AfDB and Other Institutions Launch a 600 USD Million Fund

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The African Development Bank (AfDB) Group, the European Investment Bank (EIB), the International Financial Corporation (IFC), the OPEC Investment and Development Fund and Abu Dhabi Development Fund (ADDF) on Tuesday, May 25, 2010, launched the African Capitalization Fund.

With an initial package of US$ 600 million, including co-investment resources, the new mechanism is designed to finance the continent’s banking system. Designed by the IFC, the fund will be managed by the World Bank’s asset management branch responsible for private sector operations. It will buy shares mainly through savings in identified banks as determinants in a country or a region for regional integration or trade facilitation.

Speaking during the event, the AfDB private sector director, Timothy Turner, the African Capitalization Fund “is one of the multiform responses that the AfDB, in particular, and the international finance institutions, in general, have come up with to counter the effects of the global financial crisis on African economies.”

Weighing the real risk that declining credit due to the withdrawal of commercial banks from the markets and the increasing banking regulations pose to African economies, these institutions are looking to use this new mechanism to counter the shortage of financing that is looming on the horizon. Speaking during the launch, the IFC director for East Africa and Australia, Philippe Prosper, explained that “the decline or the drying up of credit translates into a dangerous withdrawal from the financing of economies, thus an unfortunate contraction of private sector activities.”

The African Capitalization Fund therefore aims at “strengthening the banking sectors of African countries by providing resources it needs to continue financing the private sector.”

Being pan-African in nature, an EIB expert, P. Walsh, stressed that “he will do everything he can to cover the entire continent in its interventions,” adding that "countries will be considered in the same way and that the portfolio will be more diversified and it will be in line with the investment principle which aims at systematically strengthening large banks on the continent, regardless of their sizes.”

The appropriateness of this new mechanism is not in doubt, and according to a Mauritanian leasing fund manager, it is designed to serve as “a missing link in the African development financing chain.” The conditions for its interventions constitute a concern, though. There is fear that if its conditions are stiff, many African banks may not access its services. According to inside sources, the conditions are expected align with those of the markets. Besides filling a gap, the fund, which has been awarded US$50 million by the AfDB will benefit from expertise from the various international financial institutions given that it is a partnership.