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The African Development Bank (AfDB) has concluded a US$500mn credit insurance deal with the African Trade Insurance Agency (ATI) and Lloyd’s of London reinsurers to free up space for new lending.

The transaction is also expected to drive more private credit insurers to the African continent.

The deal covers 22% of AfDB’s US$2.3bn portfolio of non-sovereign operations in Africa. Specifically, it will protect the bank against the non-payment of loans made to about 30 African financial institutions across the continent.

According to a statement from the parties, the vehicle is enabling “many insurance companies operating outside Africa to participate in the financing of development in Africa for the first time”. While ATI is the direct insurer on the portfolio, a number of Lloyd’s and private reinsurers are taking part in the transaction and will share the risk on African financial institutions.

The deal will release US$500mn of capital for new lending, which is good news for a continent facing a reported US$120bn trade finance gap. Meanwhile, the parties also believe the transaction will have “an important demonstration effect” that will encourage similar institutions to invest more in Africa in the future, strengthening the development of the continent’s credit insurance markets.

Commenting on the deal, Akinwumi Adesina, president of AfDB group, says it creates “new pathways for collaboration between private insurers and the bank in the development of the African continent”.

“The experience and comfort gained in transferring risks between the AfDB, ATI and the Lloyd’s reinsurers are expected over time to lead to the lengthening of insurance terms and lower insurance and financing costs, leading to more trade and investment in, and among, the private sector and the African region,” the statement explains.

The agreement is the second balance sheet optimisation transaction undertaken by the AfDB under its “Room to run” programme, a scheme it has set up to release capital for impact lending. The previous transaction involved the signing of a US$1bn synthetic securitisation in September, the first of its kind between a multilateral development bank and private sector investors.

Credit insurance, a highly specialised market with a currently low penetration in Africa, is one of the instruments being explored as part of the programme, with the new deal being one way in which the bank is encouraging credit insurers to play a more active role on the continent.

“With ATI’s insurance guarantees leveraging the balance sheet of AfDB and crowding-in new investments, this innovation provides a timely solution to the scarcity of trade finance that could create enormous impact across the continent,” says George Otieno, CEO of ATI, adding that the new vehicle can easily be replicated.

Insurance broker RFIB helped put together the new instrument. The “leading UK reinsurers” taking part in the deal have not been named.