The Board of Directors of the African Development Bank (AfDB) has approved a seven-year multi-currency line of credit for an amount equivalent to $300 million to FirstRand Bank Limited (FRB) of South Africa to finance a wide range of projects in local currencies and across Africa.
Most African countries including Ghana are characterized by low discretionary rates of domestic savings. As a result, the intermediation capacity of the financial sectors is limited, leading to the gap currently being filled with borrowings denominated in foreign currency.
However, this introduces a currency mismatch in the financial systems' balance sheets constituting a potential source of instability.
Thus, there is a clear need for providing stable sources of local currency financing. The line of credit from the AfDB will contribute to filling this gap by making available medium-term local currency financing to sub-borrowers across Africa, according to officials of AfDB.
The line of credit will be drawn in multiple African currencies including the Nigerian Naira, the Kenyan Shilling, the Zambian Kwacha, the Ghanaian Cedi, the Mozambique Metical and the Tanzanian Shilling.
Further, in line with the AfDB's mandate to contribute to the development of local capital markets, it is expected that the local currencies will be mobilized through the establishment of bond issuance programs in the domestic capital markets and the issuance of local currency denominated bonds to meet the specific local currency requirements of FRB.
These programs are expected to complement existing efforts to develop Africa's local capital markets thereby providing a strong catalytic and demonstrative effect.
The line of credit to FRB will contribute to mobilizing significant financial resources in the countries where its proceeds will be deployed, ultimately contributing to economic development and employment opportunities.
The line of credit is also expected to contribute to government revenues, the development of local capital markets as well as African regional integration.
The Director of the AfDB's Private Sector Department, Timothy Turner said: "With this line of credit, the AfDB is introducing a new and innovative form of local currency financing.
This structure can be replicated by other banks in Africa to gain access to funding in African currencies thereby reducing unnecessary currency mismatches and deepening the local capital markets."
The FirstRand Group Treasurer, Andries du Toit said: "We are very pleased with this loan facility as it further deepens our relationship with AfDB, and provides FirstRand and our clients' access to in-country local currency throughout the African continent.
This innovative solution will certainly contribute to growth in corporate activity, which in turn supports our own African expansion strategy."