A study of African corporate borrowing costs has found that firms in Africa pay more to borrow than similar companies elsewhere in the world, with yields running above their peers. The study spanned more than 330,000 corporate debt securities, sold by over 50,000 companies across thirty years. The researchers add that the gap could narrow through reformed pension systems, markets more open to capital flows, and better governance within companies.
The International Finance Corporation (IFC) found that African companies seeking corporate debt financing pay a typical real borrowing cost 180 bps (1.8%) higher than that paid by firms in rich countries.
How much more African firms pay to borrow
Worldwide, the dataset spans over 330,000 bonds from more than 50,000 firms, gathered across a period of three decades.
Between 2015 and 2024, African countries recorded a median real corporate bond yield of 2.8%, against 1% in wealthy economies. That gap of 180 basis points reflects the extra price African companies pay when they raise debt through capital markets.
The research nonetheless indicates that the issue goes further than the price of capital alone. What a business pays to raise debt is shaped by a range of factors:
- the state of domestic public finances
- how exposed an economy is to shocks in global finance
- how deep the pool of local investors is
- the regulatory framework
- the characteristics of each individual company
African corporate borrowing costs vary widely between economies
Analysis from the IFC also reveals that what firms pay to borrow is far from identical from one African country to the next.
When it set several economies side by side, among them Nigeria, Morocco, South Africa and Egypt, the IFC found sizeable gaps in the real yields on corporate bonds. For these chosen markets, the yields quoted are:
- Nigeria: 4.9%
- Morocco: 3.9%
- South Africa: 4.7%
- Egypt: 2.1%
Such gaps indicate that companies face different financing conditions, even when they are located on the same continent.
Borrowing costs depend not just on whether a country is labelled an emerging market or a developing nation, but also on the state of its home financial system and its fiscal circumstances.
Firms hunting for long-term funding should take note of this difference. Money being on offer is not the same as money being cheap, especially when conditions in the home market and the mood of investors drive yields upward.
A credible fiscal position can cushion economies from worldwide shocks
Among the study's more notable conclusions is the link between a government's fiscal health at home and what companies pay to borrow.
The IFC's analysis shows that when sovereign yields fall by one percentage point, corporate yields on local debt markets drop by 76 bps. On the global markets, the equivalent fall is 46 bps.
The pattern shows how a better borrowing position for the state can spill over to private firms.
When a government's own borrowing becomes cheaper, firms find that the cost of their funding eases as well. Fiscal credibility is therefore a matter not only for governments managing what they owe, but also for businesses seeking capital at an affordable price.
How US interest rates feed through to African corporate borrowing costs
The study also looks at how shifts in American monetary policy feed through to African corporate borrowing costs.
When the US benchmark interest rate goes up by one percentage point, yields on corporate debt in local markets increase by about 10 basis points.
In global markets, the same increase lifts yields far higher, by 47 bps.
The gap suggests that home-grown capital markets are better placed to cushion shocks that originate abroad. Local markets still feel the pull of global monetary conditions, but the effect on them is milder than on international ones.
African companies that depend on overseas bond financing may therefore find that shifts in US central bank policy bear more directly on what they pay to borrow.
Pension reforms might lower African corporate borrowing costs
Another route to cheaper financing, according to the IFC, is to widen the base of domestic investors.
The organisation's research indicates that overhauling pension systems so that individually funded schemes become compulsory, or close to it, can lead to more corporate bonds being issued.
Over time, the impact grows stronger. According to the presentation, local corporate issuance climbs steadily after a reform takes effect, hitting roughly 4.6% by year four.
Of greater significance, such reforms go hand in hand with cheaper borrowing for companies. The research found that, in domestic markets, pension reforms can cut the yields on company-issued bonds by around 150 basis points for firms that issued bonds both before and after the changes. That points to pension systems doing more than just supplying retirement savings.
A bigger base of institutional investors lets pension reforms add depth to local capital markets and gives companies additional funding that is available over the long term.
