Africa Financing: Why the Low Investment Despite Proven High Returns

It is becoming increasingly clear that Africa offers some of the highest returns on investment globally, and yet still attracts very little investment and continues to be perceived as high risk. I try to breakdown the key reasons why this could be the case, starting with the concept of risk. 

Concept of Risk 

In an investment context, risk is the chance that actual results will fall short of expectations, potentially causing financial loss or underperformance because of future uncertainties. By its nature, risk concerns what lies ahead and is expressed in terms of probabilities, not guarantees. Although past performance can shed light on the potential riskiness of an investment, what concerns investors and credit rating agencies is how future scenarios could possibly unfold. Thus, for investment flows into Africa to rise meaningfully, strong historical returns must be complemented by a substantially improved forward looking risk outlook across the continent. Below, I offer my summarized thoughts on two key risk elements where improvement would go a long way in providing comfort to investors on the investability of the continent. 

1. Country Risk: 

i. Sovereign and Governance Risk: This is one of the key areas where risk continues to remain high. It encompasses the strength of the rule of law, the effectiveness of checks and balances, the integrity of political institutions, the predictability of policy, the transparency of data, and overall security conditions. In most African countries, we are lagging global standards. Simply put, without improving and fixing these aspects, investors will not be comfortable risking their money in the continent for long periods of time when there are other safer alternatives. 

ii. Economic, Fiscal, External and Monetary Risk: Effectively managing economic, fiscal and monetary risks is essential for a country seeking to draw and retain investment. By promoting stable growth, diversified industry, and resilient public finances, policymakers reassure investors that local businesses can generate reliable returns and that sovereign obligations will be met. Prudent external‐balance management and adequate foreign‐exchange reserves guard against sudden capital‐flow reversals and currency devaluations, while a credible central bank and low, predictable inflation reinforce confidence in the financial system. Together, these risk‐management efforts lower the perceived risk premium, reduce borrowing costs, and create a more attractive environment for both domestic and international investors. 

To summarize, a project or company’s credit rating and access to capital are ultimately constrained by the stability of the country in which it operates. Regardless of the company’s own strength or track record, political or economic turmoil in its host country will inevitably undermine its financial standing and operational performance.’ 

2. Lack of deep and well-regulated capital markets 

Deep and well-regulated capital markets would go a long way in helping reduce some of the key investment challenges/risks in the continent that lead to low investments and high financing cost namely: 

Price Discovery: Price discovery thrives on transparent, continuous capital markets, mandatory disclosures and real‑time trading generate a rich flow of information about companies’ risks and prospects. Over various market cycles, this ongoing visibility enables participants to accurately assess expected returns and adjust valuations, ensuring that security prices reflect collective insights and evolving fundamentals. 

Tradability and Liquidity: Capital markets significantly improve market breadth leading to reduced transaction costs and importantly offering secondary markets where investors can easily exit investments whenever they need to. Moreover, they broaden the pool of available funding by engaging not just banks, but retail investors, pension and mutual funds, and help create additional investors e.g. pooled asset managers. By linking these diverse surplus capital sources to companies seeking growth financing, capital markets expand overall capital supply and deepen financial intermediation significantly reducing liquidity risk. 

Project Bankability: Capital markets enhance project bankability by converting uncertain, long‑term cash flows into standardized securities that meet institutional investors’ criteria. Through rigorous due diligence, credit ratings, and disclosure rules, they compel sponsors to pinpoint and mitigate key risks, construction, offtake, currency and to implement credit supports like guarantees, reserves, or bankruptcy‑remote vehicles. By separating a project’s revenues from the parent company’s balance sheet and pooling assets via securitization or project‑finance bonds, capital markets create investment‑grade instruments, giving lenders and investors the confidence and liquidity they need to provide financing. 

Conclusion 

While the risk elements mentioned above are not extensive by any means, I believe they are the most material elements where any improvements would lead to a significant shift in the risk outlook of African countries and where all stakeholders should prioritize. By addressing sovereign and fiscal vulnerabilities, fostering credible institutions, and broadening the investor base through robust capital market infrastructure, Africa can transform its historically high‑return opportunities into sustainable, large‑scale capital inflows.