ABSA Bank Ltd

Africa Financial services

Our investment

In 2019, CDC provided a $100 million one-year trade loan to Absa Group Ltd (Absa) to increase the availability of US dollar liquidity for trade finance on the African continent. In 2020, CDC increased its commitment to $150 million to provide additional counter-cyclical support during the COVID-19 pandemic and help mitigate the indirect economic impacts of the crisis.

In 2019, CDC also made a $75 million commitment to a risk participation agreement with Absa to increase the availability of trade finance in Africa. In 2020, CDC increased its commitment to $150 million, again to provide additional counter-cyclical support during the COVID-19 pandemic.

The trade loan allows Absa to increase lending to domestic banks in Africa, which in turn allows them to support trading businesses with the imports of commodities, goods and equipment, and ultimately support economic opportunities and access to goods for people. By March 2021, the agreement had enabled over $180 million in trade volumes across four countries in sub-Saharan Africa, and the loan was extended for at least one more year.

The risk-sharing agreement allows Absa to increase its limits to local banks, which has the potential to increase the volume of short-term trade credit by up to $360 million per annum. Again, this will allow domestic banks in Africa to support trading businesses in importing commodities, goods and equipment and ultimately support economic opportunities and access to goods for people. By the end of 2020, the agreement had enabled over $350 million in trade volumes across six countries in sub-Saharan Africa.

Impact
  • Support economic opportunities by improving access to trade finance for businesses (SDG 8.1, 8.5, 8.10) and improve resiliency to the indirect economic impacts of COVID-19 (SDG 1.5).
  • Improve access to goods, including food and other commodities (SDG 1.4, 2.1).
How?

(Trade loan) Economic enabler: CDC has extended a trade loan which Absa will use to on-lend foreign currency trade credit to domestic African banks. This will enable trading businesses to import the commodities, business inputs and capital equipment they need to sustain business operations, market output and contribution to GDP, ultimately leading to job and livelihood preservation and the continued availability of goods for consumers.

(Trade risk sharing facility) Economic enabler: CDC has provided a risk-share arrangement so that Absa can extend more foreign currency trade credit to regional and domestic banks and sustain higher trade volumes than the bank can support without CDC’s support. This will enable businesses to import the commodities and equipment they need to sustain business operations, market output and contribution to GDP, ultimately leading to job/livelihood retention and the continued or increased availability of goods in the market.

Stakeholder Geography Characteristics
Employees, consumers

(Trade loan) Pan-African. By March 2021, CDC’s trade loan had financed trades in four countries, namely Nigeria (category ‘B’ country), Mozambique (category ‘B’ country), Ghana (category ‘C’ country) and Kenya (category ‘C’ country).

(Trade risk sharing facility) Pan-African. By December 2020, the trade risk sharing facility had supported trade flows in the following countries: Ghana (category ‘C’ country), Nigeria (category ‘B’ country), Kenya (category ‘C’ country), Malawi (category ‘A’ country), Madagascar (category ‘A’ country) and Zimbabwe (category ‘A’ country).

Given the variance of industries in which the businesses operate, for characteristics of people who ultimately benefit from the enabled trades, we assume mass market characteristics and demographics of the respective geographies.

Scale Depth/Duration

It is not possible to state the number of people who will be reached, so we use the scale of the facilities and enabled trade as a proxy.

By March 2021, the $150 million trade loan facility had supported $180 million in trade volumes.

Based on assumptions related to average tenor and utilisation, we anticipate that the $150 million trade risk sharing facility will enable up to $360 million in additional trade volumes per year.

Depth: In October 2020, the World Bank adjusted its real GDP growth projection for Africa to -3.3 per cent in 2020, after expanding by 2.4 per cent in 2019. As a result, impact is expected to be deeper in a context where circumstances have worsened as a result of COVID-19, i.e. increasing unemployment and lower access to goods/services. Countries with smaller and less developed domestic capital markets continue to feel the effects of COVID-19 more acutely than more developed markets.

Grid Score Contribution

-

(Trade loan) 2.13 (Trade risk sharing facility) 2.85

Market context: the global trade finance gap is estimated to be $1.5 trillion, and the average unmet demand in Africa represents 5.5 per cent or $91 billion

To help us direct our investments, we use a tool called the Development Impact Grid. The Grid scores every investment we plan out of a score of four, based on two factors: the difficulty of investing in the country and whether investment in that sector will lead to jobs.

(Trade loan)

  • Financial: Commercial funding is not available in sufficient quantity nor on the same terms, particularly in the COVID-19 context. There is retrenchment of capital, making investors less willing to support African banks. The DFI liquidity that CDC has provided incurs significantly lower Basel III Net Stable Funding Ratio (NSFR) costs and this ultimately improves the funding costs to African trading activity which this lending supports.

(Trade risk sharing facility)

  • Financial: Funding is not available in sufficient volumes in CDC’s markets. Particularly in the current COVID-19 context, there has been increased retrenchment of capital, making commercial investors less willing to support African banks.
  • Value-add: CDC is offering preferential terms (e.g. increased risk share or longer tenors) for the least developed countries and COVID-19 priority sectors such as food/healthcare commodities to help support trade flows in essential goods.
Risk
  • Evidence: Visibility on the impact on ultimate borrowers depends on Absa and the local banks’ ability to provide data on underlying borrowers. Absa provides data on underlying trades financed through the facility, including information on country, sector and a description of goods. We mostly rely on theory, evidence and macro trade data to understand the indirect impact of trade on capital markets, economies and people.
  • External: There may be a risk that there is not enough demand and/or that other constraints are hindering the impact to occur, e.g. logistical, economic, policy.

Environmental and social aspects

We worked with Absa to ensure that environmental and social standards (CDC's exclusion list) are applied to trades under the facility, in line with development finance institution approaches to trade facilities.

Key facts

Status:
Active
Region

Since 2012, we’ve only invested in Africa and South Asia. Investments outside these regions are from our pre-2012 portfolio.

:
Africa
Sector

We have seven priority sectors. However, we continue to invest outside these sectors, largely in the most challenging regions, as new investment supporting any sector helps to underpin the private sector, and create jobs and livelihoods for people.

:
Financial services
Website:
www.absa.africa
Investment type

We provide capital in three broad ways: direct equity, debt, and intermediated equity (principally through investment funds).

:
Direct Debt
Start date

For direct investments, this is the date CDC committed capital to the business or project.

For funds, this is the date that CDC committed capital to the fund.

For underlying fund investments, this is the date that the fund invested capital into the business.e

:
October 2019
Amount

For direct investments, this is the total amount that CDC has committed to the business or project (it may be a combination of equity and debt).

For funds, this is the total amount that CDC has committed to the fund.

:
$175m
Domicile

This is the investee company’s place of incorporation; or a fund’s jurisdiction.

:
South Africa

CDC is becoming British International Investment