Absa has signed a deal with the Multilateral Investment Guarantee Agency (Miga) which will enable it to reduce the regulatory risk weighting of mandatory reserves held by its subsidiaries across sub-Saharan Africa, thus freeing up lending capacity.
Absa’s subsidiaries outside of South Africa are required to maintain reserves at the central banks in their respective jurisdictions, based on the volume of customer deposits that these subsidiaries have. Under the terms of the new agreement, Miga will issue US$497mn in guarantees for up to 15 years on Absa’s investments into its subsidiaries in Ghana, Kenya, Mauritius, Mozambique, Seychelles, Uganda and Zambia, reducing counterparty risk and cutting the South African bank’s risk-weighted assets (RWA) on a consolidated basis. Absa says that it is the first African banking group to enter into this type of guarantee transaction with Miga.
“While essential for regulatory reasons, reserves held with central banks consume consolidated capital and do not generate income for subsidiaries and their international parent,” says Miga executive vice-president, Hiroshi Matano. “Miga is freeing up risk capacity associated with the reserves and helping make more financing available for corporates and small and medium enterprises.”
Absa says it will use the additional RWA capacity to increase its subsidiaries’ financing for corporates and SMEs, and on projects with potential climate co-benefits, adding that its Kenyan and Mauritius arms now plan to lend US$325mn in support of new climate-related deals.
January 8, 2020