How banks assess African risk in sovereign lending

Emerging markets and developing economies (EMDEs) face growing challenges in accessing long-term, affordable capital. Rising interest rates, tighter financial conditions and increasing debt vulnerabilities are constraining access to financing, especially for African sovereigns. 

The study examines how commercial banks’ internal risk models and decision-making processes shape their lending to African sovereigns. It finds that international banks with local presence are increasingly lending in local currency, at shorter maturities and higher borrowing costs - creating a vicious cycle that undermines debt sustainability. These decisions are driven by internal risk models that combine quantitative data with qualitative judgement, often assigning significant weight on real time market intelligence and on-the-ground assessment of domestic market conditions, and in some cases overriding credit rating agency (CRA) assessments. 

Together, these dynamics highlight a self-reinforcing structural trap. African sovereigns need foreign currency to bridge domestic savings gaps and to meet pressing infrastructure development needs, yet such financing is limited because commercial banks' lending patterns are tilting more towards local currency, which is often accessed at high cost and short maturities. Governments then turn to local currency markets, where limited depth leads to even higher costs and shorter tenors. This further tightens fiscal space, constrains long-term investment in infrastructure and reinforces negative risk perceptions. Breaking this cycle requires a clearer understanding of how banks assess risk, price sovereign exposure and allocate capital. The study sets out three practical recommendations to help achieve this.  

This represents an initial, high-level assessment based on information gained through interviewing a pool of commercial banks, both local and international. While not exhaustive, it highlights key areas that would benefit from further investigation, validation, and more detailed analysis. 

Recommendations include: 

• Develop local capital market infrastructure: Build deeper, more liquid domestic markets by strengthening infrastructure, expanding the investor base and easing regulatory constraints.  ‍
• Thoroughly assess the impact of Basel III on African lending: Better understand how regulatory rules affect foreign currency lending to lower-rated sovereigns and explore ways to reduce unintended barriers to finance.  ‍
• Strengthen investor relations capacity in African governments: Improve transparency, debt management and communication with investors to build confidence and reduce borrowing costs.  

Why this matters: 

• Break the debt cycle: High costs and short maturities increase refinancing risks and limit investment. ‍
• Improve access to capital: Better alignment can unlock long-term, affordable financing. ‍
• Support sustainable growth: More efficient capital allocation strengthens resilience and development outcomes.