DailySun
Recent changes in debt restructuring practices are adversely affecting the traditional trade finance asset class and African multilateral public development banks (PDBs), according to Admassu Tadesse, group president and managing director of the Trade and Development Bank Group. PDBs serve as a critical trade financier in a continental market that is often underserved and characterized by significant market failures.
During his address at the Africa Investment Forum, Tadesse voiced his increasing concern regarding the unpredictable challenges faced by specialized trade financiers and international insurers operating in Africa. In a region fraught with economic fluctuations and a challenging global backdrop, these banks have been dealing with worsening conditions, compounded by debt distress and restructurings throughout the continent.
Although some creditors have responsibly deferred payments due to climate impacts and Covid-related shocks, accommodating debtors with concessional re-pricing, the new restructurings have not recognized these measures, penalizing responsible African financial institutions that have traditionally utilized classical short-term letters of credit—which typically remain unaffected by debt restructuring.
During a panel discussion at the Africa Investment Forum in Rabat last month, Tadesse highlighted what he considers to be unjust treatment of trade finance as an asset class.
“Investors and insurers enter agreements fully aware of the risks involved and the established norms in the asset class,” he stated in an interview with African Business on the sidelines of the event. “However, amidst various shocks and debt restructurings, trade finance is now being inadvertently and inadequately folded into these processes, defying existing conventions.”
Altering the rules halfway through the game undermines the stability and predictability that investors, insurers, and trade financiers value deeply.
International banks step back from Africa
The situation is made even more precarious, he notes, as several international banks are withdrawing from the continent. African PDBs have stepped in to fill the widening gap, effectively becoming market-makers and lenders of last resort. Diminishing these vital institutions could lead to negative repercussions.
“It sends all the wrong signals. The phrases like ‘crowding in’ and ‘scaling up’ will lose meaning as people perceive the African economic environment as unpredictable, with emerging global institutional practices exacerbating financing challenges. It is crucial to establish consistency and predictability, demonstrating awareness of major shocks and unsustainable debt,” he stresses.
Tadesse posits that the confidence of lenders—both African and international—has been eroded.
“If an African multilateral financial institution cannot be treated fairly, how can others expect to be respected? If a sovereign treats its own multilateral institution in a damaging manner, how are others expected to perceive that entity? If you can impose such treatment on your own African multilateral, what confidence can private financiers have? What would happen to a private bank lacking multilateral funding or treaty arrangements that provide reassurance?”
Moreover, it’s not only trade finance institutions that are unsettled by these shifts in the rules.
“We have insurers, co-funding partners, and various entities that engage based on trust and predictability. Then suddenly, influential players in the ecosystem mislabel an asset class like trade finance and redefine it incorrectly.”
In the wake of the pandemic, lending institutions, including trade finance entities, have had to show leniency to borrowers, allowing time for recovery. Tadesse believes this may have contributed to the mislabeling, even though it does not mitigate its impact. This could lead to higher borrowing costs and increased hesitance in servicing African institutions. “Costs will increase; access will diminish,” he summarizes.
“Some sovereigns need to clarify their commitments to the asset class within the debt restructuring context,” Tadesse remarks.
“Other sovereigns have continued servicing all of their trade finance loans, despite defaulting on other debts, such as bonds. While there have been difficult debt restructurings, trade finance has, in many instances, been honored according to established conventions.”
This approach, he argues, would instill confidence in future financiers engaging with such counterparts, assured that trade finance will be shielded from debt restructuring even in challenging times.
Fostering confidence
The ability to inspire confidence will be increasingly vital for the continent as it endeavors to attract more pan-African and emerging market banks, along with local DFIs, to bridge the gaps left by some international commercial banks. Tadesse welcomes the enhanced presence of a few global banks in Africa, such as JP Morgan, which has recently established a presence in Kenya; however, he notes that the situation is more complex.
He recounts discussing the rationale behind JP Morgan’s decision to enter Africa with a senior executive, who acknowledged the long-term business case for being in Africa but expressed concerns over the high regulatory costs and disincentives for international banking in the region, which limits the scope of their operations. This reluctance among non-African banks to engage with the African market persists, despite its immense size and potential. For these banks, alternative markets exist that seem less daunting, and there is not enough commitment to long-term investment required to manage regulatory risks shaped by the international financial regulatory framework.
The disparity between rhetoric and reality is something Tadesse has pondered deeply. “It’s wonderful to hear proclamations about investing more in Africa, yet the opposite happens when stakeholders return home. The ongoing enthusiasm in discussions rarely translates into genuine commitment or engagement,” he observes.
Tadesse believes it is critical for larger domestic banks to expand their reach across the continent. “African banks will gradually mature into more pan-African institutions to varying extents.”
He highlights Moroccan banks expanding into the West African region, alongside South African banks extending their operations across multiple regions. Examples can also be seen in Nigeria and Kenya, where larger commercial banks are establishing a presence across sub-regions and beyond. Additionally, Ecobank has been specifically designed as a regional commercial bank, covering a vast majority of Sub-Saharan Africa.
This cross-border expansion is essential to complement the local growth of banking, ultimately boosting Africa’s intra-regional trade and investments.
“All of these developments will align well with our vision of a more integrated Africa and an advancing African economy. The African economic community is progressing further along this path.”
Yet, akin to other transformational processes underway on the continent, the pace remains sluggish. “Banks offer excellent services and have demonstrated significant growth over the years, continuing to scale up. However, in the grand scheme, their expanded capacities are still inadequate, particularly concerning long-term financing,” he remarks about the continent’s commercial banks.
