As the African Development Bank relocates its headquarters back to Abidjan following a 10-year temporary relocation in Tunis, GTR speaks to Yaw Adu Kuffour, head of trade finance, about the take-up of its Trade Finance Programme (TFP), launched 18 months ago.
GTR: How much demand has there been for the TFP since its launch?
Kuffour: Demand for the TFP has been quite strong since its launch in February 2013. So far, total approvals have reached US$994mn. This is made up of unfunded Risk Participation Agreements (RPAs) of US$704mn and Trade Finance Lines of Credit (TFLOC) of US$290mn respectively. 50% of these approvals have been signed with international confirming banks such as Standard Chartered and Commerzbank who make up the bulk of the RPAs.
This distribution reflects both the design of the programme as well as market demand. There has been a deliberate strategy to focus on RPAs as it would help to minimise the resource commitment necessary to ramp up AfDB’s trade finance activities. Furthermore, RPAs have the capacity to cover multiple domestic financial institutions and a large number of SMEs quite quickly, as well as generate the desired development impact. The RPA is the programme’s flagship product and it is expected to constitute up to 70% of all project approvals.
In terms of market demand, although trade finance liquidity remains very important for most African financial institutions, we have seen significant request for risk mitigation support (in the form of RPAs) from international confirming banks to cover the credit risk of trade transactions originated by banks in Africa. This trend reflects the continuing extensive use of documentary credit in its various forms to support trade finance in Africa. Even when liquidity is available, the biased perception of risk in Africa by international banks has necessitated the high demand for guarantees – a need that is not necessarily satisfied by the mere availability of liquidity.
The third initiative, the soft commodity finance facility (SCFF), is targeted at commodity aggregators such as parastatals and private sector companies. The facility supports the export and import of agricultural commodities and inputs in the bank’s regional member countries. This includes the provision of pre-export financing for the purchase and export marketing of soft commodities. Although there is demand for this facility, the complexities of commodity finance require that we carefully seek out the right partners who meet the bank’s eligibility criteria. This cautious approach explains the slow start of the SCFF product. The TFP’s pipeline in total is quite robust. There are currently more than US$500mn worth of projects at various stages of processing.
GTR: Which regions and sectors have benefitted the most?
Kuffour: West Africa has so far benefitted the most from the TFP. Countries such as Nigeria, Ghana and to some extent Ivory Coast feature more prominently. Admittedly, these are also the largest economies in West Africa and it is therefore no surprise that they account for most of the demand for trade finance support.
In light of the political challenges in North Africa, we have also observed an increase in requests for guarantees (RPAs) for trade transactions originated by banks in that region. Our RPA partners are particularly keen to share risk on banks in Morocco, Algeria, Egypt and now Tunisia. In Southern Africa, there is demand for risk guarantees in countries such as Mozambique, Angola and Zimbabwe.
Of course there are trade finance needs all over Africa and our aspiration is to facilitate trade in all the countries where there is demand. Furthermore, to ensure portfolio diversification and, more importantly, encourage international confirming banks to increase their trade confirmation services in the smaller countries that arguably have greater need for these facilities, we are considering various ‘sweeteners’ to nudge these international banks towards taking more risk in these smaller countries.
In terms of sectors, ‘food & live animals’, ‘building & construction materials’ and ‘mineral fuels & lubricants’ each accounts for at least 20% of total value of trade so far supported. The other significant sectors are ‘chemicals’, which includes pharmaceuticals and fertiliser, and ‘machinery, communication and transport equipment’.
Our most active RPAs are with Standard Chartered and Commerzbank. While the individual transactions are generally small, what is noteworthy is that the RPAs have so far supported more than 300 trade transactions in at least 15 countries in Africa. The TFP is projected to support approximately US$8bn of trade over a four-year period.
GTR: How does the TFP differ from the bank’s TFI?
Kuffour: The Trade Finance Initiative (TFI) was established in 2009 in response to the global financial crisis. It was a counter-cyclical crisis-response initiative designed to counteract the severe reduction in trade finance facilities for African financial institutions and businesses following the withdrawal and curtailment of limits by various international commercial banks. The TFI was therefore reactionary and was intended to be a short-term solution. On the other hand, the TFP is intended to mainstream trade finance into the bank’s operations. It is the result of a more strategic thought process which took into account the importance of trade as a catalyst for economic growth and poverty reduction.
It is initially for a period of four years ending in 2017, but it is believed that the TFP will be extended beyond its ‘sunset’ date given the importance of trade finance and the high level of demand that cannot be readily filled by private sector financial institutions.