An analysis of over 330,000 corporate bonds across 50,000 firms over three decades reveals that African businesses face higher borrowing costs. However, pension reforms, capital market liberalisation, and stronger corporate governance could help reduce this premium.
African businesses pay significantly more to borrow in corporate bond markets than their counterparts in high-income economies, with firms on the continent facing a median real borrowing cost that is 180 basis points (1.8%) higher, according to research by the International Finance Corporation (IFC).
The findings, presented by Césaire A. Meh, Manager of Private Markets at the IFC during the Africa Financial Industry Summit (AFIS) in Luanda, Angola, examine the factors driving corporate borrowing costs across countries, currencies, and financial markets.
The analysis draws on more than 330,000 bonds issued by over 50,000 firms globally over 30 years.
Between 2015 and 2024, the median real yield on corporate bonds in African countries was 2.8%, compared with 1% in high-income countries. The 180-basis-point difference highlights the additional cost African businesses face when accessing debt financing through capital markets.
However, the research suggests that the problem extends beyond the cost of capital itself. Domestic fiscal conditions, exposure to global financial shocks, the depth of local investor markets, regulatory frameworks, and individual company characteristics all influence how much businesses pay to raise debt.
Borrowing costs differ significantly across African markets
The IFC’s analysis also shows that borrowing costs are not uniform across the continent.
Its comparison of selected African economies, including Nigeria, Morocco, South Africa, and Egypt, points to considerable differences in real corporate bond yields.
The figures presented for these selected markets include yields of 4.9% in Nigeria, 3.9% in Morocco, 4.7% in South Africa, and 2.1% in Egypt.
These differences suggest that businesses operate under varying financing conditions even within the same continent.
The cost of borrowing is influenced not only by a country’s broader classification as an emerging or developing economy but also by its domestic financial and fiscal environment.
For businesses seeking long-term financing, this distinction matters. Capital availability does not necessarily translate into affordable capital, particularly where domestic market conditions and investor confidence push up yields.
Fiscal credibility offers protection against global shocks
One of the more significant findings is the relationship between domestic fiscal conditions and corporate borrowing costs.
According to the IFC analysis, a one-percentage-point reduction in sovereign yields is associated with a 76-basis-point decline in corporate borrowing yields in domestic markets. In international markets, the corresponding decline is 46 basis points.
This relationship illustrates how improvements in a country’s sovereign borrowing conditions can extend to private businesses.
When government borrowing costs fall, companies also benefit from lower financing costs. This makes fiscal credibility relevant not only to governments managing public debt but also to businesses seeking affordable capital.
The research also examines the effect of movements in US monetary policy on corporate borrowing costs.
A one-percentage-point increase in the US policy rate is associated with a 10-basis-point increase in corporate borrowing yields in domestic markets.
The effect is considerably larger in international markets, where yields increase by 47 basis points.
This contrast points to the relative ability of domestic capital markets to absorb external financial shocks. While local markets are not insulated from global monetary conditions, the impact is less pronounced than in international markets.
For African businesses that depend on international bond markets, changes in US monetary policy can therefore have a more direct effect on financing costs.
Pension reforms could lower the cost of corporate debt
The IFC identifies expanding domestic investor bases as another way to improve access to affordable financing.
Its analysis finds that pension reforms that introduce mandatory or quasi-mandatory individually funded programmes can increase corporate bond issuance.
The effect becomes more pronounced over time. The presentation shows domestic corporate issuances increasing progressively in the years following reform, reaching approximately 4.6% by the fourth year.
More importantly, the reforms are associated with lower yields on corporate borrowing. The analysis finds that pension reforms can lower corporate bond yields by approximately 150 basis points in domestic markets among firms issuing bonds before and after the reforms. This suggests pension systems play a role beyond providing retirement savings.
By expanding the pool of institutional investors, pension reforms can deepen domestic capital markets and provide businesses with additional sources of long-term financing.
For African economies seeking to mobilise private investment, pension reform can contribute to both the supply of investable capital and the affordability of corporate debt.
Opening capital markets could reduce international borrowing costs
Capital account liberalisation is another policy intervention identified by the IFC. The measures considered include reducing capital controls, opening markets to foreign investors, and easing regulations.
According to the analysis, these reforms increase corporate bond issuances, particularly in international markets.
The presentation shows international issuances rising following liberalisation, while domestic issuances also increase over the period examined.
The reforms are also associated with lower yields on corporate borrowing in international markets. For firms issuing bonds before and after liberalisation, the IFC reports a 120-basis-point reduction in international corporate yields.
The findings suggest that removing barriers to foreign investment can expand the pool of investors available to companies and improve the conditions under which they raise debt.
However, the results also reinforce the importance of domestic market development. Liberalisation is presented alongside pension reform as part of a broader effort to expand the investor base and increase corporate access to capital.
Transparency and governance influence what companies pay
The cost of borrowing is not determined by government policy and macroeconomic conditions alone. The IFC’s research also identifies firm-level characteristics that influence the yields companies pay.
Stronger regulatory disclosure requirements correlate with lower corporate yields, according to the presentation’s comparison of corporate transparency and median real bond yields across income groups.
At the company level, the analysis finds that unlisted firms pay a premium when accessing bond markets. The premium is 22 basis points in domestic markets and 84 basis points internationally.
Prior access to loan and bond markets, however, is associated with lower borrowing costs. Firms with previous market access record reductions of 23 basis points in domestic markets and 31 basis points internationally.
The presentation also identifies state-owned enterprises as borrowing at lower yields, with reductions of 50 basis points domestically and 37 basis points internationally.
These findings point to the importance of a company’s market reputation, ownership structure, and track record when investors assess its creditworthiness. The IFC argues that businesses can improve their credibility through three broad areas of intervention: governance, disclosure and creditor protection.
On governance, the IFC notes that independent oversight, effective audit committees, and credible board monitoring can strengthen investor confidence in a company’s management and decision-making.
On disclosure, timely and detailed financial reporting, clear information about debt profiles and the use of proceeds, and regular communication with investors can reduce information gaps.
Covenants, collateral, guarantees, and credible enforcement venues can provide investors with greater protection when extending credit can help protect creditors.
These firm-level interventions are particularly valuable in environments where country-level institutions and disclosure frameworks are still developing.
The challenge of mobilising private investment
The IFC’s findings offer a broader perspective on the challenge of financing business growth in African economies. Reducing borrowing costs requires more than increasing the amount of capital available to businesses. It also requires improving the conditions under which that capital is mobilised and deployed.
The research identifies several connected interventions: strengthening fiscal credibility, expanding domestic institutional investor bases through pension reforms, opening capital markets to international investors, improving regulatory disclosure, and encouraging stronger corporate governance.
Together, these measures could help narrow the borrowing cost gap between African businesses and firms in high-income economies.
The 180-basis-point premium identified in the IFC analysis illustrates the scale of the financing disadvantage. However, the findings also suggest that the gap is influenced by factors that governments, regulators, and businesses can address.
For African companies, the implications are equally important. Access to capital markets is not simply about issuing bonds. A company’s transparency, governance, ownership structure, and borrowing history can influence the cost of financing.
The central issue, therefore, is not only how African economies mobilise more private investment, but how they create financial markets and corporate environments in which businesses can access that investment at a lower cost.