The Financial System Development and Stability Sub-Committee ATI Insurance products as a recognised tool for risk mitigation Jef Vincent, CUO African Trade Insurance Agency 19, August 2013 Nairobi, Kenya

Insuring Africa, Guaranteeing Opportunity Presentation Outline 1.Background 2.ATI’s Proposal 3.Rationale for ATI’s Proposal 4.Key Facts on ATI 5.Risk Management Attributes of ATI 6.Conclusion & Recommendation

Africa’s Export Credit Agency Credit Risk Mitigation (CRM) ●CRM refers to the various measures and techniques that lenders employ to minimize losses that may arise from a counterparty’s default ●It has therefore become an important element of banking regulators’ role in ensuring the soundness of banking systems ●Credit risk guarantee by institutions such as ATI is a widely used CRM tool in the developed world, against which capital relief is afforded banks that use it to secure their credit risks

Africa’s Export Credit Agency ATI’s Proposal Request to Central Banks within COMESA to designate Risk Weightings and offer Capital Relief to banks and financial institutions for lending facilities backed by ATI’s comprehensive credit risk cover

Rationale for the Proposal ●The Basel Framework has recognized certain risk mitigation tools against which lower risk weightings may be applied to give banks some capital relief ●These include guarantees by corporates, sovereigns, central banks and other official entities Para 53 of the Basel Framework: Claims on sovereigns and their Central Banks: Note that ATI is rated A/Stable by Standard & Poor’s Credit Rating of Guarantor AAA to AA- A+ to A-BBB+ to BBB- Bb+ to B-Below B-Unrated Risk Weighing 0%20%50%100%150%100%

Rationale (cont’d) ●The Basel framework also recognizes claims against certain Multilateral Development Financial Institutions as qualifying for Zero Risk Weighting These are listed in footnote 20 under paragraph 59 of the Basel Framework ●These institutions are recognized for their strong financial standing as well as the strength of their shareholders

Rationale (cont’d) The financial institutions recognized for zero-risk weighting are: African Development Bank – AfDB Asian Development Bank – ADB Caribbean Development Bank – CDB Council of Europe Development Bank – CEDB European Investment Bank - EIB European Investment Fund –EIF European Bank for Reconstruction and Development – EBRD Inter-American Development Bank- IADB International Bank for Reconstruction and Development - IBRD International Finance Corporation – IFC Islamic Development Bank – IDB Nordic Investment Bank - NDB

Africa’s Export Credit Agency ●In May 2010, the Multilateral Investment Guarantee Agency “MIGA”, which offers similar products as ATI, sought and was granted ascent by the Basel Committee on Banking Supervision for its guarantees be acknowledged for Zero-Risk Weighting ●Accordingly, despite not being a development bank, MIGA is now included in the list of multilateral development banks as set out on footnote 20 of the Basel Framework ●It needs to be highlighted that while MIGA only offers political risk and sovereign default guarantees, ATI’s scope of cover is much more relevant to bank risks as it includes credit risk cover on corporate borrowers Rationale (cont’d)

ATI’s Request (1) In recognition of: a)The ownership and control over ATI by African states; and the oversight role of the World Bank on ATI; b)ATI’s strong “A” rating by Standard & Poor’s; and c)The comprehensive scope if its cover; ATI requests COMESA Central Banks to accord 20% risk weighting, or any other weighting as they may individually or by consensus consider appropriate, for bank facilities covered by ATI

ATI’s Request (2) Additionally: 1.ATI requests COMESA Central Banks to allow banks to increase their single obligor limit proportionally to the amount of the exposure that is covered by ATI. 2.ATI requests to be allowed to access and to actively participate in the national credit bureaus.

Africa’s Export Credit Agency Brief Introduction to ATI ATI’s Mandate: ATI was set up to promote trade and investment in Africa and reduce the cost of doing business by offering risk mitigation products. ATI Products: ATI offers investors and lenders comprehensive insurance policies that protect them from: 1.Political Risks such as expropriation, nationalization, currency transfer restriction, embargo, war and political violence 2.Credit Risk against the non-payment of sovereign and sub-sovereign debt obligations 3.Credit risk against the non-payment of commercial debt by corporate obligors as well as calling of bonds

Africa’s Export Credit Agency Brief Introduction to ATI Inception: ATI began operations in 2001 Corporate Identity: ATI is an African multilateral financial institution, established under Article 102 of the Treaty of the United Nations, Certificate of Registration No and with its headquarters in Nairobi, Kenya Ownership: Initially owned 100% by African governments, ATI’s shareholding has evolved to accommodate strong financial institutions sharing similar mandate. The Agency nonetheless remains majority-owned by African governments who subscribe to ATI’s capital and ratify its Treaty

ATI Shareholders Member States ●Benin ●Burundi ●DR Congo ●Kenya ●Madagascar ●Malawi ●Rwanda ●Tanzania ●Uganda ●Zambia *Pending capital subscription In Advanced Stages ●African Development Bank ●Ghana Non-Member States ●Africa Re ●Atradius ●COMESA ●PTA bank ●SACE ●ZEP-RE ●AfDB *

