The World Bank Group is preparing to channel billions of dollars of lending through financial systems in developing countries under a new initiative supported by six of the world’s biggest insurance companies.
John Gandolfo, treasurer of the International Finance Corporation, the World Bank division that lends to the private sector, said the scheme has been in preparation since before the onset of the coronavirus crisis but will provide funding to small businesses struggling to recover from the economic impact of the pandemic.
“At this moment, lending to small and medium-sized enterprises in emerging and developing countries will be critical to their ability to stay in business and pay their workers,” he said.
The initiative, to be unveiled this week, will allow the IFC to enlarge its own lending capacity by farming out part of the risk to six insurance companies: Munich Re, Liberty Mutual, Aspen, AXA XL, Everest and Tokio Marine.
“We are leveraging our own balance sheet, by getting people together to take exactly the same risk as us,” said Euan Marshall, manager of investment syndication at the IFC. “It allows us to lend more without breaching our prudential limits.”
The scheme is an extension of the IFC’s Managed Co-lending Portfolio Program launched in 2013, which assembles portfolios of loans to private sector borrowers and shares the exposure with third parties.
The first co-lender to join the initiative in 2013 was the People’s Bank of China, the country’s central bank, through its State Administration for Foreign Exchange. Others include Eastspring Investments, one of the largest asset managers in Asia, and the asset management arms of several global insurance companies. To date, the MCPP format has increased the IFC’s loan portfolios by $8bn, Mr Gandolfo said.
Insurers involved said the latest initiative would help to reduce default risk in poor countries by encouraging productive investment.
“It makes sense for our business to work with institutions whose purpose is to have a positive impact on the problems that are causing issues globally at the moment,” said Jerome Swinscoe, chief underwriting officer of Tokio Marine.
“They could have done this on an ad hoc basis [by buying insurance for individual loans] but this really streamlines the process,” he added.
“We like it because of the diversification,” said Dan Riordan, chief underwriter for political risk at AXA XL. “People think the public sector crowds out the private sector but the IFC is crowding in private sector insurance for a very big purpose. The IFC has been very transparent over how it manages risk and this allows it to do a lot more.”
Under the scheme, the risk of each individual loan in a portfolio assembled by the IFC will be shared equally between the IFC and the consortium of insurers, up to a maximum insured value of $75m. For loans up to $150m, the risk will be split 50/50; for any loans above that value, the IFC will take a larger share of the risk.
The insurers will provide cover for $2bn, allowing the IFC to lend up to $5bn under the scheme.
The new initiative builds on a smaller one in operation since October 2017, under which Munich Re and Liberty Mutual provided $1bn of default risk insurance, allowing the IFC to lend $2.4bn in total.
The latest scheme will expand on that experience, doubling its size and lending to non-bank financial institutions as well as to banks.
Mr Gandolfo said lending under the scheme would follow a similar pattern to the previous one, in which 45 per cent of loans went to banks for lending on to green investments and 40 per cent to banks in the world’s poorest countries that are eligible for funding under the World Bank’s International Development Association, which covers 76 countries in sub-Saharan Africa and elsewhere.