When an African government borrows on international markets, investors often demand an interest rate that seems higher than the country’s economic and financial position would justify. This extra cost is commonly known as the African risk premium.The consequences are severe, both for financing Africa’s critical development needs and for the cost of borrowing. The UN Development Programme (UNDP) estimates that the continent faces an annual financing gap of $1.3-trillion if it is to achieve the UN Sustainable Development Goals. At the same time, debt servicing absorbs more than a quarter of government revenue in many African countries, leaving less money for essential public services and investment. A 2023 UNDP report estimates that the premium adds $74.5bn to the annual cost of African sovereign debt.Debates about this premium usually offer two explanations. The first says the problem lies in perception: investors and credit rating agencies often treat African countries as riskier than their economic record warrants. The second says the higher cost is justified by real weaknesses, such as political instability, fragile institutions, shallow financial markets and poor fiscal management.Both explanations are relevant. But they miss a third source of the premium, which has become embedded in the rules of global finance. This part of the premium is institutionalised because it does not depend only on what individual investors think. It is also produced by regulations and standards that banks, insurers and other financial institutions must follow.Consider the capital rules governing internationally active banks and insurers. Basel III applies to banks, while Solvency II applies to insurers. Both require these institutions to hold capital against risky investments. The aim is sensible. Institutions should hold enough capital to absorb losses if an investment goes wrong.The harder question is how the rules decide what counts as risky.Under standard regulatory methods, the answer often depends heavily on ratings issued by external credit rating agencies. This matters for African governments because many are either unrated or assigned below-investment-grade (or “junk”) ratings. According to the UNDP, 34 of Africa’s 54 countries were rated by the major agencies in 2025, and only three held investment-grade ratings.Some studies suggest that the poor ratings assigned to African countries reflect weaknesses and biases in the credit rating system. When regulatory rules rely on those ratings, any bias does not remain a matter of opinion or perception. It becomes part of the calculation used to determine how much capital a bank or insurer must hold under global financial rules.That calculation can directly affect the price of finance. Suppose a bank lends to a country rated below investment grade. It may have to set aside more capital against the loan. Holding that capital costs money, which the bank is likely to pass on through a higher interest rate. Banks and insurers also play important roles in the eurobond market, both as investors and as market makers. Eurobonds have become an important source of external finance for many African governments.African borrowers can therefore pay more not only because investors perceive them as risky, but also because the rules themselves make lending to them more expensive. This is what I call the institutionalised African risk premium.Climate regulation may deepen the problem. Financial institutions are increasingly expected to take climate-related risks into account when assessing their capital needs. These assessments often consider how vulnerable a country, region or project is to floods, droughts, extreme heat and other physical climate shocks. A project located in a highly exposed region may therefore be treated as financially riskier, even if the project itself is climate-friendly.That approach has particular consequences for Africa. The region is regarded as standing out “disproportionately as the most vulnerable region in the world” and as “an exposure and vulnerability ‘hot spot’ for climate impacts”. This could raise financing and insurance costs across the continent, reinforcing the institutionalised African risk premium.This argument does not claim that every African country is a low-risk borrower. Nor does it deny the continent’s climate vulnerability or reject financial regulation. Strong regulation is essential to protect banks, insurers and the wider economy.The problem is that risk is often measured using data, models and assumptions that may not fully reflect African conditions. Rules that rely heavily on external ratings, climate-vulnerability measures or market models developed largely outside the continent can turn Africa’s structural challenges into additional regulatory costs.This creates a striking contradiction. The international community accepts that Africa urgently needs more development and climate finance. Yet parts of the same international financial system can make that finance harder to obtain and more expensive.Emedosi is a lecturer in banking and finance law and co-director of the Aberdeen Centre for Commercial Law.Business Day