The African Development Bank (AfDB) has signed a risk participation agreement (RPA) with Commerzbank.

The agreement will see Commerzbank match AfDB’s trade finance lines to eligible banks, with the pair assuming 50% of the risk. Each has agreed a maximum contribution of US$100mn, which creates a maximum portfolio of US$200mn. Intra-continental trade will be prioritised and it’s estimated that the RPA could help facilitate US$1.2bn in trade over three years.

Babatunde Tijani, investment officer at the AfDB, tells GTR that under the arrangement “Commerzbank and AfDB will take up an equal share of the default risk of eligible trade transactions originated by African issuing banks”.

It is part of the development bank’s ongoing efforts to re-engage the commercial sector in African trade finance, after many of the banks retrenched in the aftermath of the financial crisis. Furthermore, it’s hoped that the agreement will help local African banks capitalise on the ongoing boom in the continent.

Tijani explains: “Many international banks which had hitherto been pivotal to trade finance in Africa through the provision of trade lines such as letter of credit confirmations, guarantees, indefeasible right of use (IRU) and standby letters of credit have been constrained to reduce their exposures in Africa due to significant balance sheet shrinkage as well as more stringent regulation on capital charge requirements. The situation has led to a dearth in availability of trade finance.”

He expects that agribusiness and manufacturing will be the sectors to benefit the most from the RPA, with SMEs and indigenous companies standing to enjoy priority. While the facility is available to all 54 members of the African Union, Tijani explains that an initial list of issuing banks in 20 African countries will be the first set of beneficiaries under the scheme.

These are: Algeria, Angola, Egypt, Ethiopia, Gabon, Ghana, Kenya, Libya, Madagascar, Malawi, Morocco, Mozambique, Nigeria, Rwanda, Sierra Leone, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe.