Putting Africa’s savings to work

African economies will not be able to meet their development goals unless they can mobilize their own resources. But to do that, policymakers must confront a fundamental question: Where are the investment platforms that are needed to effectively channel domestic savings into productive investment?

Africa’s problem is not a shortage of savings. Across the continent, pension funds, insurers, sovereign wealth funds and banks already hold about $1 trillion in long-term capital and those pools are growing steadily. Nor is it a lack of appetite: African institutional investors would welcome credible, well-structured opportunities to invest at home.

What is missing are the pathways that connect savings to productive investment. Without them, capital gravitates toward the simplest instruments available. In most African markets, that means short-term sovereign bonds. However ambitious investors may be, their options remain limited by the financial architecture.

This distinction matters. Much of the debate about mobilizing domestic savings assumes that capital must somehow be “unlocked.” But these savings are not idle. They are channeled primarily into government debt — accounting for about 60 percent to 70 percent of pension fund portfolios in many African countries because no scalable alternatives exist. Prudential rules, rigid regulatory frameworks and the near-total absence of diversified, credit-enhanced long-term instruments leave pension funds with little choice but to invest heavily in government securities.

Over time, that dynamic creates a deeper structural vulnerability. When domestic savings primarily finance government deficits, the balance sheets of financial institutions and governments become tightly intertwined. Fiscal stress quickly becomes financial stress. A deterioration in sovereign creditworthiness then ripples through pension portfolios, bank holdings and insurance reserves, concentrating risk rather than dispersing it.

However ambitious investors may be, their options remain limited by the financial architecture

Gomez Agou

Financial sovereignty is not merely the capacity to borrow domestically. It requires diversified domestic balance sheets that channel long-term savings into productive assets rather than amplify systemic fragility. An economy where savings circulate primarily between the government and financial institutions is not truly sovereign.

Breaking that pattern requires deliberate institutional design. Development banks are uniquely positioned to lead this effort, as they work simultaneously with finance ministries, central banks, regulators, global asset managers and project funders. That vantage point enables them to align the regulatory, fiscal and financial conditions under which new asset classes can emerge.

Fulfilling that mandate requires action on three fronts. The first is regulatory alignment. Across much of Africa, prudential frameworks were written at a time when sovereign bonds were the only realistic long-term asset available to institutional investors — and most countries have yet to catch up.

The issue is not preferential treatment for sovereign debt, which is standard practice globally, but rather the creation of new instruments before regulatory categories can adapt. Without clear classifications, even well-structured, investment-grade instruments compete on unfavorable terms with government bonds that regulators already know how to handle.

Working alongside regulators and finance ministries, development banks can help ensure that regulatory frameworks keep pace with new instruments and that credit-enhanced instruments become as familiar as sovereign bonds to pension supervisors. This work, while painstaking, is precisely what separates functional capital markets from shallow ones.

The second challenge is platform construction. Institutional investors do not invest in individual projects but in assets that are recognizable, standardized and scalable, with clear risk profiles. A single infrastructure project, however well designed, does not constitute an asset class; a programmatic platform that aggregates projects under common standards, shared risk structures and consistent regulatory treatment does. That is the difference between a one-off transaction and a market.

Kenya’s Dhamana Guarantee Company offers a useful model. Established as a privately incorporated, nonbank institution — with equity from the African Development Bank, the UK-backed Private Infrastructure Development Group and Nairobi’s County Pension Fund — Dhamana provides irrevocable, unconditional credit guarantees for local-currency infrastructure bonds across East Africa. By enhancing the bonds’ creditworthiness, these guarantees help bring them into the investment-grade range required by pension and insurance regulations.

Where financial institutions hold a large volume of government bonds, fiscal stress quickly spreads

Gomez Agou

Critically, these guarantees are private, nonsovereign instruments designed to reduce reliance on government balance sheets. The presence of a domestic pension fund among Dhamana’s founding shareholders is not incidental — it is a signal. Change the instrument and you change where savings flow.

Less visible, but equally constraining, is the analytical gap facing domestic investors. A Ghanaian pension fund manager or an Ivorian insurer does not have the research infrastructure of a global asset manager. They cannot independently underwrite infrastructure bonds, model the cash flows of securitized loans to small and medium-size enterprises or stress-test local-currency green bonds against macroeconomic scenarios. In the absence of that capacity, sovereign bonds — familiar, rated and liquid — become the default.

Development banks can serve as shared analytical infrastructure for domestic markets. They can produce standardized credit assessments of emerging asset classes, publish sector-specific risk frameworks that institutional investors can use as underwriting anchors, and convene forums for trustees and chief investment officers to engage directly with regulators and project funders. By lowering transaction costs, this institutional plumbing channels capital flows into productive assets rather than sovereign bonds.

To be sure, regulatory alignment, platform construction and shared analytical capacity all depend on macroeconomic discipline. Sovereign risk influences capital costs in every economy, but where financial institutions hold a large volume of government bonds, fiscal stress quickly spreads through the financial system. Guarantees or blended-finance instruments, if designed in isolation from sovereign-debt management, risk shifting fragility rather than reducing it.

Integrating sovereign balance-sheet discipline and domestic capital-market design is therefore essential. Development banks have a clear comparative advantage here, since they can bring economists, policymakers and investors under a unified framework where success is judged not by the volume of loans but by the quality, scale and resilience of the capital they help mobilize.

The question, then, is not whether Africa can mobilize the capital needed to finance its economic development. Much of it already exists within its own financial system. The task ahead is to build the institutional architecture that allows domestic savings to flow where they are needed most.

• Gomez Agou, former resident representative of the International Monetary Fund in Gabon from 2021 to 2025, is a fellow at Harvard Kennedy School.

Copyright: Project Syndicate