Cabo Verde's local Financing problem

Cabo Verde's Banks: Plenty of Money, But Nobody Can Borrow It

Cabo Verde's banks are flush with cash and meet all the safety requirements. Yet getting a loan is nearly impossible for most businesses.

This is the central puzzle of the country's financial system. Eight banks operate locally, holding capital well above what regulators require. They're sitting on excess deposits. Private sector lending equals 66 per cent of the economy's total output.

But 44 per cent of companies say access to finance is their biggest problem. That's more than double the average across sub-Saharan Africa.

Why Banks Won't Lend

The main issue is risk. Banks demand collateral—assets they can seize if you don't repay. Some 82 per cent of firms need to put up collateral for loans, compared with 69 per cent elsewhere in sub-Saharan Africa. Historical data suggests banks want collateral worth 176 per cent of the loan amount. If you want to borrow €10,000, you need assets worth €17,600.

Most small businesses don't have that kind of security. Only 24 per cent of investment requests get approved by banks. Nearly one in five companies ends up using personal loans to keep their business running—three times the rate seen elsewhere in the region.

Interest rates make matters worse. Small business loans of €2,500 or less can carry monthly interest rates of 3 to 4 per cent. That's 36 to 48 per cent per year. Foreigners buying property face rates of 8 to 12 per cent annually, and banks will only lend 70 per cent of the property's value.

Bad Loans Are the Problem

Banks are cautious because they've been burned before. Non-performing loans—debts that aren't being repaid—hit 10.5 per cent of total loans in June 2024. That's high compared with similar island economies.

When Covid-19 hit, banks gave borrowers temporary relief on repayments. When that relief ended in 2023, bad loans jumped from 7.8 per cent to 8.7 per cent. Banks remember that lesson.

There's another factor. Banks hold 56 per cent of the government's domestic debt. Lending to the government is safe and predictable. Lending to private businesses is riskier. The government crowds out private borrowers.

A Handful of Banks Control Everything

Two banks control 70 per cent of all lending. Four banks are classified as systemically important—meaning if they fail, the whole economy suffers. This concentration of power means a few institutions decide who gets credit and who doesn't.

Competition is limited. The difference between what banks pay depositors and what they charge borrowers is 3.1 percentage points. In more competitive markets, that gap would be narrower.

The Government Steps In

Recognising that banks won't lend to small businesses, the government created three public institutions in 2017 with World Bank support.

Pró-Empresa helped companies access more than $90m in financing in 2021, including $45m in Covid-19 emergency credit and $15m in investment loans and guarantees.

Pró-Garante operates as a guarantee fund. It promises banks that if a small business defaults, the fund will cover part of the loss. By the end of 2022, it had helped mobilise 75m escudos in loans for just over 2,000 companies. The fund received €17m in additional capital.

Pró-Capital invests directly in small and medium businesses, taking equity stakes in strategic sectors.

A new private equity fund called Pro Impacto is raising €10m to invest in agriculture, transport, logistics and clean energy. It's managed by Investment Capital Partners and supervised by the central bank.

Microfinance institutions provide tiny loans to people in rural areas who have no access to formal banking. The central bank supports these lenders with refinancing.

The government also created a programme to attract investment from Cabo Verdeans living abroad, offering easier funding access and tax breaks.

Capital Markets Barely Exist

Cabo Verde has a stock exchange, but almost no companies are listed on it. The government wants to change that and is planning to issue bonds specifically for environmental projects, social programmes and diaspora investors. So far, progress has been slow.

What This Means for Foreign Investors

Foreign investors have the same legal rights as locals. Opening a bank account is straightforward—you need ID and a tax number. If you're setting up a limited liability company, you must deposit at least half the company's capital in a local bank.

Here's the critical part: if you want to take profits or capital out of the country later, you must register your investment with the central bank. Without registration, you can't repatriate funds.

The investment law guarantees your right to transfer money abroad, but the central bank must approve each transfer. It has 30 days to do so. If it takes longer, it must pay you interest at an international reference rate.

There's one exception. If your transfer would seriously damage the country's balance of payments—essentially, if it would drain too much foreign currency at once—the central bank governor can force you to take your money out in equal instalments over two years.

Large Projects Need Outside Money

If you're planning a major infrastructure or energy project, don't count on local banks. They don't have the appetite or capacity for large-scale project finance.

Investors are advised to bring their own capital, structure deals as public-private partnerships, or work with international financial institutions like the World Bank or African Development Bank.

Interest Rates Are Rising

The Central Bank of Cabo Verde has been raising interest rates to control inflation and protect the currency. The policy rate reached 2.25 per cent in December 2024, up from 1 per cent in May 2023. This makes borrowing more expensive for everyone, but particularly for small businesses already struggling to access credit.

The Bottom Line

Cabo Verde's banking system is financially sound but functionally stuck. Banks have plenty of money but won't lend it to most businesses. They've been burnt by bad loans and prefer the safety of government debt.

Small and medium businesses survive on personal loans, guarantees from public funds, or simply don't expand. Large foreign investors need to bring their own financing or partner with international lenders.

The system works fine for moving money around. It just doesn't work for funding economic growth.