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The African Development Bank (AfDB) has approved an unfunded US$250mn risk participation agreement with South Africa’s Absa Bank.

The new deal will allow Absa to increase its risk-taking appetite on local banks in Africa and provide them with more trade finance facilities. AfDB forecasts that, when fully utilised, the agreement will catalyse trade worth more than US$2bn in three years.

Under the agreement, AfDB and Absa will share the default risk on a portfolio of eligible trade transactions originated by African issuing banks and indemnified by Absa. AfDB has committed to assume up to 50% of every underlying transaction issued, while Absa will confirm the transaction and bear the remaining risk.

With the deal the parties are seeking to address a challenge that most African issuing banks face: that they are relatively small and thus struggle to obtain adequate trade finance facilities from international confirming banks to support African importers and exporters, particularly SMEs. This challenge has grown significantly over the last few years as many international banks have reduced their credit risk stake in developing markets or left them altogether in what is also referred to as “derisking”.

Absa, until last year a Barclays subsidiary, has itself been a victim of this trend. In 2016 Barclays quoted the regulatory costs of maintaining operations on the continent as the reason for plans to lower its 62.3% ownership stake in Absa Group (or Barclays Africa Group as it was known at the time) down to a “non-controlling, non-consolidated position”. Since then, Barclays has reduced its share to just 14.9%.

“This facility, through a 50/50 risk sharing approach, will help to promote broad-based economic growth on the African continent through increased facilitation of import-export activities of African corporates and SMEs, and increase intra-Africa trade and regional financial integration,” explains AfDB’s financial sector development director, Stefan Nalletamby.