Reducing the Risk Profile of Financial Investments

Lack of long-term local funding has always been a major constraint on growth in developing countries. Local banks normally have access to short-term funding through local deposits, but long-term funds tend to be scarce and international banks are less inclined to take on longer-term risks due to the inherent instabilities in some emerging economies and the need to prudently manage their country limits.

MIGA guarantees are well-suited to reducing the political risks to guaranteed investments and can be used in many ways. For example, a local bank in an emerging market may find it difficult to obtain medium to long-term funding. MIGA may be able to address this concern by providing political risk insurance to a foreign lender that is willing to lend to the local bank at longer tenors with a MIGA guarantee.

MIGA is also classified as a highly-rated multilateral by the Basel Committee on Banking Supervision. This means that a private bank using MIGA insurance to protect against the risk of currency convertibility and transfer restrictions being imposed can now make use of the borrower’s local currency rating for risk-weighting purposes. This recognition also means that when an international bank has obtained MIGA’s coverage for a non-honoring of a sovereign financial obligation, the bank receives very significant capital relief.