As the global economy continues along its path to recovery after the financial crisis, development finance institutions (DFIs) are playing an increasingly crucial role in supporting trade flows, providing risk mitigation and liquidity where it is most needed. Combining the strength of DFIs with the on-the-ground knowledge of banks creates an enormous opportunity to drive trade; but are banks ready to leverage this to its full potential?
DFIs have been part of global aid infrastructure for decades, but in the wake of the global financial crisis, their scope of activity expanded to creative and pragmatic approaches to accelerate the recovery of trade flows.
One such example is the IFC, which launched its Global Trade Liquidity Programme (GTLP) in May 2009. Since its inception, the programme has supported nearly US$20bn of trade flows globally. But the financial crisis was not the only impetus for increased DFI activity in trade support. With the shifting pattern of global trade creating new East-West and North-South corridors, DFIs have also come up with a structured approach to create solutions to bridge trade gaps between emerging and developed countries.
A decade on from the financial crisis, some of its impacts still remain. As a result, the trade finance landscape remains challenging, with tighter liquidity and increasing financial regulations placing greater restrictions on the capacity of large banks due to increased compliance costs and higher capital requirements for trade.
As DFIs work to meet their development objectives, they are uniquely positioned to assist in meeting the challenge of improving the availability of trade finance, but they may not be able to do it entirely alone. This has led to the creation of dynamic partnerships with commercial banks. “For banks, this enables us to share risk that we are comfortable with,” says Aditya Mazumdar, Head of Trade Distribution Programme Management at Standard Chartered, who adds that far from being a de-risking strategy, partnerships between banks and DFIs create balance sheet opportunities to improve returns and capital efficiency.
“Trade has always been linked to underlying commercial transactions and the real economy,” says Nicolas Langlois, Global Head of Trade Distribution at Standard Chartered. “The partnership between DFIs and banks means this is taken to the next level, linking trade financing to developmental objectives. Banks and DFIs have joined forces to drive that common agenda.”
It is a win-win situation, as Mazumdar explains. “DFIs bring in credit protection which provides additional financing capacity beyond pre-set credit appetite. The second dimension is access to liquidity. During the financial crisis, liquidity evaporated and that is when DFIs play an increasing role in providing liquidity to bridge that gap. The third dimension is the regulatory capital aspect. Transactions backed by DFIs benefit from significant uplift on return on capital, allowing banks to mobilise their balance sheet more effectively and efficiently.”
On the other hand, DFIs draw comfort from commercial banks’ extensive underwriting capability and deep local knowledge of clients.
DFI support enables banks to do more with their clients by creating velocity of the balance sheet through the support of investors. “Essentially, what we are doing is optimising capital requirement, and adding liquidity to the bank. That is how we are able to do more with clients, by having investors who have a similar risk appetite, who don’t necessarily have access on the primary basis to the clients that we have been underwriting,” says Langlois. “The DFIs rely on our strong origination capabilities. We have access to the clients, we know them, have been assessing their risk, and have provided them with facilities for a number of years. But we have our own balance sheet constraints, and risk appetite is always finite. What the partnership with the DFIs allows us to do is to go beyond those constraints, to do more with the client and be more relevant to them.”
As the trade landscape has evolved, so too has the role of DFIs in supporting that trade, with many having not only set up trade finance programmes but also having dedicated trade teams to manage and develop new solutions in that space. “DFIs have always understood transaction banking and trade finance, and now also understand clients’ businesses and their flows ,” says Mazumdar. Nonetheless, it is far from the case that DFIs are moving in on the banks’ playing field. The relationship is very much one of co-operation rather than competition, in large part due to the distinct operating model of banks as compared to DFIs. “Their approach is usually more thematic in driving a long-term sustainable development, while banks provide the support through a wide range of services to very diverse set of clients such as capital markets, forex and cash management,” says Mazumdar.
Supporting economic development is not an overnight process, and as a result, DFIs are present for the long-term. “For the relationship to work there needs to be alignment of interest for the long run. This is where a programmatic approach to sharing the risk with replenishable structures is best suited for sustainable and long-term co-operation,” explains Langlois. And once a bank has established which obligors the DFI is comfortable with, it can reference within the pre-agreed limits that have been allocated, enabling efficient balance sheet management within the DFI-backed programme. Furthermore, DFI involvement can smooth over bumps from macroeconomic situations. Last year, for instance, saw both Nigeria and Angola undergo forex crises, where there were delays in payment due to a lack of local availability of forex. In this situation, DFIs were able to take cognisance of the forex challenges as well as provide on-the-ground local support.
In practice, this symbiotic relationship also creates a further win for the end client. “Partnerships with DFIs mean improved liquidity for banks, enabling us to keep flow trade on and therefore create value for geographies with developmental and expansion priorities,” says Mazumdar.
And those geographies are becoming ever-more diverse. While Standard Chartered has recently agreed with the IFC to upsize their trade finance partnership into the third series of the GTLP with a total investment of an additional US$1bn, the bank has also signed a new Rmb80mn supply chain finance agreement with the Asian Development Bank (ADB) that will benefit small and medium-sized enterprises (SMEs) in Malaysia. The deal is ADB’s first supply chain financing agreement in the country through a financial institution. Standard Chartered runs a number of trade finance programmes and is also partnering with other DFIs, such as the CDC, OPEC Fund for International Development (OFID) and the African Development Bank (AfDB) in order to maximise its reach to developing geographies.
With DFIs seeking to improve economic development across a vast range of sectors, the opportunities for deeper involvement for banks are innumerable. “We have been discussing with different DFIs topics for the future in how we can take the development agenda to the next level,” highlights Langlois, who adds that these areas range from women’s leadership to renewable energy and agricultural development. “We are also seeing increasing interest for diversified thematic portfolios and for larger single situation transactions. We are joining together with DFIs in a commitment to developing economies in a difficult situation. It is at the core of our strategy to grow and develop these countries right at the centre of our footprint, and therefore partnering with development organisations makes perfect sense.”
Today, both banks and DFIs have built out global, regional and country trade programmes, as well as tailored, client-specific approaches which offer more bespoke solutions, enabling them to work in concert to drive forward the specific development agenda from global down to local level. By taking the opportunity to join forces with developmental institutions, banks can keep the wheels of trade turning even in challenging environments as well as become a force for good; helping businesses, people and countries as they take their activity beyond profit generation to sustainable value creation.