FirstRand Rest of Africa Central Bank Mandatory Reserves Coverage
This summary describes equity investments by FirstRand Limited (FirstRand Group) into First National Bank Zambia Limited (FNBZ) in Zambia. FirstRand Group’s interest in FNBZ is held by FirstRand EMA Holdings Pty Limited (FREMA), being the investor. The investor has applied for MIGA guarantees of up to US$36.5 million in mandatory reserves cover for a period of up to 15 years.
FirstRand Group, South Africa-based, is one of the largest pan-African financial institutions in terms of total assets with operations in ten countries in Sub Saharan Africa. Its subsidiary banks 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. Mandatory reserves contribute to FirstRand Group’s overall risk-weighted assets (RWA) at the consolidated level, consuming a level of capital that could otherwise have been deployed in productive assets.
This Project is a Category FI-1 project according to MIGA’s Policy on Environmental and Social Sustainability (2013). FNBZ is a commercial bank providing retail and corporate banking services across Zambia. It has 30 branches.
MIGA analyzed the portfolio of FNBZ for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. As of June 2019, corporate finance accounts for around 10% of the bank’s total advances portfolio, SME portfolio is at 66%, retail banking at 16% and Vehicle Asset Finance at 8%. The top exposures in corporate finance include copper-cobalt mining service providers (including excavation works, underground civil construction, ore transport), fuel storage and distribution, wholesale and retail trade and telecommunications industry. In terms of SME lending, FNBZ is exposed to upstream copper-cobalt mining and associated mining services; sand, clay and gravel mining; crop production (mainly wheat, barley, maize and soya); livestock farming; fuel storage and distribution; scrap metal recycling; and, wholesale and retail trade. FNBZ does not have exposure to coal. It has a direct exposure to tobacco farming and manufacturing. The main environmental and social (E&S) risks of this project are associated with the subsidiary’s lending activities in medium to high-E&S risk sectors and its capacity to manage these risks. The applicable environmental and social (E&S) requirements for the bank’s portfolio are MIGA Exclusion List; applicable national environmental and social laws and regulations; and MIGA’s Performance Standards.
FirstRand Group became an Equator Principles (EP) signatory in 2009 and has developed a Guideline for the Management of Environmental and Social Risks in Financing which describes the Environmental and Social Risk Assessment (ESRA) due diligence process implemented in a number of the Group’s business units including FNBZ. FirstRand Group has policy statements on environmental sustainability, policy statements relating to restrictions on the financing of certain sectors/activities, and thermal coal financing policy. FSR has developed an Exclusion List and a Sensitive Industries Matrix. The Exclusions List indicates activities that FSR will not finance at all (“strict exclusions” such as projects involving child labor/forced labor, activities and material deemed illegal under host country laws and international agreements, cross border trade in waste, destruction of high conservation value areas, unbounded asbestos fibers, pornography/ prostitution, racist and anti-democratic media), or sectors within which the amount of financing provided has been limited to a selected limit (“limited exclusions” including radioactive materials, substantial involvement in alcoholic beverages, tobacco, weapons and munitions, gambling/ casinos, commercial logging operations for use in primary tropical moist forest and production or trade of wood or other forestry products other than sustainably managed forest). The activities on the Sensitive Industry Matrix potentially raise significant environmental and social issues which require a position to be taken by the bank regarding potential lending to these industries. They include nuclear power generation, fracking, biofuels, political party funding, hunting of exotic and endangered species, trade of conflict minerals and cannabis-based products. FSR policies are publicly disclosed on the FSR website. In addition, FSR publishes on its website Equator Principle performance reports, that have been attested by an independent third party and reflect information about project finance activities and E&S performance in line with the requirements of the EPs.
In July 2018, FNBZ adopted and implemented the ESRA due diligence system for all commercial and SME lending except overdrafts approved for Working Capital loans. Per FNBZ ESRA Policy, relationship managers ensure that transactions are screened against the FSR policy statements on sensitive industries and the Exclusion List via the ESRA automated online system. FNBZ does not currently have an E&S specialist (ESRA Specialist). Nevertheless, E&S Specialists of the FirstRand Bank South Africa (FRBSA) in South Africa provide support to relationship managers and credit teams to ensure that transactions are screened through the ESRA online tool. ESRA screening results in assigning an E&S Category to the transactions. Relationship Managers conduct the due diligence and together with FRBSA E&S specialists request and review Client’s E&S documentation. Covenants linked to E&S compliance are included in the loan documentation as suggested by the E&S specialists. Where the client is not in compliance with its environmental and social covenants, FNBZ works the clients on remedial actions and, if necessary, exercises remedies as considered appropriate.
