The International Monetary Fund has warned African borrowers that securing private credit from direct lenders with high-value collateral could increase default and liquidation risk.

In its Global Financial Stability Report, released on Tuesday, the IMF revealed that private direct lenders have issued nearly $2 trillion in loans worldwide.

“Direct lending is becoming increasingly relevant for financial stability. Having outgrown its origins as a niche financing channel, direct lending now accounts for nearly $2 trillion globally in loans,” the IMF said.

The IMF noted that although data suggested declining default rates among direct borrowers, the financing system remained untested in some areas and warned of growing vulnerabilities. It also stressed that private lenders often forced borrowers to take on significant contingent liquidity commitments.

“Its extensive cross-border interconnections between banks and nonbanks, combined with growing reliance on contingent funding arrangements and borrowers’ leverage, are creating risk transmission channels that have yet to be tested in a sharp tightening of financial conditions.

“Recent trends suggest that vulnerabilities are building in some areas, even as some data providers report declining trailing default rates among direct lending borrowers. This is in part because funds have provided flexibility to some borrowers by, for example, amending and extending loans,” the IMF stated.

The report also found that some borrowers, usually medium-sized companies, have been forced to take on additional debt, partly used for dividend recapitalisations, due to “pressure on private equity sponsors to return capital to investors”, leaving borrowers in continuous reliance on external financing.

“Although these transactions generate liquidity for investors, they leave borrowers more leveraged and less resilient. As a result, the ratio of the median borrower’s debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortisation) has risen from 2024 through 2026, especially in the software and services industries.

“Elevated leverage helps explain the persistently large share of borrowers unable to generate sufficient cash flow to meet debt-servicing obligations, leaving many reliant on sponsor support, lender forbearance, or continued access to external financing to remain viable,” the report added.