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A Framework For Championing Securitization in Africa to Mobilize Capital and Drive Economic Development
October 12, 2023
By Kabir Vassanji
Earlier this year, SFNet announced its second Cross-Border Finance Essay Contest, sponsored by Goldberg Kohn Ltd. Members of SFNet’s International Finance and Development Committee judged the essay submissions on content, originality, clarity, structure and overall contribution to furthering and expanding understanding and discourse within the field of cross-border finance. This essay won third place.
The authors of the winning essays have been invited to participate on a panel at SFNet’s 79th Annual Convention in Orlando, FL, November 15-17. The second place and first place winners will be published in the October and November issues of TSL, respectively.
Framing Securitization’s Role in the Global Development Context
The potential of securitization to meet a range of financing needs in African markets is yet to be fully realized.
The United Nations has established Sustainable Development Goals (SDGs), which formalize 17 global targets aimed at eradicating poverty and inequality by 2030.1 However, the annual financing gap faced by the SDGs is estimated between (all figures in $USD) $2 trillion and $4 trillion,2 (which cannot be bridged by government and multilateral institutions (i.e., development banks) alone. Mobilizing private capital will be essential to advancing the SDGs. Redirecting even a fraction of the global asset and wealth management industry’s portfolios (over $100 trillion3 ) towards SDG-aligned investments would significantly reduce the funding gap. On the other side of the equation, a growing number of global institutional investors and asset managers are seeking to invest in ways that create a sustainable future and embedding SDGs into their mandates.4 However, a common constraint they face is a dearth of attractive opportunities in emerging markets.5
The emergence of securitization markets in developing economies presents a promising solution. The underlying premise of securitization is that any asset that produces recurring cash flows can theoretically be securitized. Focusing the credit decision on the strength of an asset’s cash flows is especially important in developing economies where credit markets are underdeveloped and restricted to only well-known corporates. Securitized transactions pool the cash flows from hundreds or thousands of consumers, via mortgages, credit cards, or even commuter bus fares, and raise capital by issuing bonds backed by those cash flows. These bonds can be structured to provide risk and return profiles tailored to a range of investor preferences. Securitization is undoubtedly effective in raising capital and enhancing transactions, but it is important to recognize its broader potential in attracting and accelerating investment towards large-scale problems, reflecting a compelling opportunity to achieve both financial returns and social impact. As such, securitized investments in developing regions represent a uniquely positioned asset class that intersects emerging market, fixed-income credit, and broader impact-investing mandates.
Although there is a growing need for infrastructure financing in Africa, securitization is still in its infancy on the continent. Multilateral organizations and export credit agencies currently facilitate most significant securitizations, and the overall market is fragmented.6 An analysis of the transactions executed in Africa reveal that certain markets, namely South Africa and Nigeria, are advanced in their respective lifecycles, while others such as Kenya show the potential and regulatory willingness to catch up. By examining the advancements and challenges in these economies, one can carve out a series of actionable steps to promote the development and eventual maturity of most nascent securitization markets, which in turn can help bridge the global SDG funding gap.
Please click here for the full article.
The authors of the winning essays have been invited to participate on a panel at SFNet’s 79th Annual Convention in Orlando, FL, November 15-17. The second place and first place winners will be published in the October and November issues of TSL, respectively.
Framing Securitization’s Role in the Global Development Context
The potential of securitization to meet a range of financing needs in African markets is yet to be fully realized.
The United Nations has established Sustainable Development Goals (SDGs), which formalize 17 global targets aimed at eradicating poverty and inequality by 2030.1 However, the annual financing gap faced by the SDGs is estimated between (all figures in $USD) $2 trillion and $4 trillion,2 (which cannot be bridged by government and multilateral institutions (i.e., development banks) alone. Mobilizing private capital will be essential to advancing the SDGs. Redirecting even a fraction of the global asset and wealth management industry’s portfolios (over $100 trillion3 ) towards SDG-aligned investments would significantly reduce the funding gap. On the other side of the equation, a growing number of global institutional investors and asset managers are seeking to invest in ways that create a sustainable future and embedding SDGs into their mandates.4 However, a common constraint they face is a dearth of attractive opportunities in emerging markets.5
The emergence of securitization markets in developing economies presents a promising solution. The underlying premise of securitization is that any asset that produces recurring cash flows can theoretically be securitized. Focusing the credit decision on the strength of an asset’s cash flows is especially important in developing economies where credit markets are underdeveloped and restricted to only well-known corporates. Securitized transactions pool the cash flows from hundreds or thousands of consumers, via mortgages, credit cards, or even commuter bus fares, and raise capital by issuing bonds backed by those cash flows. These bonds can be structured to provide risk and return profiles tailored to a range of investor preferences. Securitization is undoubtedly effective in raising capital and enhancing transactions, but it is important to recognize its broader potential in attracting and accelerating investment towards large-scale problems, reflecting a compelling opportunity to achieve both financial returns and social impact. As such, securitized investments in developing regions represent a uniquely positioned asset class that intersects emerging market, fixed-income credit, and broader impact-investing mandates.
Although there is a growing need for infrastructure financing in Africa, securitization is still in its infancy on the continent. Multilateral organizations and export credit agencies currently facilitate most significant securitizations, and the overall market is fragmented.6 An analysis of the transactions executed in Africa reveal that certain markets, namely South Africa and Nigeria, are advanced in their respective lifecycles, while others such as Kenya show the potential and regulatory willingness to catch up. By examining the advancements and challenges in these economies, one can carve out a series of actionable steps to promote the development and eventual maturity of most nascent securitization markets, which in turn can help bridge the global SDG funding gap.
Please click here for the full article.
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