DR CONGO, 9 June 2015 – At a press conference held in Kinshasa, Mr. Jules Bondombe Assango, Vice Governor of the Central Bank of the Democratic Republic of Congo (DRC), made a ground breaking announcement that will bring a competitive advantage to their banking industry. In partnership with the African Trade Insurance Agency (ATI), the Vice Governor announced that banks would receive up to 50% capital relief on any transaction that is secured with a credit risk guarantee supplied by ATI.
The announcement also places ATI in the unique position of being the first multilateral of its kind to be granted this standing based largely on the strength of its credit rating. ATI has been in discussions with the COMESA Central Banks, including the DRC, for several years and this is the first significant outcome of those discussions. ATI is hopeful that the move by the DRC’s Central Bank will pave the way for others in the region to follow.
Within most African countries, central banks require commercial banks to reserve a prescribed minimum capital in proportion to their loans and advances to cushion against default by their customers. This is known as the regulatory capital reserve ratio, which can be higher than 12% in some markets.
For example, in some African countries central banks require that local banks maintain a total capital to total risk weighted assets ratio of around 12%. This means that if the bank was to advance a loan facility of $500,000 they would have to set aside an equivalent of 12% of the bank’s total capital to cushion the lending.
In the case of DRC, the regulatory capital to risk weighted assets is currently 24.5%. Under the new legislation and with ATI’s insurance cover, a bank will only be required to set aside 12.25% worth of capital reserve if the transaction meets all eligibility criteria.
In developed markets, central banks require lower ratios for transactions covered by strongly rated credit insurance companies. This frees up banks’ capital enabling them to lend more. In Africa, with the now recent exception of DRC, central banks have not adopted this policy.
“This restriction has historically placed African banks at a disadvantage when competing with international banks. Without capital relief, local banks face a tighter fiscal environment and cannot lend at the same levels as their better capitalized international counterparts,” notes Jef Vincent, ATI’s Chief Underwriting Officer.
Today’s announcement puts the DRC in line with Central Banks in developed markets, which are governed by the Basel Committee on Banking Supervision. The Basel Framework established reforms to improve the sector’s risk management, governance, transparency and ability to absorb shocks from financial and economic stress.
The Framework recognises certain risk mitigation tools against which lower risk weightings may be applied to give banks some capital relief. These include guarantees by corporates, sovereigns, central banks and other official entities. The Framework also recognises claims against certain Multilateral Development Financial institutions as qualifying for zero risk weighting. These institutions are recognized for their strong financial standing as well as the strength of their shareholders.
Under the current Basel Framework, the following international institutions are recognized for their zero weighting:
The World Bank’s MIGA, despite not being a development, bank is now included in Basel’s list of multilateral development banks. ATI’s advantage to its African member countries is that while MIGA only offers political risk and sovereign default guarantees, its scope of cover in Africa is much more relevant to bank risks as it includes credit risk cover on corporate borrowers.
In the DRC, ATI is currently working on a multi-million dollar pipeline of transactions in various sectors that will benefit from this new capital relief guideline.
ATI had two representatives participating in the press event. Jef Vincent, ATI’s Chief Underwriting Officer and Attaty Kodjo, who is responsible for developing ATI’s business in Francophone member countries, have been the chief drivers of the ATI-led central bank initiative.
