African Development Bank Group approves the first Multi-jurisdictional Fixed Income ETF in Africa
The Board of Directors of the African Development Bank (AfDB) has approved a seed equity capital investment of USD 25 million into the African Domestic Bond Fund (ADBF). The ADBF was conceived as part of the African Financial Markets Initiative (AFMI, www.africanbondmarkets.org), dating back to 2008. Its objectives are to contribute to the development of local debt markets in Africa, by strengthening the domestic bond market infrastructure and investing in local currency-denominated debts. The AFMI’s activities are implemented through its two pillars which are the African Financial Markets Database (AFMD) and the African Domestic Bond Fund (ADBF).
The ADBF is expected to be a game-changer for the investors’ community to access the African markets. It is structured as an enhanced Exchange Traded Fund (ETF) listed in Mauritius, but will also be listed in other stock exchanges in order to invite other investors to invest in the fund. It will be managed by an external fund Manager – MCBIM (Mauritius Commercial Bank Investment Management Co Ltd.). “The ADBF aims to stimulate the development of African domestic bond markets through the provision of an innovative and efficient product in the form of an enhanced Index Bond Fund to broaden investor’s participation” as confirmed by the Bank’s Finance Vice-President and chairman of AFMI steering committee, Charles Boamah.
The ADBF will address the perception and challenges that create barriers for investors to commit to local currency fixed income in Africa. The markets show that African credit risk is not the stumbling block for international investors. Capital has been staying on the side-lines because of technical barriers that can mostly be overcome. Beginning with the premise that investors are deterred by these factors, structuring a product that mitigates these concerns is an opportunity to attract local and international capital to African markets. While strong demand for Eurobonds demonstrates appetite for African sovereign risk, this does not generally translate into appetite for local currency bonds despite the currency yields being higher and often being adequate enough to compensate for currency exchange risk.
According to AfDB’s Director for Financial Sector Development, Stefan Nalletamby: “In developing markets, it is particularly important for the lead institutions to act to reduce financial market impediments and instill local and international investor confidence. AfDB is leading the establishment of the ADBF as a sovereign fixed income ETF investing in different countries which will be the first time institution of this kind established in Africa. AfDB is the premier development Bank for Africa and the Bank’s leadership in the establishment of ADBF is demonstrable of the Bank providing a local solution to several structural weaknesses.”