- AfDB signs a risk facility worth over $150 million to boost financial inclusion.
- Survey shows risk-supported Commercial Banks in Africa can play a key role in poverty eradication.
- Increased access to capital loans will help lower-income families increase their household earnings
To boost intra-Africa trade in line with the aspirations of the African Continental Free Trade Area (AfCFTA), the African Development Bank Group has approved a $150 million risk facility.
The funding will be through the Trade Finance Unfunded Risk Participation Agreement, a deal which has been entered between the African Development Bank (AfDB) and the Trade & Development Bank (TDB).
Under this agreement, “the AfDB will provide guarantee cover of 50 per cent and up to 75 per cent for transactions in low-income countries and transition states on a risk share basis with TDB to a number of qualifying local and regional banks,” the bank states.
In this first round, the risk facility covers the Common Market for Eastern and Southern Africa (COMESA) region and is expected to support about $1.8 billion of trade over the next three years.
“Supporting trade in Africa is a key priority for the AfDB. Trade finance is an important driver of economic growth and is critical for cross-border trade, particularly in emerging markets,” explains Nwabufo Nnenna, the group’s Director General for the Eastern Africa region.
“We are delighted to work with TDB, a strong partner with extensive knowledge and network in Africa, on a shared ambition to support the region’s Trade,” he said.
Similarly, Admassu Tadesse, TDB Group President and Managing Director, shared similar sentiments; “TDB Group is very pleased to continue building on its strategic partnership and fit-for-purpose risk sharing facilities with the AfDB Group to scale up trade finance and other offerings in a region, where there continue to be large gaps in access to trade finance, among others, and where major international banks have been withdrawing and reducing their risk appetite.”
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AfDB’s Unfunded Risk Participation Agreement (RPA)
The Unfunded RPA is one of the trade finance instruments offered by the Bank to support local banks in Africa.
RPA is designed to give regional and international commercial banks partial risk cover for their trade finance operations in Africa, with the AfDB typically taking a 50 per cent share of the risk.
“The Bank selects its commercial partners based on the size of their African portfolio, the breadth of their African market coverage, support for intra-African trade, and the quality of the credit approval processes,” reads the communique.
The AfDB also offers a three-year trade finance Transaction Guarantee (TG) service to local banks that is designed to support confirmation of their trade finance transactions.
By description, the RPA is an arrangement where by a commercial bank and the African Development Bank share the default risk on a portfolio of trade finance transactions. In effect, the RPA gives confidence to commercial banks to lend and invest.
“The RPA is designed to give regional and international commercial banks partial cover for their trade finance operations in Africa … the commercial bank performs the credit risk analysis on the issuing banks and originates, processes, and monitors the transactions,” explains AfDB.
Benefits of the RPA
- Provides the partnering bank with cover for a broad range of trade finance instruments; with capital relief and the confidence to enter new markets and with capacity enhancement in terms of increased limits and tenors.
- Helps issuing banks to form relationships with new correspondent banks and enhances their risk profile.
- Gives regional financial institutions the support to become acceptable confirming banks.
- Offers a stimulus to SME sector financing.
Commercial banks play a vital role in poverty eradication in Africa
In a recent research paper, it was investigated the threshold effect of financial inclusion on poverty reduction in sub-Saharan Africa (SSA) and clear evidence showed how commercial banks play a significant role in poverty eradication.
“Using an annual dataset, Hansen’s estimation and differenced generalized method of moments (GMM) methods were used to estimate the threshold level of financial inclusion that will reduce poverty and factors that influence financial inclusion respectively,” reads the report.
“The results showed that beyond a threshold level of 0.365, financial inclusion would lead to poverty reduction with money supply being positively significant towards poverty reduction in SSA.”
The results further indicated that domestic credit to the private sector positively affects financial inclusion, in other words, when commercial banks have more confidence and lend more then financial inclusion increases in the community and in turn, helps to reduce poverty.
“Development partners and governments in the sub-region should therefore implement policies that are aimed at providing an enabling environment for financial institutions to provide financial services that are readily available and affordable to the public in order to benefit from the desired poverty reduction effect of financial inclusion,” the stakeholders advice.
It follows that when there is a lower level of financial inclusion in sub-Saharan Africa the end result is that the welfare of the people is negatively affected. Undoubtedly this has a ripple effect on the entire economy and regional progress overall.
For example, the fact that financial inclusion facilitates the achievement of a majority of the Sustainable Development Goals (SDGs) e.g. eliminating extreme poverty (SDG 1), reducing hunger and promoting food security (SDG 2), and achieving good health and well-being (SDG 3) to mention but a few.
Poverty, which in this case is defined as the state in which people or individuals lack financial resources to meet their minimum standard of living, is the devastating reality of most African nations. The World Bank defines poverty as surviving on less than $1.9 a day an amount the majority of Africans cannot afford.
Financial inclusion critical in eradicating poverty
“To eradicate poverty from the world, financial inclusion is one of the panacea…a key element to ending social exclusion is financial inclusion, which presents an opportunity for people to benefit from financial services and as such contribute to the processes of economic and social advancement of the beneficiaries,” explains the report.
The UN says; “an inclusive economy is imperative for the world’s vulnerable people involved in the informal sector.”
Through financial inclusion, the poor (but active population) can acquire loans that they can in turn invest in any business of their choice, In turn, these businesses, big or small, will lead to increased income for the people and the economy as a whole.
“People who are included in the financial sector would be able to overcome risks through investments they have made as a result of their savings,” reports the UN.
