Africa is a continent with two financial identities. The first is Sub-Saharan Africa (SSA), a multi-polar group of economies which are often more connected to global markets than to their neighbors. On the other side of the Sahara, North Africa is tied to the Middle East through cultural ties, including a shared language and dominant religion. As such, many analysts consider the swath of countries from Morocco to Somalia as part of the Middle East and North Africa (MENA) region. Because Africa’s total assets are relatively low compared to other regions of the world, both these territories are often reported together.
In the MENA region, the common theme of Arab culture and language create a common thread through diverse countries. Driven by oil wealth, the region holds a large proportion of the world’s Islamic banking assets.
In the wake of the financial crisis, interest rates were low and investors looked to emerging markets for higher returns. The market risk premium in South Africa promises high returns on successful investments, but such attractive rates imply that default risk is a real issue. Africa’s cost of credit risk of banks is a percentage point higher than the global average, and this risk premium varies significantly from country to country. This makes Africa an attractive place for emerging market investors but also leaves the continent more exposed to the financial perturbations.
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