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The African Development Bank (AfDB) has approved a $100-million unfunded risk participation agreement (RPA) for FirstRand Bank (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.
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 further aim to foster financial sector development and deepen regional integration, while assisting FRB to enhance its risk-bearing capacity, as well as its ability to provide risk mitigation support for trade-related transactions originated by issuing banks across Africa.
The RPA would also enable FRB to increase its visibility as a credible confirming bank for trade transactions originated by African issuing banks, said the AfDB.
The three-year facility was a 50:50 risk sharing arrangement that would enable FRB to match AfDB’s undertaking in every transaction and would, at its peak, have a portfolio size of $200-million.
At full utilisation, including roll-overs, the facility was expected to support over $1-billion of trade in equipment, raw materials, intermediate and finished goods over the three-year period.
“Most African banks confront major hurdles in obtaining credit support from international confirming banks to undertake sizeable transactions largely owing to their relatively small capital bases.
“AfDB’s additionality lies in the use of its AAA rating to share trade risk and enhance the trade finance capacity of banks in Africa, thereby expanding trade and strengthening regional integration,” the bank said in a statement on Thursday.
The project was fully aligned with the AfDB’s ten-year strategy and core operational priorities of regional integration, financial and private sector development, as well as its regional member countries’ priorities to promote trade, as was reaffirmed by the African Union at its eighteenth Ordinary Session in January 2012.
It was further expected to boost intra-African 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 will support trade related activity in at least 35 countries and provide financing to more than 100 financial institutions," it noted.