By KENNEDY MUPESENI –
THE African Development Bank (AfDB) has approved a US $100 million unfunded Risk Participation Agreement (RPA) for FirstRand Bank Limited South Africa (FRB), under which the two banks will share the default risk on a portfolio of trade transactions originated by issuing banks in Africa and confirmed by FRB.
According to an AfDB statement, the facility would help address critical market demand for trade finance in Africa by working through financial institutions to provide support across vital economic sectors such as industry, services, agribusiness and manufacturing.
It would foster financial sector development and deepen regional integration.
The facility would also help enhance FRB’s risk-bearing capacity and its ability to provide risk mitigation support for trade-related transactions originated by issuing banks across Africa.
The RPA would enable FRB to increase its visibility as an established confirming institution for trade transactions originated by African issuing banks.
This three-year facility is a 50/50 risk sharing arrangement that would enable FRB to match AfDB’s undertaking in every transaction and at its peak, would have a portfolio size of US $200 million.
AfDB said at full utilisation and counting roll-overs, the facility was expected to support more than US $1 billion of trade in equipment, raw materials, intermediate and finished goods over the three-year period.
Most African banks confronted major hurdles in obtaining credit support from international confirming banks to undertake sizeable transactions largely due to their relatively small capital bases.
AfDB’s used its “AAA” rating to share trade risks and enhance trade finance capacity of banks in Africa, thereby expanding trade and strengthening regional integration.
It would boost intra-Africa trade and promote regional integration, thereby contributing to the reduction of the trade finance gap in Africa.
Given FRB’s position as an active provider of trade finance in Africa and its commitment to supporting Africa’s economic diversification, export growth and deepening of trade value chains, this facility would support trade related activity in at least 35 countries and provide financing to more than 100 financial institutions.
Additionally it would support more than US$1 billion of trade in Africa over a three-year period, thereby helping to deepen the financial sector and promote private sector development.