AFRICA CAPITALIZATION FUND
- Reference: P-Z1-HAA-033
- Approval date: 13/12/1901
- Start date: 01/01/2002
- Appraisal Date: 03/03/2010
- Status: OngoingOnGo
- Implementing Agency: --
- Location: Pan-African
The Africa Capitalization Fund (ACF) is a response to the global financial crisis, established to capitalize systemically important banks in Africa with a view to spurring economic recovery and job creation. By investing Tier I and Tier II capital into developing countries' financial sectors, the Fund is intended to help prevent the outbreak of local credit and liquidity crises and to reduce systemic risks.
The ACF, a limited company to be registered in Mauritius, will be co-investing with the Global Fund or IFC and the Africa Latin America Caribbean (ALAC) Fund.
The Fund will make
(i) equity or equity-related investments to recapitalize African banks; and
(ii) via IFC, offer to portfolio banks, as needed, targeted advisory services aimed at strengthening investee banks' risk management, non-performing loan (NPL) resolution capabilities, and increasing access to finance.
The Fund will invest in African regulated commercial banking institutions (including private sector banks and state-owned banks with a clear path to privatization) which have systemic impact in their home markets. The Fund will acquire equity shares in privately-negotiated transactions whether the banks are privately owned or publicly traded in the open market . It may make investments directly or indirectly, through holding companies, subsidiaries or otherwise. This will be a good opportunity for governments to privatize the relevant banks in their country and for family owned banks to diversify their ownership and expand their operations regionally.
The objective of the Africa Capitalization Fund is:
1. to strengthen the capital of systemically important banks in Africa
2. bring technical assistance to improve banks practices in terms of risk management, credit management and reporting of non performing assets
3. the overall objective is to ensure banks have sufficient capital to keep assuming their financial intermediation role and maintain their lending operations in their market to avoid a further economic slowdown.
As a crisis response tool, the ACF proposal complements the ELF and Trade Finance Initiatives approved by the Board back in March 2009. It also addresses the priority of strengthening the private sector via the financial systems.
The ACF aligns well with the bank's overall strategy to improve the enabling environment for the private sector of RMCs by providing assistance in "soft infrastructure" (e.g. regulatory and legal frameworks, financial sector development, trade liberalization). ACF is an efficient tool to contribute to strengthening systemic banks in RMCs and reverse the slowdown in lending.
The ACF fits the overall strategy of the Bank both as a crisis response initiative and in general with its objective of strengthening financial systems on the continent.
ACF is a direct response to the global financial crisis which for banks has moved from a liquidity crisis to a chronic situation where bank assets has been negatively impacted to considerably weaken capital adequacy ratios of banks worldwide. The African continent has not been spared. By injecting equity in systemically important banks on the continent (largely banks with regional operations), ACF will reinforce the capital of the banks and encourage them to resume lending. The equity investments will be accompanied with advisory services to help the banks improved their governance and risk management practices which will play a double positive impact on the banks. The result should be stronger financial markets on the continent and better ability to lend to all spectrum of the economies. Development outcomes should naturally result from this exercise.
From a commercial viability perspective, the participation of IFC as support services provider should largely contribute to the success of the Fund. The ability of both the Fund and the IFC to work together for best alignment between investments will be crucial. IFC has the structure in place to deliver. With its role at the ACF Advisory Committee, AfDB will play a key role in ensuring the alignment between the ojectives of the Fund and the investors' interests. The Fund's governance structure is in line with best practices and the market outlook is conducive to building the portfolio. A balanced pipeline of future investments has been identified.
The Global Fund and ACF will leverage the World Bank Group advisory services capabilities, supporting portfolio companies in various capacities ranging from helping to strengthen their lending to assisting in the implementation of appropriate risk management systems. Based on historical track record, and Independent Evaluation Group ("IEG") and external reviews, IFC interventions have had stronger developmental impact and higher financial returns when investments are linked to advisory services. The variables used to measure Development Outcomes will be directly related to improving banking systems and individual banks in the portfolio.
Economic Performance: The Fund is expected to deliver strong development impact by:
(i) stabilizing portfolio banks thus speeding up economic recovery and maintaining and/or creating jobs in the respective countries;
(ii) strengthening private sector development through the provision to portfolio banks of advisory services aimed at improving their economic and financial performance;
(iii) catalyzing private-sector investments into emerging financial markets that are stabilizing;
(iv) fostering local financial market development by investing in many banks that may be currently privately held but are expected to be eventually listed on the relevant local stock exchanges, thereby increasing market liquidity and attracting foreign capital; and
(v) focusing on smaller countries due to diversification requirements and the relative sizes of banking systems in emerging markets.
Private Sector Development and Demonstration Effect: The Fund is expected to strengthen private sector development through the provision of advisory services to portfolio banks. These advisory services will be aimed at improving each bank's financial performance, corporate governance and risk management. The Fund will have strong demonstration effects that will serve as a catalyst for private-sector investments by providing a "stamp of approval" and attracting follow-on investment by third parties. Based on the overall amount of committed capital invested by investee bank, the Fund will be tracking for each investee bank, increased availability of credit, improved asset quality, market stabilization (capital adequacy ratio). As the Fund will also provide advisory services, implementation by the manager of international best practices for transparency and corporate governance of investee banks will be measured as the percentage of investee banks where the Fund has the right to appoint a board member which is expected to be two thirds of the number of Fund's investments. The target for the increased availability of credit by the 5th year of investment should be of around USD 1 bn based on a leveraging effect of 5 times the fund's expected invested equity amount of USD 200 mn. 3.26 Infrastructure Systemically important banks in country often are those providing most of financing to infrastructure in the country. This will not be a tracked indicator. 3.27 Effects on Governments Provision of USD 200 mn in capitalization funds will stabilize banking markets and speed economic recovery leading to greater government tax receipts. The Fund's investments also allow governments in the region to concentrate scarce funds on other services and investments. Taxes paid by investee banks above baseline year will be tracked.
Effects on Macroeconomic Resilience: The Fund will free scarce resources that would have otherwise been necessary to prop up the banking sectors. It is expected to provide additional stability in financial markets which will stabilize exchange rates and investment flows into and out of target countries.
Analysis of Additionality and Complementarity
Incremental Commercial Viability: With the Africa Capitalization Fund, the IFC Global Equity Fund doubles the size of commitments to Africa, enabling a better diversification for optimized returns.
Incremental Development Outcomes: With a seat on the Advisory Committee and on-going monitoring, AfDB is playing a catalytic role by adding development outcomes tracking indicators and by ensuring that investee banks will be those with most systemic impact on the continent.
Complementarity: The Bank will be investing USD 50 mn in the Fund which is expected to represent 25% of total capitalization. Without the participation of the Bank, ACF would probably not have materialized and instead of benefitting from USD 600 mn, the African continent banking sectors would have received only half of that amount. The presence of AfDB as an investor in ACF is determinant in having the three other investors in the Fund. For OFID and ADFD, the presence of AfDB and EIB as joint partners on the advisory committee plays a large role in their decision to invest in the Fund.
ANSAH Dennis - PINS2