According to Tadesse, larger DFIs in the continent have responded to the demand for more services but are also facing their limitations. “We’ve made significant efforts to address market and institutional failures. While we have risen to the occasion, our impact remains insufficient.” For Tadesse, the focus should be on achieving diversified economic growth. “The goal must be to restore economic growth to robust levels of 6% to 7% through enhanced diversification and value addition. This is a continent emerging from the lost decades of the 80s and 90s. The early years of the new millennium were promising, but we are now challenged to surpass a 4% growth level,” he reflects.
The necessity for growth
With the continent’s population expanding rapidly, consistent output growth at 6% to 7% is essential to adequately tackle issues like unemployment, extreme poverty, and migration, he argues. “The closest thing to a silver bullet for making a difference is achieving solid long-term economic growth. We must boost productivity and create far greater economic opportunities,” Tadesse emphasizes, adding, “We are a growth continent, but we operate well below our potential and the levels necessary for socio-economic transformation.”
To accelerate growth, Tadesse advocates for African nations to refocus and address aspects within their control. While he acknowledges the necessity for reforms in the international financial architecture—a topic generating considerable discussion among leaders in the Global South—Tadesse believes that promptly addressing administrative and institutional barriers to growth is equally urgent. “Let’s get our micro- and meso-level factors sorted along with certain macro-factors within our reach,” he urges, citing Morocco, Rwanda, and Mauritius—where the TDB Group is based—as nations demonstrating effective practices.
This statement does not imply that the international community bears no responsibility. “Fostering global stability and facilitating institutional investors and banks in deploying finance in Africa would be immensely beneficial. We require predictable and constructive global regulations that do not worsen adverse perceptions. The last thing we need is additional systemic shocks in a landscape recovering from numerous global crises. We need stability right now, not further obstacles, disincentives, and regulatory disruptions,” he emphasizes.
Tadesse highlights that the Bank is well-structured, noting that the shareholders have been highly supportive and operations are efficiently managed. “We have taken the necessary steps to ensure we are professional and accountable, maintaining our fit-for-purpose status while optimizing the experiences of our investors and striving to make each interaction as positive as possible.” TDB has also gained favor among institutional investors, including pension funds and sovereign wealth funds. “They have invested in TDB in ways that were unimaginable 10 or 15 years ago. It’s a very encouraging narrative.”
External variables
Nonetheless, external variables remain a worry. The global landscape is unstable, and further shifts could be imminent as political conditions change in the coming year. Investors may become skittish and wary of the continent. “Risk fluctuates; one day you have an appetite, the next day you don’t. Something goes awry, and everyone abruptly withdraws, creating gaps,” he observes. African leaders must acknowledge the constraints of international capital and bolster the growth of local financial institutions, Tadesse suggests. “We need to enhance our savings rates. We must confront the substantial illicit flows exiting Africa, which impede our progress.”
Among TDB’s achievements is its trade finance fund, which Tadesse describes as a prime example of scaling up. Established in collaboration with the Arab Bank for Economic Development in Africa (BADEA), the fund has amassed over 30 shareholders just four years post-launch. “This effectively illustrates how African MDBs can anchor initiatives and attract private sector participation,” Tadesse explains. “It’s a compelling story of favorable returns, managed risks, and strong backing for developmental trade finance flows.” Building on this momentum, the group is pursuing additional partnerships and developing more SPVs to further expand these initiatives.
Promising prospects
Another promising initiative is the Trade and Development Fund, which operates as a concessional and grant-making vehicle within the TDB Group. Tadesse notes that TDF, among other functions, offers tailored financial services to SMEs and marginalized groups who often lack access to traditional financial products. “These populations merit more attention and support, and we are addressing that need,” Tadesse asserts. The fund focuses on providing less rigid funding, guarantees, and grants while bringing in additional partners to extend these efforts.
According to Tadesse, TDB is intensifying its commitment to the climate agenda, backing renewable energy projects of varying scales—from large initiatives to smaller impactful efforts such as mini-hydropower, off-grid generation, and mini-grids—as well as fostering clean energy access through innovative technologies and business models. These projects are underpinned by specialized funding that bridges the divide between commercial and non-commercial endeavors, promoting innovative business models and green technologies. The Group is also willing to embrace greater risk to assist early-stage businesses that are pioneering advanced technologies and experimenting with novel strategies. “Everything begins small, and it’s inspiring to witness these smaller ventures gaining traction with our support,” Tadesse expresses.
In response to these investments and expansions into new regional markets, as well as strengthened collaborations with other MDBs, including the World Bank Group—which Tadesse describes as becoming more proactive and innovative in Africa—he anticipates robust growth for TDB in the coming years. “While being cautious in a setting undergoing re-norming, we expect to return to strong annual asset growth of about 10% in the near future,” he notes.
He clarifies that this projection is “contingent,” stating, “assuming we do not encounter any more major shocks that could constrain our progress.”
Looking forward to 2025 and beyond, Tadesse finds abundant reasons for optimism.
“We are actively developing and implementing various initiatives that are underway, expecting to gain more traction by 2025,” he predicts. Central to the plans are hybrid capital and ongoing capital-raising endeavors from qualified institutional investors and new funding allies. “It’s about enhancing lending capacity to meet our needs,” he concludes. However, he remains vigilant regarding the potential risks.
“There are numerous uncertainties,” he admits. “We will likely assess the landscape midway through 2025 to gauge how new developments are influencing the operational environment.”
