Most African issuing banks are relatively small and face challenges as international confirmation banks obtain adequate trade finance facilities to support African importers and exporters. Risk reduction (the idea of international banks reducing or abandoning their share of credit risk in market development already exacerbated this already serious situation, particularly for African SMEs. Under the RPP, the bank and ABSA share the risk of failure of a portfolio of authorized commercial transactions from African issuing banks and compensated by ABSA. The bank`s commitment under the RPA is to cover up to 50% of each underlying transaction of the aforementioned African issue banks, while ABSA will confirm such a transaction and will bear no less than 50% of its underlying risk. The objective of the Microfinance Risk Participation Program is to cover the risk of default for MFI loans to MFI loans in ADB DMCs. ADB shares in proportion to the risk of failure of microfinance institutions approved by the ADB up to 50%. The aim is to encourage MFIs to provide loans in the event of a significant lack of access to MFI financing. As part of the risk-sharing agreement, the ADB would create additional flexibility for PFIs to increase the volume of loans below national and individual MFI limits. In presenting the project to the Board of Directors, Stefan Nalletamby, the Bank`s Director of Financial Sector Development, made a strong case for how the Bank`s RPA instrument, through strategic partners such as ABSA, continues to facilitate trade on the continent; help reduce Africa`s trade finance gap. “Through a 50/50 risk-exchange approach, this facility will help promote large-scale economic growth on the African continent by facilitating the import and export activities of African businesses and SMEs, and strengthening intra-African trade and regional financial integration, in line with the bank`s strategic objectives,” he said. The bank`s additionality therefore lies in the use of its “AAA” rating to provide greater comfort to enable ABSA to increase its thirst for risk-taking for local banks in Africa and to provide them with increased trade finance facilities.
This reinforces the expansion and deepening of Africa`s financial systems. a. The microfinance portfolio of a partner financial institution (retail) ADB guarantees or participates in the risk of default of wholesale loans from a PFI to a given IFM and sets a credit limit for each participating MFI. However, in some countries (for example. B India), loans are grouped by microcredit borrowers (often MFIs that are used as agents). The current and potential new partners of the PFI program and MFIs have asked the ADB to guarantee or participate. The ADB will guarantee or risk a partial guarantee or risk for the participation of 50% of the microcredits pooled in the balance sheet of a PFI, thereby reducing the risk profile of these assets for the PFI and promoting the continuation of loans to the sector. This portfolio guarantee and/or risk participation are carried out on a pilot basis with existing accredited PFIs and should be applied initially in India. B. Autonomous Guarantees For countries where ADBs do not have an accredited PFI, it is proposed that a separate partial guarantee and/or risk participation for approved MFIs be included in the program to enable MFIs to obtain a bank loan.