Economics

Bank Financing For Business Investment In Different Parts Of The World

In East Asia and the Pacific, only around 1 in 7 firms use banks to finance investment, while almost half in the Caribbean do so.

Property investment is becoming more expensive around the world today. Property prices have been on a steady rise discouraging potential investors with limited cash to finance the property. Investment is an economic term referring to the purchasing of goods that are not utilized today but are used in the future to create additional wealth. Therefore, investment financing is committing finances on monetary assets with the aim of having an income in future when the asset is sold at a higher price. Financial institutions, including banks, government institutions, and insurance companies, have made it possible for investors to own property through investment financing. The banking sector is the largest investment financing institution in most countries.

East Asia and the Pacific

Growth and development in East Asia and the Pacific have remained resilient, and the region is expected to continue to grow modestly in coming years according to the World Bank. East Asia and the Pacific countries account for almost 40% of the global growth. Investments aimed at strengthening commerce especially in emerging markets are critical in East Asia and the Pacific. Banks have continued to play important roles in the financing of emerging markets with 13.7% of the firms using banks to finance their investments in East Asia and the Pacific. However, the number of firms seeking for investment financing from the banks are fewer because the majority of the firms are more in need of working capital to maintain their competitive advantage than to grow.

Sub-Saharan Africa

Sub-Saharan African economies face several economic challenges, including a lack of adequate skilled labor forces, weak markets, a lack of sufficient credit resources, and insufficient access to new technology. The challenges facing the region have led to a slow economic growth characterized by consumerism. The banking sectors in Sub-Saharan Africa are well capitalized and profitable but only focus on financing large corporate clients and government institutions. SME and low, middle class firms find it difficult to access credit for investment from the banks. Investment financing is risky in Sub-Saharan Africa because of the high defaulting rate and as such most commercial banks prefer financing working capital to investment. Only 19.1% of firms are using banks to finance their investment projects.

Maghreb and North Africa

Maghrebi and North African governments have made great strides in restructuring their financial sectors to bring them up to international standards. Private and public sectors are increasingly accessing financial services from the several banks and credit institutions especially in Tunisia, Egypt, Algeria, and Morocco. The public sector accounts for more than 30% of investment loans. Firms can now access investment financing for their growth from the banks. Currently, 20.6% of the firm's investments across Maghreb and North Africa region are being financed by both local and foreign banks. Egypt and Algeria have a larger share of firms benefiting from investment financing by the banks in the region.

Determinants of Demand For Bank Financing of Investment

The need for growth and expansion has seen more firms approaching banks for investment financing in many parts of the globe. However, the high interest rates charged by most banks have discouraged firms from seeking financing from the banks. Other credit institutions with friendly interest rates and flexible repayment terms than the banks have attracted more firms compared to the banks in most of these regions. Also, the demand for working capital is higher than that of investment capital, hence the lower number of firms accessing investment financing from banks.

Variations In Bank Financing For Investment Around The World

RankRegionShare of Firms Using Banks to Finance investment
1East Asia and the Pacific13.7%
2Sub-Saharan Africa19.1%
3Maghreb and North Africa20.6%
4South Asia21.9%
5Eastern Europe and Central Asia24.7%
6Middle East25.4%
7Central Europe and the Balkans27.5%
8Western Europe30.0%
9Latin America33.1%
10Caribbean41.3%

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