Country: Kenya

Climate finance innovation for Africa

The African continent presents a massive investment opportunity for investors to advance climate solutions in the coming decade, however, a set of barriers to finance have stifled requisite investment to date. In this new report, in collaboration with Climate Finance Innovation for Africa and Climate Policy Initiative, we provide a framework for how innovation in financing structures can leverage strategic deployment of public capital to ‘crowd-in’ private investment at levels not yet seen.

This paper focuses primarily on climate mitigation, which represents the largest investment opportunity for private investors. We refer audiences focused specifically on adaptation to the work done by the Global Center on Adaptation and Climate Policy Initiative on Financial Innovation for Climate Adaptation in Africa.

InfraCo Africa to invest US$15m to anchor pioneering new guarantee company

Posted on by TIMOTHYRADIER

Sharm El Sheikh, Egypt: On the opening day of COP27, InfraCo Africa, part of the Private Infrastructure Development Group (PIDG) has announced that it will invest US$15m into a newly established guarantee company, alongside a US$5m commitment from Cardano Development. The announcement was made as part of a KES 500bn package of new investment from the UK to support Kenya’s leadership on climate change.i 

Established by InfraCo Africa and Cardano Development with support from PIDG and FSD Africa, the new company is modelled on InfraCredit Nigeria and InfraZamin Pakistan, aiming to unlock local capital into sustainable infrastructure and projects that improve climate mitigation and adaptation and deliver on the SDGs. InfraCredit Nigeria is an infrastructure guarantee facility established in 2017 by PIDG company GuarantCo and the Nigeria Sovereign Investment Authority. InfraCo Africa became InfraCredit’s third investor in 2020. PIDG has sought opportunities to replicate this innovative model in other geographies, including establishing InfraZamin Pakistan. FSD Africa has also extended grant funding to Cardano Development valued at nearly US$297,000 for the establishment of the new company, and GuarantCo is exploring the possibility of providing a contingent capital facility to the company in the near future. 

PIDG’s CEO Philippe Valahu said, “We are pleased to announce our anchor investment into this new guarantee company during the important COP27 summit. As well as addressing Kenya’s and East Africa’s infrastructure access gap, the new company will issue guarantees to projects that are Paris aligned, helping to link flows of finance with global efforts to mitigate and adapt to the climate crisis.” He continued,  “This innovative model of local currency guarantees has proven to be successful in Nigeria – where InfraCredit Nigeria has issued circa NGN 114 bn worth of local currency guarantees in its first five years of operations – and also in Pakistan, where InfraZamin Pakistan recently issued its first guarantee.”  

The initial focus of operations will be in Kenya. Kenya holds significant wealth in pension,ii life insurance and private wealth funds. However, Kenyan infrastructure projects and other cash-flow based investments are largely reliant on US dollar denominated bank loans, loans which seldom offer the length of tenor required for successful developments and which expose borrowers to currency exchange risk.  

InfraCo Africa’s Chief Investment Officer, Claire Jarrett said, “The new guarantee company seeks to issue up to US$100m of local currency guarantees in its first few years of operations. Kenya’s capital markets are developing quickly and it is hoped that access to local currency guarantees will enable institutional investors such as pensions and insurance funds to invest into high-quality assets whilst also supporting businesses to secure the finance needed for them to deliver vital new infrastructure, underpinning economic development across the country.” 

Joost Zuidberg, CEO Cardano Development added, “Cardano Development is proud to act as a catalyst for making emerging and frontier markets more investible, through our incubating activity and investment into the new guarantee company. With climate change at the top of the global agenda, our expertise, alongside our partners InfraCo Africa and PIDG, will help fast-track the flow of climate friendly finance into key sectors, through local currency guarantees.” 

Mark Napier, CEO FSD Africa, and Board Member of the GFANZ Africa Advisory Board said, “The mandate of the new guarantee company is well aligned to critical climate finance initiatives such as the Glasgow Financial Alliance for Net Zero’s (GFANZ) objective of addressing sector-wide challenges associated with the net-zero transition helping to ensure high levels of ambition are met with credible action.  FSD Africa is committed to supporting local currency bond markets in Africa as well as local currency credit enhancement facilities as they play an important de-risking role. This role is pivotal in the mobilisation of climate finance from both local and international owners of capital to African economies that require different sources of capital to fund their green growth.” 

 

Private debt markets in Africa

We engaged Lion’s Head Global Partners to conduct a study on Private Debt markets in Africa. While keeping a pan-African perspective, the study focussed on Nigeria, Kenya, Ghana, and Morocco as markets of strategic importance. South Africa was used as a reference market, given the development of the financial sector and the size and scale of the South African institutional investor base.

In addition to desk research and data analysis, the outputs, analysis, and recommendations were driven by stakeholder consultations, workshops, and interviews to both reflect individual positions, but also generate buy-in from stakeholders.

The insights from the study will support FSD Africa’s overarching strategic goal to mobilise long-term finance in local currency to support Africa’s development priorities and inform our transaction support, regulatory initiatives and knowledge and capacity-building engagements under its Africa Private Equity and Private Debt programme. The study will also benefit stakeholders including institutional investors, borrowers, regulators and policymakers, who seek to improve the enabling environment.