Shareholding Structure

The ATI Advantage 1. Financials: - Very Strong Capitalization - Strong Investments - Strong Liquidity - Small size risk exposure retention and; - Strong World Bank Support 2. Risk Management, through well defined exposure limits i)Country Risk: Aggregate Exposure retained in every member state is restricted to 5 times compared to up to 12.5 times for banks (using an average capital adequacy ratio of 8%) ii)Product Category Limits: ATI seeks to balance the utilisation of its Gross Exposure across product lines in its portfolio as in the table below ProductsLimit as % of ATI’s Net Exposure Political Risk InsuranceIn aggregate≤ 100% Sovereign, Sub-Sovereign and Parastatal Obligor Non-payment Insurance In aggregate≤ 40% Private Obligor Non-paymentIn aggregate≤ 30%

Industrial SectorsLimit as a % of ATI’s Gross Exposure AgribusinessIn Aggregate ≤ 40% Construction & Real EstateIn Aggregate ≤ 20% Financial ServicesIn Aggregate ≤ 40% ManufacturingIn Aggregate ≤ 40% Mining, Oil & GasIn Aggregate ≤ 30% PowerIn Aggregate ≤ 30% TelecommunicationsIn Aggregate ≤ 30% TransportationIn Aggregate ≤ 30% ServicesIn Aggregate ≤ 40% iii) Sector Limits ATI limits its Gross Exposures by industrial sector as another mechanism to achieve a diversified portfolio, as below. The ATI Advantage (cont’d)

iv) Project Limits: ATI limits its Net Exposure, calculated as a percentage of capital and reserves, to a single project, across product lines as in the table below The ATI Advantage (cont’d) ProductsLimit as a % of ATI’s Capital & Reserves (US$ equivalent) Political Risk Insurance7.5% or US$ 10 million, whichever is higher Sovereign Non-payment Insurance7.5% or US$ 15million, whichever is higher Single Obligor Credit RiskUS$ 5 million

Africa’s Export Credit Agency The ATI Advantage (cont’d) v) Obligor Limits For credit risk, Net Exposure to a single obligor would not exceed US$ 5 million ( currently 3.2% of ATI’s capital) For transactions that would result in exposures in excess of set limits, ATI cedes part of the exposure through risk sharing to international public and private reinsurers Cognisant of reinsurers’ credit risk (reinsurer’s ability & capacity to pay claims), ATI follows a stringent criteria by requiring eligible reinsurers to have a rating of ‘A’ or better by S & P or equivalent rating by other major rating agencies, i.e. Moody’s, A.M. Best or Fitch vi)Policy Wording ATI’s Policy Wordings are drawn to match international best practice and are Basle II Compliant for use by banks and financial institutions

Africa’s Export Credit Agency Addressing some Critical Issues 1) Risk Management Capabilities: ●ATI’s policies governing risk exposure limits, were set at inception and have been revised only with the express authority of the ATI Board and the World Bank ●The Board of ATI comprises top government officials representing the member states that own the Agency ●ATI is also subject to periodic reviews by the World Bank 2)ATI’s Credit Rating is reviewed annually by Standard & Poor’s and a detailed ratings commentary is published. Banks relying on ATI collateral are therefore regularly updated on the status of ATI’s rating ●Banks generally conduct their own due diligence on ATI, as well as continuous monitoring such as annual reviews. ●ATI can provide the same to Banking Regulators so they are updated on the status of ATI at any given time.

3) Timing, Conditions & Exclusions for Claim Payments ●The ATI Policy Wording provides for less cumbersome claims payment provisions and exclusions which mostly define transactions eligible for ATI support 4) Possible Laxity in Borrower Monitoring on the Part of Banks transferring Risks (“Risk Shedders”) ●ATI’s approach is to ensure that banks retains a reasonable portion of risk (between 50% and 85%) as incentive for careful ongoing borrower monitoring Africa’s Export Credit Agency Critical Issues (cont’d )

●ATI as a creature of African governments provides a unique pool of financial resources and strength capable of facilitating international capital flows into member states, and expanding trade by mitigating against credit risks ●Having committed capital to ATI, African governments should maximize the benefits of ATI by encouraging banks to take up ATI’s insurance and thereby: - Help expand lending; - Mitigate banking losses from borrowers default by laying off the risk with ATI ; Africa’s Export Credit Agency Conclusion & Recommendation

●In most instances ATI’s insurance is taken by banks to supplement, not substitute other collateral provided by borrowers ●By contributing to ATI’s underwriting capital, African governments, and the banks that insure with ATI, collectively commit more than necessary capital to secure lending transactions in the continent ●Accordingly, reasonable capital relief should be accorded to banks utilizing ATI’s risk mitigation products ●It is therefore proposed that COMESA Central Banks accord 20% risk weighting to bank facilities secured by ATI’s credit insurance cover Africa’s Export Credit Agency Conclusion & Recommendation

ATI Headquarters Kenya-Re Towers | Upperhill, Nairobi ATI Rwanda Office Ground Floor, Prester House Boulevard de l’Umuganda | Kacyiru, Kigali ATI Tanzania Office 1st Floor, Private Sector Hs | Mwaya Road Dar es Salaam ATI Uganda Office Workers House, 9th Floor Southern Wing Plot 1 Pilkington Road | Kampala ATI Zambia Office Kwacha House Annex | Cairo Road Lusaka ATI Contacts Africa’s Export Credit Agency

Questions? $3.1 m$1.9 m$1.3 Rwanda Kenya $749$349 Burundi Madagascar