The Board of Directors of the African Development Bank on Wednesday, 18 July 2018, approved an unfunded US$ 250-million Risk Participation Agreement with ABSA Bank Limited.
This Risk Participation Agreement housed within African Development Bank’s Trade Finance operations, will enhance African issuing banks’ ability to leverage trade financing through a multi-sectorial approach.
When fully utilized, forecast estimates indicate that the facility will catalyze roughly over US$ 2 billion worth of trade in 3 years. The facility’s alignment to address the acute market demand for trade finance in Africa through agriculture, transport and manufacturing is consistent with the Bank’s goals of ensuring that Africa industrializes, trades more, and is able to feed herself. By extension, this RPA will also foster financial sector development and regional integration.
Presenting the project to the Board, the Bank’s Financial Sector Development Director, Stefan Nalletamby, made a robust case for how, through strategic partners like ABSA, the Bank’s RPA instrument continues to facilitate trade on the continent; thereby helping to reduce Africa’s trade financing gap. “This facility, through a 50/50 risk sharing approach, will help to promote broad-based economic growth on the African continent through increased facilitation of import-export activities of African corporates and SME’s, and increase intra-Africa trade and regional financial integration in line with the Bank’s Hi5 strategic objectives,” he said.
Most African issuing banks are relatively small and face challenges in obtaining adequate trade finance facilities from international confirming banks to support African importers and exporters. De-risking (the idea of international banks reducing their credit risk stake in developing markets or leaving them altogether) has exacerbated this already dire situation especially for Africa’s SMEs.
The Bank’s additionality, therefore, lies in the use of its “AAA” credit rating to provide greater comfort to allow ABSA to increase its risk-taking appetite on local banks in Africa and provide them increased trade finance facilities. This consequently enhances the broadening and deepening of Africa’s financial systems.
Under the RPA, the Bank and ABSA will share the default risk on a portfolio of eligible trade transactions originated by African Issuing Banks and indemnified by ABSA. The Bank’s commitment under the RPA is to assume up to 50% of every underlying transaction issued by the said African issuing banks while ABSA will confirm such a transaction and bear not less than 50% of its underlying risk.
Absa Group Limited, formerly a Barclays PLC subsidiary, is listed on the Johannesburg Stock Exchange and is one of Africa’s largest diversified financial services groups. Absa Group offers an integrated set of products and services across personal and business banking, corporate and investment banking, wealth and investment management and insurance. The group is present in 12 countries in Africa, with approximately 42,000 employees.