NAIROBI, December 22, 2011 -The big picture: In 2011 Regional African banks returned home to find a wealth of opportunities International banks emerged as the major headline in 2011. They are at the heart of the Eurozone debt crisis which threatens to dampen two of the hottest growing continents on the globe – Asia and Africa. As the crisis continued, reports emerged in December that European banks were reluctant to lend to African projects. Combined with record lending rates, the broader crisis may seem dire but for regional African banks, the story that emerged was quite different.
With big infrastructure budgets and a tightening international credit environment, African governments have increasingly found themselves under pressure to finance their commitments. To bring its roads, water and power networks up to 21st century standards, the continent will need to double infrastructure spending to $93 billion a year or 15 percent of its regional output.
Where will the money come from? This is the question currently fueling the fortunes of regional banks. They are eagerly cueing up to fill the financing gap left vacant by the European and North American banking behemoths.
Traditionally local and regional banks were either not mandated to finance projects with tenors beyond five years or they struggled to find the dollars needed to finance such capital intensive projects. Circumstances have reversed this picture. Regional banks are now positioning themselves to take advantage of a rare opportunity that could see the financing landscape in Africa permanently altered.
To help them, regional banks are now increasingly turning to political risk insurance to cover their growing risk portfolio. In the event a government defaults, or acts in a way that may damage their investment, the banks would be able to recover their money under ATI’s preferred creditor status arrangements with member governments.
Because of this trend, regional banks such as PTA Bank and Standard Bank of South Africa have emerged as one of ATI’s major clients. Of the over $2.6 billion worth of transactions covered by ATI in 2011, nearly one-third or $900 million represented projects insured on behalf of regional banks. This contrasts with just $121 million out of a $1.2 billion portfolio in 2010.
Trade credit insurance (also called credit risk insurance) is another option, which has the potential to help regional banks do even more business. Seen widely as a financial solution, credit risk Insurance can be used as collateral to secure loans. Compared to other options that may be more costly such as letters of credit or more difficult to unload such as fixed assets, this type of insurance is being used by banks as a means to lend more and at reasonable rates to their clients. This solution helps ease the banks’ fear of loan defaults on a customer’s buyers, for example. And at the same time, it helps bring down the customer’s lending rates.
Already in some African markets, interest rates have soared as banks are forced by the rising Central Bank lending rates to pass on the added cost to their customers. On the business front, SMEs most often bear the brunt of these costs. In Africa, where SMES dominate the economic landscape, the situation threatens not only livelihoods but also economic growth.
The World Bank’s IFC estimates that there are between 30 and 37 million SMEs in Africa that are financially underserved, representing a gap in credit financing of between US$140 and $170 billion. With a 75% contribution to employment in Africa, SMEs play a significant role in its development.
In almost all ATI member countries, banks have figured prominently in 2011, fronting projects largely in support of infrastructure development. Tanzania, where ATI supported regional banks in projects valued at nearly $400 million has reaped some of the biggest benefits. One transaction, which backed a portion of a $250 million financing facility for infrastructure development saw the government set a possible trend for other regional governments to access infrastructure financing outside the normal donor-funded stream. Already, Kenyan and Zambian have made steps to borrow huge sums of money from commercial banks to finance key infrastructure projects. ATI is positioning itself to support these transactions slated for 2012.
African banks have extensively used ATI’s political risk and trade credit insurance product e.g. In Uganda, where they supported the government and SME development in two separate deals. In one transaction, a distributor of telecommunications equipment needed credit to maintain adequate stocks of goods for their retail customers. The local bank fronted the $154,000 loan. While the loan was relatively small, the bank may have been less willing to lend to the supplier without the assurance of ATI cover backing the loan against payment default.
And in Rwanda, ATI helped strengthen that country’s sovereign risk by insuring a regional bank’s $60 million loan for the expansion of the country’s national airline.
With the economic crisis yet to fully unravel in Europe, African banks may be able to make hay for some time to come. Regional African banks, mainly Nigerian and South African, are retooling their products and services to hone their focus on opportunities in Africa. The statistics support their optimism. The “Economist” indicates that Africa has one of the fastest growing middle classes and an ever-increasing rate of foreign investment – estimated to have soared tenfold in the past decade.
In the midst of international financial instability, the large global banking players in Europe for instance, are retreating to their home ground – for shelter. But for regional banks in Africa, home is proving to be the best place of all.
