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The International Finance Corporation (IFC) plans to increase its support for critical trade flows in Africa and other vulnerable regions after launching a new joint trade finance initiative alongside the Multilateral Investment Guarantee Agency (Miga).

As part of the move, the IFC and Miga will work to boost the trade of goods such as food and medical equipment in low-income and fragile countries through the provision of trade finance guarantees.

The new initiative will be launched under the IFC’s existing global trade finance programme (GTFP) and will offer targeted support to transactions intermediated by state-owned banks, and involving small and medium-sized enterprise (SME) exporters and importers.

An IFC spokesperson says that through the new scheme, government-owned or correspondent banks can approach the IFC for support, after which a state-owned bank may be added to the GTFP following a thorough due diligence process.

“Once a bank is approved, each individual transaction will be reviewed and Miga and IFC combined will provide an up to 100% guarantee to the confirming banks,” they add.

The new programme has been hailed by the IFC as a “game changer” and a way for the World Bank Group member to bolster its support in Africa in particular.

To find out more, GTR speaks to the IFC’s Nathalie Louat, director of trade and supply chain finance, and Makiko Toyoda, head of the GTFP.

In the exclusive interview, they outline some of the new initiative’s key features, why the partnership with Miga will offer a boost to trade finance capacity in Sub-Saharan Africa, and how the IFC has seen demand change since the onset of the Covid-19 pandemic.

 

GTR: Can you provide further details on the IFC-Miga initiative, and how it’s going to work practically?

Louat: As a bit of background, IFC launched the GTFP in 2004, and it focuses mainly on private sector banks. We have received several requests from public sector banks over the years and included some of them, though as a portion they make up a small percentage. Through this new partnership with Miga, we’ll be able, as the World Bank Group, to work both with private sector banks as we did, while also growing our exposure to state-owned banks to reach out to private sector beneficiaries. This is very important for confirming banks, who will be able to work with us and interact with state-owned financial institutions through the programme.

Previously, the outstanding amount limit for the GTFP was US$5bn, but we have now requested an additional capacity of US$500mn for public sector institutions. In theory, we can likely do up to US$1bn of new business as a result of the partnership.

We are already starting to talk to banks who may be eligible for the programme, and we can definitely hope to have onboarded several of them by the end of the calendar year.

 

GTR: To what extent will the Miga partnership see IFC’s business with state-owned banks grow this year?

Toyoda: In terms of the number of state-owned banks, for example, last year, only four banks were active in the GTFP out of 240 member banks.

Because of this new initiative, we hope to potentially onboard up to seven or eight new banks in the next year. It’s still a small portion of our programme, but because we have been very limited in our work with state-owned banks previously, this is a bit of a game changer for some of the new countries that we are trying to enter, such as Rwanda and Mali. In some of the countries we are piloting under this initiative, we haven’t had much activity with them in the past, and so this Miga partnership will give us the opportunity to re-engage with these markets.

Louat: In some countries, state-owned banks are very dominant and it’s difficult for the IFC to finance trade in these nations without going through private sector banks, which remain very small and not particularly active in the trade business. That’s why this partnership with Miga makes sense, given it allows us to be active in countries where we would have almost no business otherwise. Miga specialises in supporting state-owned entities, which we don’t at the IFC. So they have better knowledge of the institutions, and they already have relationships – away from the trade sector – with some of these public banks.

 

GTR: How much do you expect this new initiative will see you ramp up your trade finance activity in Africa?

Louat: In the past year, we have significantly increased our exposure to African private sector banks, so this new partnership will help us build on this growth: 60% of the countries that we’re targeting through this new Miga initiative are in Sub-Saharan Africa.

This is a programme that allows us to work in low income and fragile countries, which is more difficult to do through IFC’s regular long term finance investment products.

Trade is very suited to work in these countries and 70% of our GTFP is in those low income and International Development Association (IDA) countries, so it’s very important for us to continue to develop that activity.

 

GTR: The IFC has said that with the new partnership it’ll be able to originate trade flows that it wasn’t able to capture to date. What sorts of flows does this refer to?

Toyoda: We can cover all sectors under the GTFP programme, however, since the onset of Covid, the percentage of food and agri transactions has increased dramatically. Food and agri trade is sometimes originated by state-owned banks, so the new initiative with Miga will help us assist vulnerable countries with these goods. This will work to reduce food security risks, particularly with commodity prices going up.

The other aspect is also medical equipment and vaccine-related goods, with governments funding these through state-owned banks. In the past, while we tried to work with private sector banks on these types of deals, we often weren’t able to capture them.

 

GTR: What other initiatives are you rolling out in Africa?

Louat: In the last six years, our commitments in Sub-Saharan Africa have increased by more than 40%, and we intend to grow this volume by adding new countries and growing support to also include SME traders. We’re looking to provide different products to see how we can support the private banks by sharing the risk of these SME traders.

We announced a new programme, our Africa trade recovery support initiative, which we launched in Paris in May. Since the onset of Covid, there has been even more demand from confirming banks requiring a development finance institution like ours to provide additional support in the more difficult markets.

 

GTR: In which regions has the IFC seen the highest levels of demand since the onset of the pandemic? Were there any changes in demand in terms of sectors or trade flows?

Toyoda: In general, we have had high demand from low income and poor countries. There was substantial need from Sub-Saharan Africa, but also from low-income countries in other regions such as Asia. The Covid-19 crisis was pretty tough for some local and regional banks in these markets. They told us that trade lines were being cut as global banks shied away from emerging markets. So we tried to support them.

An interesting trend we saw during Covid-19 was that new trade corridors were created. On the buyer side, companies didn’t want to stick with one particular supplier: if countries went into lockdown, ports could close, and they would lose access to these supplies. This meant there were plenty of new opportunities for other emerging markets to step in and create a new trade relationship with those buyer companies. At the IFC, we tried to support these new trade corridors and the banks receiving those new trade orders.

 

GTR: Do you foresee these trends continuing? Will the IFC have to continue stepping in to the same degree due to a lack of support from commercial banks?

Louat: We talk to banks regularly and they’re not seeing the end of this crisis yet. So we believe that the demand will continue to be strong until the end of the calendar year.

As Makiko mentioned, there were changes in terms of fresh trade corridors. But another situation was that regional banks increasingly stepped in. We saw South African and Moroccan banks, for instance, growing their trade finance business across the rest of Africa. In Africa it was a very clear trend. Looking at the growth of regional bank commitments in Sub-Saharan Africa, the volume actually doubled from FY20 to FY21.

 

GTR: Are there any other products or initiatives that the IFC is working on this year?

Louat: There are two other areas that we are working to develop: supply chain finance (SCF), focusing on smaller buyers and suppliers, and digitalisation, where we are just starting and looking to conduct pilots with several different platforms and solutions.

We already have a SCF programme, but it focuses on large buyers. What we’re trying to do is push funding down the supply chain into the lower tiers by working through our partner banks.

Currently, what we do is we take individual risk on individual buyers, which requires a good knowledge of those specific corporates. What we’d like to do is use a portfolio approach, where we would work with banks on portfolios of buyers, where we would delegate to the banks the responsibility of monitoring with us the credit of the portfolio overall. That would allow us to take on smaller buyers, and therefore reach smaller suppliers. We have teams looking at this in Africa and Asia.