FNBZ has developed a Human Capital Manual which is available to all employees through the on-line system. It includes conditions of employment and compensation, working time, benefits and performance management, talent management, redundancy policy (which covers retrenchment), non- discrimination, grievance redress, provisions for the employees’ organizations and other. FNBZ Grievance Policy and Procedure describes various levels of grievance redress within the organization, whereas Whistle Blowing Policy describes the ways for reporting of misconducts to the FirstRand Ethics Committee and the international consulting company who acts as an external auditor to the FirstRand Group.
FNBZ has a Business Continuity Plan (BCP) and the Crisis Response Plan which also includes emergency response procedures. These documents cover emergency response procedures, crisis management and business recovery protocols for the critical business processes, internal/ external notification and decision tree, requirements for training and drills and the requirements for auditing of the business continuity plans.
FNBZ has contracted several private security companies and Zambia Police Service to protect its branches and the headquarter office, as well as the cash-In-transit. Associated Service Level Agreements contain companies’ mandate and responsibilities, advisory role and actions in case of emergency.
Based on MIGA’s review and applicable performance requirements, an environmental and social action plan (ESAP) will be agreed with FNBZ prior to entering into a MIGA guarantee and will be implemented within an agreed timeframe. The ESAP would be expected to contain the following items:
- Update the ESRA system to include MIGA E&S requirements.
- Appoint an E&S specialist/officer responsible for the Environmental and Social Management System (ESMS)/ESRA.
- Update and implement a training program for staff on the ESRA policy and process.
- Develop and implement subsidiary security policy, procedures and plans in line with the requirements of Performance Standard 1.
- Develop and implement a procedure for external communications to screen and assess the issues raised by the public through its open channel and document responses in line with requirements of Performance Standard 1.
FNBZ will report periodically to MIGA on the development and implementation of the ESMS and application of the Performance Standards.
The aim of MIGA’s proposed guarantees is to help FirstRand Group reduce the risk of some of its assets, which would lead to a reduction in the group’s RWA on a consolidated basis. FirstRand Group plans to deploy this headroom of consolidated RWA across its Africa operations, including Zambia, thus increasing the potential reach, development impact, and financial returns of the foreign investment.
MIGA’s proposed coverage to FirstRand Group is aligned with the most recent World Bank Group’s strategy for Zambia, as it seeks to promote private-sector-led growth via increased access to finance in the country and to promote sustainable investments.
MIGA supports its clients (as defined in MIGA Policy on Environmental and Social Sustainability) in addressing environmental and social issues arising from their business activities by requiring direct investment clients to set up and administer appropriate grievance mechanisms and/or procedures to address complaints from Affected Communities. MIGA support to Financial Intermediary clients applying the Performance Standards are required to develop External Communications Mechanisms to receive and review inquiries or complaints from any interested party regarding the E&S risks and impacts of their operations as per the requirements of Performance Standards 1.
In addition, Affected Communities have unrestricted access to the Compliance Advisor/Ombudsman (CAO), the independent accountability mechanism for MIGA. The CAO is mandated to address complaints from people affected by MIGA-guaranteed business activities in a manner that is fair, objective, and constructive, with the goal of improving environmental and social project outcomes and fostering greater public accountability of MIGA.
Independent of MIGA management and reporting directly to the World Bank Group President, the CAO works to resolve complaints using a flexible, problem-solving approach through its dispute resolution arm and oversees project-level audits of MIGA’s environmental and social performance through its compliance arm.
Complaints may relate to any aspect of MIGA-guaranteed business activities that is within the mandate of the CAO. They can be made by any individual, group, community, entity, or other party affected or likely to be affected by the environmental or social impacts of a MIGA-guaranteed business activity. Complaints can be submitted to the CAO in writing to the address below:
International Finance Corporation
2121 Pennsylvania Avenue NW
Washington, DC 20433 USA
Tel: 1 202 458 1973
Fax: 1 202 522 7400