MIGA Helps FirstRand Free Up Reserves and Bolster Lending During COVID-19

During a financial crisis, capital is key, and the current pandemic is no exception.

When COVID-19 hit, many businesses had trouble getting the credit they need to operate. Small companies in small countries suffered most as banks pulled back on lending, fearing that quarantines and lockdowns would lead to defaults, diminishing their capital.

Early on, the World Bank Group and other international organizations took steps to bolster banking reserves and restore liquidity. The Multilateral Investment Guarantee Agency (MIGA), the insurance arm of the World Bank Group, has played a key role in that effort by guaranteeing loans from large investors and lenders to smaller institutions around the world.

Few economies are more vulnerable to shocks like COVID-19 than those in Africa, where capital markets aren’t as robust, and emergency lending is scarcer. MIGA is helping African businesses and consumers get through the pandemic by working with one of the largest financial services groups on the continent: FirstRand. The South African company operates in nine other Sub-Saharan countries: Botswana, Eswatini, Ghana, Lesotho, Mozambique, Nigeria, Zambia, Tanzania, and Namibia.

Doing business across borders puts firms like FirstRand into a complex regulatory environment. Like all banks, FirstRand’s subsidiaries in the rest of Africa are required to maintain a certain percentage of customer deposits on reserve at the nations’ central banks. But, by international standards, those deposits are considered to be at risk because of the chance, albeit slim, that one of the central banks can’t or won’t return the capital when the bank requests it.

Enter MIGA. The agency is an expert at “capital optimization”. In plain terms, that means freeing up cash to sustain FirstRand’s subsidiaries in its countries of operations. MIGA does that by insuring the deposits that a bank holds in Nigeria, say, against expropriation, or failure to return them for any other reason.

In FirstRand’s case, MIGA agreed to guarantee up to $256.3 million of reserves held by FirstRand in seven countries outside its base in South Africa for as long as 15 years. The MIGA guarantee means that the reserves are de-risked in the eyes of international regulators, so FirstRand can sustain its operations in Sub-Saharan Africa.

“This MIGA tool was timely for them, especially in these crisis times,” says Annabelle Libeau, an investment guarantee officer at MIGA.

The pandemic has plunged Sub-Saharan Africa into its first recession in 25 years, according to the World Bank, with the region’s economy expected to contract by as much as 5 percent this year after growing 2.4 percent in 2019. COVID-19 could push up to 40 million people in Sub-Saharan Africa into extreme poverty, the World Bank says.

“Economic and social impacts are immense, costing the region between $37 billion and $79 billion in estimated output losses in 2020,” the World Bank said, “reducing agricultural productivity, weakening supply chains, increasing trade tensions, limiting job prospects, and exacerbating political and regulatory uncertainty.”

Compared with other parts of the world, African nations have managed COVID-19 well. As of late November, the continent has recorded 2.2 million cases and 52,000 deaths, compared with 63 million cases and 1.5 million deaths for the world as a whole, giving the continent a far lower infection rate and many fewer deaths per capita. Some experts say Africa’s experience with Ebola made countries there better prepared for the pandemic. Others say it’s because Africa’s population is younger and less vulnerable.

Even so, the continent’s economy has suffered because of lockdowns put in place to prevent the virus’s spread. Worse yet, developed economies like those in Europe and North America aren’t importing as many raw materials from Africa, hurting prices for commodities like oil. Tourism has also declined as visitors from wealthier regions stay home.

Even before COVID-19, many international banks were exiting Sub-Saharan Africa because of challenging regulations and economic uncertainty. FirstRand has remained in the market, and executives there have said that the MIGA guarantees will help them weather the pandemic and continue lending to the relevant economies.

The FirstRand subsidiaries backed by MIGA are: First National Bank of Botswana; First National Bank of Eswatini, First National Bank Ghana, First National Bank of Lesotho, FNB Moçambique, S.A., Rand Merchant Bank Nigeria, and First National Bank Zambia.

Working with MIGA, those seven banks and all of their customers will have more access to cash, a crucial commodity, in these challenging times.