The African Development Bank (AfDB) has completed a $500 million credit insurance to protect the bank against the non-payment of loans made to approximately 30 African financial institutions.
The deal with African Trade Insurance Agency (ATI) covers a portion of the banks’ portfolio of non-sovereign operations in Africa.
The deal with is expected to have an important demonstration effect to encourage similar institutions to invest more on the continent in the future.
While ATI will be the direct insurer facing the AfDB, the transaction involves the participation of a number of Lloyd’s & Company private reinsurers.
Lloyd will share the risk on African financial institutions.
This vehicle will enable many insurance companies operating outside Africa to participate in the financing of development in Africa for the first time.
The deal is the second Balance Sheet Optimization transaction under the “Room to Run” initiative following the successful signing of the Synthetic Securitization transaction in September.
The insurance will cover approximately 22% of the Bank’s US$2.3 billion outstanding non-sovereign financial sector portfolio.
The portfolio spans 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.
“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,” said Akinwumi Adesina, President of the African Development Bank Group.
“This is a significant step towards enhancing Africa’s finance partnerships across the globe.”
Adesina added 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.
At the launch of the transaction at an event in London, Penny Mordaunt, International Development Secretary commented, 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,” he said.
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.
“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” said George Otieno, Chief Executive Officer of ATI.