FirstRand Rest of Africa Central Bank Mandatory Reserves Coverage
On June 30, 2020, MIGA issued guarantees covering the equity investments by FirstRand EMA (Pty) Ltd of South Africa (FirstRand), which is the Rest-of-Africa holding company for FirstRand Limited (FirstRand Group or FSR) into First National Bank of Eswatini Limited (FNBE) in Eswatini. FirstRand Group’s interest in FNBE is held by FirstRand being the investor. The investor received coverage from MIGA for up to US$20.5 million in mandatory reserves 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-2 project according to MIGA’s Policy on Environmental and Social Sustainability (2013). FNBE is a commercial bank providing retail and corporate banking services across Eswatini. It has 12 branches.
MIGA analyzed the portfolio of FNBE for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. As of June 2019, corporate finance accounts for approximately 10% of the bank’s total advances portfolio, SME portfolio is at 37%, retail banking at 31% and vehicle asset finance at 22%. The corporate and project finance transactions include among others exposure to sectors such as agriculture, mining and quarrying (bricks), timber production, manufacturing, electricity, gas and water supply, financial intermediaries, and transport and storage that may potentially have medium to high environmental and social risks. FNBE has some exposure to alcohol. 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 E&S requirements to FNBE portfolio are: MIGA’s Exclusion List; applicable national environmental and social laws and regulations; and the 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 FNBG. 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 Principles 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.
FNBE ESRA policy, for corporate or commercial related lending and investment transactions where the use of the proceeds is known, requires clients to comply with all relevant national environmental, health and safety legislation, compliance with permit requirements, and compliance with public commentary processes for impact assessments. In October 2016, FNBE adopted and implemented the ESRA system for all the lending activities within FNBE approved subsidiary thresholds. FNBE has recently appointed an ESRA specialist and depends on the ESRA specialist based in FirstRand Bank South Africa (FRBSA) to screen all the transactions within the FNBE thresholds on the ESRA online tool. The ESRA specialist from FRBSA is also responsible for the coordination with the relationship managers and credit teams and provides support and advice on high risk transactions (category A) and transactions that the ESRA system has flagged due to activities that are excluded per FNBE ESRA policy. All FNBE transactions with impending E&S risks shall be reviewed as per ESRA review process prior to credit approval and processing. Per FNBE ESRA policy, the credit team and the ESRA specialist based in FRBSA ensure that all transactions that are within FNBE thresholds are screened against the FSR policy statements relating to restrictions on the financing of certain sectors/activities within the ESRA online system and for those transactions that are below the country limits are manually screened against the FSR list of restricted sectors and country host laws and regulations.
FNBE has a Business Continuity Plan (BCP) in place indicating clear responsibilities and detailed procedures/plans for different IT exposures risks and scenarios.
In line with the national legislation FNBE has developed a set of Human Resources (HR) policies and procedures which cover conditions of employment and compensation, working time, leave (maternity, paternity, sick), compensation and benefits, workers code of conduct, workers grievances and redress mechanism, whistleblower policy, retrenchment policy and the responsibilities of the employees and the employer. In addition, the HR has developed an occupational health and safety procedures that are implemented within each business unit. FNBE has in place a physical security policy and physical security framework in place.
Based on MIGA’s review and applicable E&S requirements, an environmental and social action plan (ESAP) was agreed with FNBE prior to entering the MIGA guarantee and will be implemented within an agreed timeframe. The ESAP contains the following items:
- Update the ESRA system to include MIGA E&S requirements.
- Appoint an Environmental and Social specialist responsible for the FNBE ESRA system implementation and management. This item has been completed.
- Update and implement a training program for staff on the ESRA policy and process.
- Develop an emergency response plan in accordance with the requirements of Performance Standards 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 Standards 1.
- Update the Human Resources (HR) policies and procedures in line with the Performance Standards 2 requirements.
FNBE will report periodically to MIGA on the implementation of the ESRA/E&S Management System and all applicable E&S requirements.
The aim of MIGA’s 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 Eswatini, thus increasing the potential reach, development impact, and financial returns of the foreign investment.
MIGA’s coverage to FirstRand Group is aligned with the most recent World Bank Group’s strategy for Eswatini, 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