03 Mar 2021 / Article

"Bank solvency is the latest challenge in the Covid-19 era"

Grégory Clemente, CEO, Proparco

Grégory Clemente, 47, has been in finance for more than 20 years. Appointed chief executive of Proparco in 2016, he witnessed the 2008 financial crisis unfold from the trading floors of the French Development Agency (Agence Française de Développement – AFD), where he was responsible for capital market refinancing. As a core component of its overarching initiatives, Proparco is supporting Africa’s banking industry to the tune of nearly €700m (representing almost a fourth of the institution’s annual budget) by providing loans to SMEs through its “Choose Africa” programme, which launched in 2019. A friendly person with a passion for finance, Mr Clemente shared with us his cautiously optimistic assessment of the state of the industry in Africa.

 

You were on the front lines when the 2008 financial crisis hit. In what major ways has Africa’s financial sector changed since then?

African finance has become much more structured than it used to be. Today, for instance, stock exchanges have been established and are doing fairly well across the continent, and that wasn’t necessarily the case 15 years ago. A massive amount of work has been done in the regulatory sphere to make capital markets more accessible and that’s good news, as this is an extremely powerful way to finance the economy. That said, there’s still much work ahead of us and one of Proparco’s missions is to keep making progress.

 

What do you think African banks need the most amid the health crisis? 

At the beginning of the crisis, the problem we faced was a liquidity shortage in the banking system. Central banks and international lenders, including Proparco, responded by injecting liquidity into the system. But now, that’s no longer a priority, as we’ve entered the second phase of the crisis, one in which solvency poses a challenge: banks need to shore up their balance sheets and equity. 

 

In this climate, are you able to provide assistance to small and large enterprises alike? 

Proparco’s approach varies based on the structure, maturity and depth of the markets in which our partners operate. There is a wide range of situations on the continent. For example, Moroccan banks are very well structured. They are able to finance long-term and local currency-funded projects, including infrastructure projects. For these types of institutions, our goal is to strengthen their response capabilities and help support their growth strategy by acquiring stakes in them. In sub-Saharan Africa, we use the same approach but focus on two areas: liquidity and solvency. Many banks cannot take on very long-term financial risks; our role is to help them do so. 

 

What criteria do you use before deciding to invest in a financial institution? 

We primarily invest in the most financially sound banks and those operating in niche markets. For instance, banks with a strong track record of financing micro-enterprises and SMEs, as well as banks that are at the forefront of gender equality and women’s entrepreneurship. We recently signed a partnership agreement with Equity Bank in Kenya. Equity is a player that finances SMEs, but it’s also proactive on gender equality and climate-related issues. Now Proparco is involved in helping the bank shift its business model towards financing renewable energy projects. 

 

Equity Bank recently announced that it wouldn’t be paying a dividend to its shareholders for 2020 and justified this decision by saying it wanted to conserve cash so it could support its customers. Do you think it’s a good idea for other African banks to take this approach? 

We had a discussion at Proparco on the question, “Should we pay a dividend this year?” After all, the crisis has impacted us as well. As it happens, our majority shareholder – the French government – has provided crystal clear guidelines that advise against dividend payouts during a crisis. That’s the rule we’ve followed. We tell our clients that they should discuss this issue with their shareholders and obviously take into account the bank’s current situation. The answer to this question will differ from one financial institution to the next. During a crisis, paying out dividends can weaken a bank’s balance sheet, and we’re going through an unprecedented crisis right now.

 

As you said, African banks are more sound than they were 10 years ago. The crisis has, however, also adversely impacted them, while governments exhort them to aid the economy, even though their lending capacity has been impaired by non-performing loans, particularly those taken out by public enterprises. Isn’t this a paradoxical situation?

First of all, if African banks are more robust today, it’s because of the work they put in and their shareholders’ support. But it’s also important to highlight the role that public investment has sometimes played in their growth. So it’s essential to have a nuanced understanding of the public-private sector relationship. In some sectors, such as energy, we know that certain states may be in arrears with the private sector. Governments are aware of these types of difficulties and are taking action to gradually eliminate these arrears by paying them off and improving their ability to pay. International lenders are backing such efforts. A project like the Nachtigal dam in Cameroon is a perfect illustration of this approach, as it’ll have a significant impact on the population’s access to electricity and help structure and bolster ENEO, the public utility.

