The African Development Bank (AfDB), a multilateral development finance institution, has completed a $500m credit insurance agreement with African Trade Insurance Agency (ATI) and UK reinsurers.
The deal is structured to cover a part of the AfDB’s portfolio of non-sovereign operations in Africa.
AfDB expects the deal to have an important demonstration effect in encouraging similar institutions to invest more in the continent in the future.
ATI will act as the direct insurer for the AfDB and the transaction will involve the participation of several of Lloyd’s and private reinsurers who will share the risk on African financial institutions.
The vehicle will allow several insurance companies operating outside of Africa to atke part in the financing of Africa development for the first time.
The insurance will cover nearly 22% of the bank’s $2.3bn outstanding non-sovereign financial sector portfolio. It will protect the bank against the non-payment of loans made to around 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 about $500m of headroom for new lending.
AfDB president 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 also stated 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.
The deal is anticipated to strengthen the development of credit insurance markets in Africa.
The African bank said the experience gained in the transfer of risks between AfDB, ATI and the Lloyd’s reinsurers is expected to lengthen insurance terms and lower insurance and financing costs.
ATI CEO George Otieno said: “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 $35bn 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.”