For African economies keen to attract capital from private investors, pension reform can help on two fronts: more capital available to invest, and corporate debt that costs less.
Freer capital markets may bring down what companies pay to borrow abroad
The IFC points to capital account liberalisation as a further policy lever. Under this heading, it looks at loosening capital controls, admitting foreign investors to local markets, and relaxing the rules that govern them.
Its study shows that reforms of this sort result in a larger volume of corporate bonds being sold, with the strongest impact on international markets.
Figures in the presentation show issuance on international markets climbing once liberalisation takes place, and issuance at home also grows across the period the analysis covers.
Reforms of this kind also go hand in hand with cheaper corporate borrowing on international markets. Looking at companies that sold bonds both before and after the opening-up, the IFC records a fall of 120 basis points in the yields that firms pay abroad.
What the results indicate is that scrapping obstacles to inward capital from abroad can widen the range of investors open to companies and make the terms on which they borrow more favourable.
Even so, the findings underline how much depends on building up local markets. Alongside pension reform, liberalisation is framed as one strand of a wider push to broaden the base of investors and give businesses better access to capital.
What firms pay depends on how open and well run they are
Government policy and the wider economy do not, on their own, fix what it costs to borrow. Characteristics of individual companies also affect the yields they must pay, the IFC's research shows.
Where regulators demand fuller disclosure, corporate yields tend to be lower. This is drawn from the way the presentation sets corporate transparency against the middle-ranking inflation-adjusted yields on bonds across different income groups.
Looking at individual companies, the analysis shows that firms not listed on an exchange pay extra to borrow in bond markets: 22 bps at home and 84 bps abroad.
A track record in borrowing from banks and bond investors, on the other hand, goes with cheaper borrowing. Companies that have raised money before see their costs fall by 23 bps on home markets and 31 bps on international ones.
The presentation also indicated that state-owned enterprises enjoy cheaper credit, with yields lower by 50 basis points at home and by 37 basis points when borrowing abroad.
Taken together, the results show how much a firm's reputation, who owns it and its past record weigh with investors judging whether it can repay. The IFC says companies can build trust by acting in three broad areas: governance, disclosure and the protection of creditors.
As for corporate governance, the IFC observes that investors grow more confident in how a company is run and how it takes decisions when there is autonomous supervision, audit committees that work well and board monitoring that can be trusted.
Regarding disclosure, the IFC says gaps in information can be narrowed through prompt, detailed financial reporting, transparency about the debt a firm carries and how the money raised is spent, and regular contact with investors.
Creditors can be given stronger protection through guarantees, collateral and covenants, as well as dependable venues for enforcement, all of which help to shield them when credit is extended.
Such measures taken by individual firms matter most where national institutions and disclosure rules are still being built up.
Why drawing in private capital is hard
What the IFC found sheds wider light on how difficult it is to fund business expansion across African economies. Bringing down the price of borrowing takes more than simply putting extra money in firms' reach; the terms on which that money is raised and put to work must also get better.
According to the research, a number of linked steps are needed:
- building trust in government finances
- widening the pool of local institutional investors by reforming pensions
- throwing capital markets open to foreign investors
- tightening what companies must disclose to regulators
- promoting better corporate governance
Taken together, such steps might help close the gap in African corporate borrowing costs between businesses in Africa and companies based in wealthy economies.
The IFC analysis puts the extra cost at 180 basis points, which shows how large the funding handicap is. Still, its findings also point to causes of the gap that ministers, regulatory bodies and companies are able to tackle.
For companies in Africa, the lessons matter just as much. Getting into capital markets involves far more than selling bonds. How open a firm is, how it is governed, who owns it and what its past borrowing looks like can all affect what it pays for funding.
Put simply, the real question facing African economies goes beyond attracting additional private capital; it is about building financial markets and a business climate that let companies obtain such funding more cheaply, bringing down African corporate borrowing costs.
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