FSD Africa announces a US$7.5m investment in Frontclear, a global guarantee fund which aims to improve interbank liquidity in developing markets. Frontclear offers a USD guarantee against the local currency value of assets which borrowing banks need to give lending banks as collateral for a loan.
The other investors in Frontclear are EBRD, Proparco, TCX and KfW. The total capital committed at first close is US$180m. FSD Africa’s investment is in the form of Subordinated Loan Notes, a “first loss” instrument which has helped to crowd in the other investors. This is FSD Africa’s first capital investment which it is supplementing withUS$1.5m of technical assistance funding.
The interbank market is important because, alongside deposits and the wholesale market (e.g. bonds), it can be a very attractive source of capital for banks. If interbank markets function well, banks can get access to capital instantaneously and more flexible terms than in the wholesale markets.
This otherwise ‘dead capital’ can put to use through productive investments in the real economy e.g. lending to African SMEs.