 

Are you concerned about African banks’ exposure to non-performing loans?

How could I not be concerned? We’re experiencing a crisis that wasn’t on anyone’s radar. Proparco’s portfolio has suffered and we rushed to the aid of our clients as soon as the first lockdowns went into effect, agreeing to defer payments, reallocate funds, etc. With the help of the AFD and the French government, we were also able to provide €1.2bn in assistance last spring. The “Choose Africa Resilience” initiative is part of this aid package, which targets micro-enterprises and SMEs impacted by the crisis. The programme takes inspiration from state-backed loans (known as prêts garantis par l’Etat, or PGEs, in France), which will support businesses in Cameroon, Côte d’Ivoire, Madagascar and Senegal, in partnership with Société Générale, and we have plans to team up with other banking networks in the future. We hope we’ve found a solution that will enable local banks to continue to finance the economy while mitigating risk, as Proparco guarantees 80% of the loan amount. Despite the current environment, when it comes to non-performing loans, it needs to be said that if you take a look at Proparco’s portfolio, the most concerning situations are actually elsewhere than in Africa. We still have this negative perception of African businesses as riskier investments with a poor risk profile, but right now, I’m more worried about other regions in the world.

 

The US economy was boosted by a $1.6trn stimulus package, while Europe passed a $1.1trn aid package of its own. Africa, unfortunately, doesn’t have the ability to create “magic money”, even though the region needs it most. What is your position on this issue?  

Two summits are being held next month. The first one, taking place in May, will address financing Africa’s economy and be attended by Europeans, Americans, G7 countries, the IMF and large African banks. We’ll see how this meeting can further the discussion on the macroeconomic financing of African countries. Another Africa-France summit is also coming up and will tackle questions surrounding the economic response to the crisis. This is an important issue and we’ll find answers to these questions in the coming months. Public development banks have a role to play, of course, as they account for nearly 10% of total investments worldwide.

 

The African Continental Free Trade Area (AfCFTA) opened for business this past 1 January. However, many international banks operating in trade finance have left Africa in recent years. With this new trade area in place, is it time for the role of African banks to shift?

The AfCFTA is going to stimulate intra-African trade and banks need to back the businesses, both on the import and export side, that underpin this economic activity. It’s true that in recent years a number of international banks, especially French ones, have exited the continent. A lot of institutions, including Proparco, have developed a range of what are called guaranteed products, particularly in trade finance, that help facilitate international trade within the African continent, in sub-regions, between various countries and with countries beyond Africa’s borders. We’ve also been working on this issue for two or three years now in conjunction with companies like Ecobank, a pan-African player. We’ve inked several loan agreements in the area of trade finance with them. In addition, we’ve taken the time in the past few months to identify banks that could serve as issuers. One of the lessons we’ve learned from this crisis is that we have perhaps lagged behind in trade finance. Our plan is to accelerate our programme and I’m confident in our ability to expand this area of our business, as it’s really the backbone of African trade. But we’ll also continue to pursue rail, port, road and energy infrastructure projects, which are just as decisive for trade.

 

Proparco is a major force in green finance and there is by and large a massive amount of financing for green investments out there. Perversely, private financial institutions in Africa don’t seem to be able to seize all the opportunities available to them. Why is this so? 

Probably because the rules governing access to such funding are more stringent and can be more complex and difficult to fulfil. Sometimes you have to comply with contractual requirements. There are several potential ways to lower the barriers for accessing this type of money. For instance, we could help banks raise more capital from markets through green bonds or climate bonds. In this regard, we have worked with IFC and several actors on upstream aspects, providing technical assistance and aiding with capacity building to help banks structure themselves, make them eligible for this financing and comply with the contractual requirements that enable the issue of green bonds that meet market standards. Lenders represent a second route. For example, Proparco has the ability to raise specific funding from the European Union, such as in the energy sector, to assist players in the off-grid solar market. By tapping into this, we’ve raised capital that allows us to back a certain number of enterprises, in partnership with local or regional banks that can jointly finance projects with us. This approach triggers a virtuous circle effect. What I’ve just described is also true of the Green Fund, which through the programme “Transforming Financial Systems for Climate” primarily targets Africa and seeks to provide financial and technical assistance to banks as well as to public and private microfinance institutions. 

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