of Nigeria's economy, and 90% is non-oil. Thus, the authorities have talked a lot about making this 90% of activities more productive so that the economy can grow sufficiently and also, be more diversified and less dependent on a single source of income and exports, as this could become a challenge in the event of a shock. "But what we don't know is that oil accounts for 10% of Nigeria's economy, and 90% is non-oil." If we take this back to a general situation, we note that many African countries are experiencing commodity shocks, whether oil and gas shocks, food shocks or drought shocks. These are all types of shocks that these countries are experiencing. The idea is therefore to move these countries from a dominant source of foreign exchange income to other types of activities. Interview by Idriss Linge