A new trade finance fund for members of the Commonwealth has been announced by governments of four member states.

The fund will be particularly geared towards small member states lacking in mineral resources and reliant on imports for growth, but are “unable to get the necessary trade financing because of a vicious circle”, a Commonwealth spokesperson explains.

International exporters are often reluctant to trade with these small nations without letters of credit (LC) issued by local banks, while international banks are often reluctant to confirm these LCs as they deem the banks as being below creditworthy.

India, Malta, Mauritius and Sri Lanka combined to launch the Credit Enhancement Fund (CEF), which will have a start-up capital of US$20mn, made available by member states and channelled through international banks. India has already contributed US$2.5mn to the scheme.

The scheme will act as a guarantor, guaranteeing round 20% of trade finance exposures faced by international banks dealing with banks in small Commonwealth countries.

“The initial target for the CEF has been set at US$20mn to ensure a credible basis for the successful launching of the pilot project. It is estimated that the facility could have a trade creation effect of 1:20 which implies that a facility backed by US$20mn is potentially able to generate additional trade of US$400mn annually,” Commonwealth Secretariat spokesperson Hannah Murphy tells GTR.

The news was announced at this week’s Commonwealth Summit in Malta. The other major development was the announcement of a US$1bn Commonwealth Green Finance Facility which will support environmental projects across the 53-nation bloc.

The primary financial instrument of the fund will be green bonds.