By Phil Thornton
Europe missed an opportunity to use the debate over the future of development finance to establish an insurance guarantee agency to attract private capital needed to help them hit targets for investment into emerging markets, according to experts in trade finance and insurance.
Policymakers spent two years debating whether to use the EBRD or the European Investment Bank as a platform for a new single development bank before deciding to stick with the current set-up augmented by a more collaborative approach dubbed “Team Europe”.
Paul Mudde, a former trade finance professional at ABN Amro and trade credit insurer Atradius, said it would have made more sense to establish an insurance guarantee agency alongside a new development bank.
Mudde, now a consultant at Sustainable Finance & Insurance consultancy, said insurance could be used to mobilise private capital from both international and domestic banks and institutional investors. “It will allow the EU to effectively co-operate with local banks in developing countries beyond providing credit lines,” he told GlobalMarkets.
An EU development insurer could also use reinsurance to mobilise substantial amounts of non-development finance institutional capital from the private insurance market and from EU export credit agencies, Mudde said.
The problem, in his view, was that in the EU discussions about the European Financial Architecture for Development (EFAD) an insurance approach, like the World bank’s MIGA, had never been considered.
“There is a lack of knowledge about the success of insurance products in mobilising capital for development. Public insurance providers are more successful in mobilising capital for development than development banks,” he said. Their operational costs are in general also much lower than those of development banks. So, also from an aid efficiency and aid effectiveness point of view an insurance approach would make sense.
The importance of mobilizing capital has been debated for a decade and was picked by the G20’s Eminent Persons Group in 2018 and the “Building Bridges” report of the Islamic Development Bank in 2020, which clearly set out the benefits of an insurance approach to mobilise capital for development.
Although neither G20 reports has so far gained traction, Mudde said it would make a substantial contribution to the Team Europe approach. “Insurance could be used to mobilise private capital from both international and domestic banks and institutional investors,” he said.
In addition, it could provide insurance to European development finance institutions (DFIs) that would contribute to a convergence of their operations, a more effective use of scarce economic development capital and reduce the competition between DFIs.
A spokesperson for the European Commission said some of the instruments being discussed as part of the new development architecture included the possibility of de-risking private sector investments by providing blending of grants and loans, or public guarantees covering specific investments risks.
“Hence, not a specific agency for insurance, but some elements of investment de-risking in the various financial instruments for EU development policy,” they said.