Africa is providing cheap liquidity to wealthy nations. In return it is paying huge interest rates to external institutional investors at the cost of its own development.
For instance, African central banks export their reserve funds for safekeeping. Sovereign wealth funds and pension fund managers invest only in investment-grade European and United States institutions. The most popular one is risk-free US treasuries, where they earn 3.5% annually on average. These are perceived as the safest instruments, easily convertible to cash without losing value.
The same European and US institutions then reinvest the same capital back to Africa at a high return for themselves. They purchase high-yielding bonds issued by African governments. Cumulatively, Africa has raised more than US$200 billion through sovereign Eurobonds since 2003. African countries are paying between 9% and 15% through Eurobond issuances.
Based on my expertise researching African financial markets, I argue that African countries can close their financing gap if they change regulations and investment policies.
Channelling a portion of Africa’s domestic funds to the continent’s development finance institutions would create a huge pool of domestic resources. This will make a significant impact on development. It would not jeopardise the central banks and asset managers’ need for safety of their funds. This would be a practical step towards a self-sustaining African financial ecosystem.
Africa’s capital strength
African central banks hold an estimated US$530 billion in reserves offshore. This is an international financial practice promoted by the International Monetary Fund, the World Bank and credit rating agencies. Central banks are required to maintain enough US dollar reserves to pay for four to six months of imports.
The sovereign wealth funds of 20 African countries now have approximately US$109.8 billion in total assets under management. Adding other assets of African origin, the amount climbs up to an estimated US$1.2 trillion.
The latest report by Africa Finance Corporation estimates Africa’s domestic capital base at US$4 trillion. These are funds owned by African institutions and individual citizens in the form of reserves, collected deposits, premiums and savings.
Other countries such as China, South Korea and Japan used domestic resources and state-directed finance to aggressively drive their own industrial transformation.
This hasn’t been the case for African countries. The continent’s financing gap is estimated at US$280 billion annually for infrastructure and trade. That’s the amount African countries need every year to build roads, electricity capacity, ports, railways, manufacturing industries and trade connections necessary for African economies to grow and compete globally.
In addition, despite a huge domestic capital stock, African countries pay high interest rates when they borrow abroad.
A system designed for capital flight
The reason for Africa’s capital flight is systemic. Africa’s financial institutions, including central banks, are required by national regulations and investment policies to invest in investment-grade rated instruments. The only investment-grade ratings recognised by the IMF and World Bank are those issued by Moody’s, S&P and Fitch. This means the majority of African assets are excluded from the safe asset category.
The result is that African capital exits the continent. This has left African financial markets with fewer participants and investment instruments. Shallow financial markets make it difficult to finance industrialisation, infrastructure and job creation.
The absence of deep and liquid domestic financial markets becomes the justification for continuing to invest abroad. This is why African countries have remained heavily dependent on foreign capital and external debt despite growing domestic savings.
African central banks reserves
Three African leaders – the presidents of Ghana, Kenya and Zambia – have called for the continent’s foreign reserves invested overseas to be reinvested in African institutions.
At the 2025 Africa Financial Summit, central bankers agreed that it was time for African governments to place a portion of their foreign exchange reserves with domestic institutions.
Channelling a portion of these funds to African development institutions would be a practical step towards a self-sustaining African financial ecosystem. It would not compromise the effectiveness of central banks and other financial institutions. Instead, it would:
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deepen domestic financial markets
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bolster sovereignty
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reduce dependence on foreign financial centres
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strengthen local capital markets.
The Central Bank Deposit Programme by Afreximbank is a good example. Launched in September 2014, it invests in trade and development finance. The programme has mobilised over US$44 billion – about 9% of central bank reserves. Participating central banks have earned 6% to 6.5% – much higher than what investments in Europe and the US offer.
The programme’s performance demonstrates that African reserves can be safely and productively invested within the continent.
AU investment policy shift
It is for this reason that in February 2024 the African Union called on member states to redirect all their reserves back into the continent.
This was a landmark but long-overdue correction in the stewardship of Africa’s financial resources. It was more than an investment policy shift. It was a bold declaration of confidence in Africa’s own institutions and financial markets.
Since then, the AU’s own portfolio of resources has been fully reinvested in African-owned financial institutions. This declaration did not require ratification by AU member states.
What more needs to change
Building an African financing architecture demands a fundamental shift in how African assets are valued, regulated and invested. It means redefining risk for African markets. It also means developing regional investment-grade benchmarks and modernising prudential rules so that African capital can work and grow on the continent.
African capital markets remain shallow not because capital is scarce, but because risk perceptions are distorted. The rising discontent from African policymakers on the cost of capital makes the case even more compelling.
This is why a transformative project such as the Africa Credit Rating Agency has gained support in its pre-establishment phase.
African regulators and reserve managers must act decisively in the following ways:
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change reserve management frameworks to allow more investment in African assets and regional financial institutions
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formally recognise domestic credit ratings that offer contextually sensitive and empirically grounded assessments
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reform IMF-driven constraints that exclude reserves placed in African institutions from being accounted as official reserves
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allow rapid liquidity across borders when needed. This can be done while maintaining global standards to prevent illicit flows and regulatory breaches.
Africa cannot build credible domestic markets if its own capital is absent from the story. Investment is ultimately an act of confidence in the institutions behind the assets. The continent needs to invest in itself.
