The African Development Bank (AfDB) and African Trade Insurance Agency (ATI) on Monday announced the successful completion of a US$500 million credit insurance deal structured to cover a portion of the bank’s portfolio of non-sovereign operations in Africa.
The initiative, which is supported by Insurance Broker – RFIB Group Ltd – and leading UK reinsurers, is in response to G20 Action Plan for MDB Balance Sheet Optimization and creates additional headroom that will be chanelled to support further development across Africa.
The transaction is expected also to have an important demonstration effect to encourage similar institutions to invest more on the continent in the future.
According to a news report by the African Press Organisation (APO) Group on the deal, while ATI will be the direct insurer facing the AfDB, the transaction involves the participation of a number of Lloyd’s & Company private reinsurers who will share the risk on African financial institutions.
The transaction, which is the second Balance Sheet Optimization transaction under the “Room to Run” initiative following the successful signing of the Synthetic Securitization transaction in September, will enable many insurance companies operating outside Africa to participate in the financing of development in Africa for the first time.
Specifically, the insurance will cover approximately 22% of the bank’s US$2.3 billion outstanding non-sovereign financial sector portfolio and protect the Bank against the non-payment of loans made to approximately 30 African financial institutions.
The news report indicated further that the portfolio spanned the African continent, with exposure to financial institutions in all major regions of the continent, and is expected to release sufficient capital to create almost US$500 million of headroom for new lending.
Commenting on the vehicle, the AfDB President, Dr. Akinwumi Adesina, said: “This transaction leverages the Bank’s own capital to achieve more development and lending as it creates new pathways for collaboration between private insurers and the Bank in the development of the African continent. This is a significant step towards enhancing Africa’s finance partnerships across the globe.”
Adesina pointed out further that given Africa’s endowment as a resource-rich continent with a strong economic outlook, the bank had adopted more efficient and effective initiatives to bridge the existing development financing gaps.
Similarly, speaking during the launching of the transaction at an event in London, International Development Secretary Penny Mordaunt, said: “This is a great example of how the City of London can partner with African institutions to mobilise more investment for developing countries and support the creation of the 18 million new jobs a year which Africa needs. This work is driving economic development abroad and supporting prosperity at home”.
The transaction is also expected to strengthen the development of credit insurance markets in Africa. The experience and comfort gained in transferring risks between the African Development Bank, the African Trade Insurance Agency and the Lloyd’s reinsurers is expected over time to lead to the lengthening of insurance terms and lower insurance and financing costs, leading to more trade and investment in, and among, the private sector and the African region.
Commenting on the transaction, Chief Executive Officer of ATI George Otieno,noted that “with ATI’s insurance guarantees leveraging the balance sheet of AfDB and crowding-in new investments, this innovation provides a timely solution to the scarcity of trade finance that could create enormous impact across the continent.
“ATI’s commitment reflects the US$35 billion worth of trade and investments that we have supported in the past decade, which, thanks to this model, can now be more easily replicated, to the ultimate benefit of Africa”, Otieno added.
Similarly, the RFIB stated: “RFIBs Political Risk & Trade Credit team (PRTC) are delighted to have been able to assist the African Development Bank and ATI in putting together this significant insurance-backed programme that will allow the Bank to facilitate further lending, promoting further development in Africa.”
The latest transaction between AfDB and ATI is one of several recent initiatives undertaken by the Bank under its “Room to Run” programme that responds to the G20 and G7 call on the multilateral development banks (MDBs) to explore innovative ways to optimize their balance sheets to achieve the “Billions to Trillions” development agenda.
Credit insurance is one of such instruments involving a specialized market with currently low penetration in Africa, but intent on playing a more active role.