Insurance innovation portrait – Kenya

This report sketches an insurance innovation portrait for Kenya, as part of an eight-country study to determine what regulators can do to unlock innovation at scale to meet key insurance needs in sub-Saharan Africa.

A large and diverse market. Kenya has the fourth largest insurance market penetration in Africa. The market spans 56 insurance companies, 5 reinsurance companies, 12,708 intermediaries and 376 insurance service providers skewed towards the general insurance market. Compulsory lines, such as third-party motor insurance, play a prominent role in the market, as does corporate-based general, life and health insurance.

Limited retail reach. The National Hospital Insurance Fund reaches 23.4 million Kenyans. Beyond that, retail insurance market reach is limited, especially for rural women and MSMEs.

Numerous innovation efforts, but not yet paying off at scale. The insurance uptake gap signals an innovation gap and trap. Kenya has a history of a drive for inclusive insurance innovation, with numerous microinsurance, index insurance and m-insurance pilots over the years. More recently, there has been increased emphasis on the role of insurtechs to drive insurance digitalisation. Overall, however, the market remains conservative, and innovation is not yet part of the core market fabric. New tech players among other factors[1] struggle to access funding and secure viable partnerships, while insurers remain subject to distribution and premium collection challenges in reaching beyond the high-end retail and urban market.

A largely enabling environment, but gaps remain. An assessment of the innovation enabling ecosystem shows that:

  • The underlying electricity and mobile network infrastructure is a boon for innovation in Kenya, but challenges in deepening and modernising financial market infrastructure remain.
  • Access to technical insurance and science, technology, engineering and mathematics (STEM) skills remains a constraint to innovation.
  • Insurance awareness and trust need to be built further.
  • Effective partnership formation remains a key challenge, especially for new players (i.e. insurtechs) seeking a foothold in the market.
  • The regulatory environment is largely enabling. There is a growing regulatory focus on access, usage and quality of insurance services. Recent introductions of a microinsurance licence category and provisions for remote/digital distribution are also a case in point.
  • The Insurance Regulatory Authority (IRA) has taken positive strides in enabling insurance innovation through proactive industry engagements, accelerator programmes and a regulatory sandbox, and has streamlined its internal processes to be more responsive, strategically, to innovation.

[1]        Other challenges faced by new tech players include innovative business solutions especially in product development, use of massive data sets available, underwriting, pricing risk and distribution of insurance products.

FSD Africa Impact Report – 2022

FSD Africa is a specialist development agency working to make finance work for Africa’s future. Set up in 2012, we work on policy and regulatory reform, capacity strengthening and improving financial infrastructure, and addressing systemic challenges in financial markets to spark large-scale and long-term change.

Additionally, we provide risk capital by investing in cutting-edge ideas that we believe have the potential for significant impact. We take on projects that are more complex and riskier than those taken on by typical development finance firms, to unlock additional funding for innovative sectors.

Over the past decade, we’ve seen that investing in financial markets drives economic growth, boosts the income of vulnerable groups and helps to reduce poverty. Through our market-building initiatives, we have directly and indirectly crowded in around £1.9 billion in long-term capital, availing finance for SMEs, affordable housing and sustainable energy projects.

Our work has also enabled development of innovative products, increasing access to financial services for close to 12 million people in Africa. This improved access has been particularly beneficial during the Covid-19 crisis. Between 2020 and 2021, we saw an 87% increase in the use of remittance services to cushion families from the economic effects of the pandemic.

Our programmes have also supported business growth, increasing access to jobs for vulnerable groups such as women. To date, we have created or sustained approximately 67,200 full-time equivalent (FTE) jobs, of which 12% were green jobs and 59% were occupied by women.

Results against five-year targets

The figure below shows our cumulative results against the five-year targets for each of our core indicators.

Impact over 5 years

Innovative finance is essential to tackle barriers to investment in Africa’s climate finance needs – at an average investment of USD 250 billion annually from 2020 to 2030

Posted on by Kihingu Inc

11 August 2022: The African continent presents a massive investment opportunity for investors to advance the deployment of climate solutions in the coming decade according to a new report Climate Finance Innovation for Africa. However, this will require innovation in financing structures and the strategic deployment of public capital to ‘crowd-in’ private investment at levels not yet seen.

Current levels of climate finance in Africa fall far short of needs. Africa’s USD 2.5 trillion of climate finance needed between 2020 and 2030 requires, on average, USD 250 billion each year. Total annual climate finance flows in Africa for 2020, domestic and international, were only USD 30 billion (CPI forthcoming), about 12% of the amount needed.

Barriers related to shallow financial market depth, governance, project-specific characteristics, and enabling skills and infrastructure have stifled private investment in African climate solutions to date.

To overcome these challenges will require innovation in financing structures. But there is no one-size fits all. Public and private investors must tailor their financial instruments and strategies depending on the acute or chronic nature of the barriers identified.

Recommended actions for increasing the deployment of innovative finance include: Identifying and understand barriers constraining finance by sector and geography, matching instruments with barriers, matching instruments with project and technology lifecycles, enhancing engagement and co-financing with local stakeholders, and supporting innovation by establishing conducive policy and regulatory frameworks.

This work provides a framework for how these instruments and strategies can be efficiently deployed to overcome barriers to finance and capitalise climate solutions in Africa.

Read full report here.