OREANDA-NEWS. The Asian Development Bank (ADB) and the Swedish International Development Cooperation Agency (Sida) have signed an agreement on an innovative risk transfer mechanism, under which Sida will guarantee up to $155 million of ADB sovereign loans. This guarantee will allow ADB to increase its lending capacity by an estimated $500 million over the next 10 years from its Ordinary Capital Resources. The arrangement became effective on 1 October and will run until 31 December 2026.   

Risk transfer agreements pass specified risks from one party to another party in return for a fee. This can release capacity for additional operations by improving the risk profile of bank balance sheets and reducing the capital held in reserve to cover guaranteed loans. This is the first time a risk transfer arrangement has been applied to a sovereign loan portfolio of any multilateral development bank. 

“This is an innovative arrangement that allows us to release extra financing to support our operations,” said ADB President Takehiko Nakao. “This initiative is a significant breakthrough and will serve as a precedent for development banks looking to help member countries to meet the new Sustainable Development Goals (SDGs) and the COP21 climate change agreement.” 

“The guarantee provides a good return,” said Ulrika Modeer, Sweden’s State Secretary to the Minister for International Development Cooperation and ADB Governor. “The bank gets through this an opportunity to increase their lending and invest in innovative ideas in terms of poverty reduction and the environment and climate change, and at the same time it is providing Sweden with increased opportunities to support the bank’s work in this direction.” 

Mr. Nakao and Ms. Modeer will meet on 8 October to mark the signing of the risk transfer agreement during the Annual Meetings of the International Monetary Fund and the World Bank Group in Washington, D.C. 
    
ADB’s portfolio quality and diversity will be improved by replacing existing loan exposure with AAA-rated exposure to Sweden. For the risk transfer arrangement, Sida selected a portfolio of ongoing ADB loans in India, reflecting the long-standing credibility of India as a borrower.

The extra lending capacity provided by the risk transfer comes amid rising demand for innovative development financing. The Addis Ababa Action Plan for Financing Development sealed last year called on multilateral development banks to expand financing to help developing countries meet SDGs. ADB is committed to exploring risk transfers in its sovereign portfolio under the Action Plan to Optimize Balance Sheets of Multilateral Development Banks endorsed by the G20 in November 2015.