The African Development Bank (AfDB) and African Trade Insurance Agency (ATI) have successfully completed a US$500mn credit insurance deal to cover a portion of the Bank’s portfolio of non-sovereign operations in Africa
This transaction 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 who 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 Optimisation transaction under the “Room to Run” initiative following the successful signing of the Synthetic Securitization transaction in September.
The insurance will cover approximately 22 per cent of the Bank’s US$2.3bn outstanding non-sovereign financial sector portfolio. Specifically, it will protect the Bank against the non-payment of loans made to approximately 30 African financial institutions. 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$500mn 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 AfDB. “This is a significant step towards enhancing Africa’s finance partnerships across the globe.”
Launching the transaction at an event in London, Penny Mordaunt, international development secretary, commented, “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 18mn 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 AfDB, the ATI 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.
According to the industry experts, this 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.
