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Dutch development bank FMO marked the relaunch of its African unfunded trade finance programme with an official signing ceremony at Exporta’s annual Africa Trade & Export Finance Conference in Cape Town in early March.

FMO has relaunched its unfunded trade finance programme in Nigeria, and has announced plans for the programme’s structure to be rolled out to other African countries in a bid to stimulate trade flows between Africa and the rest of the world.

To date, Nigeria’s Access Bank and Diamond Bank have joined FMO’s programme as issuing banks. Sumitomo Mitsui Commercial Bank (SMBC) is the programme’s first confirming bank.

Fedja Canters, FMO investment officer for African financial institutions explains that FMO had previously had a similar structure involving a different confirming bank which regrettably pulled out of Nigeria at the end of 2008 due to the country’s perceived high risk at the time.

“A lesson learned by us is to not to be too dependent on just one confirming bank as service levels and usage may vary between banks. Therefore it makes sense to serve our Nigerian bank clients through different confirming banks,” says Canters. “So we are also discussing this with another confirming bank – starting in Nigeria, and moving to the rest of Africa as well. SMBC was the first, but we expect to close with another bank in Q2 – maybe sooner.”

According to Canters, FMO hopes to have at least three confirming banks onboard by early 2011, and will also be looking for more development financial institutions to join the programme. As a result of the publicity gained by signing the agreements with the issuing and confirming banks at Exporta’s conference, FMO has already attracted interest from various banks across Africa who are keen to join the structure.

FMO has signed the programme for a duration of six years, and as such the development bank is keen to point out that their support is not merely being offered as a temporary measure. Nevertheless, Canters notes that if margins drop significantly and the bank’s lines are not being fully utilised, they too would consider pulling out of the market. “Once we provide limits to the confirming banks it is important that they be used. We don’t want to hear that there are limits that are not being used because that’s a waste of our capital,” he says.

Programme structure

According to the structure of the programme, the confirming bank confirms letters of credit (LCs) for African banks. FMO participates in the risk through a guarantee on the confirming bank – which is in turn responsible for the documentation, monitoring and administration, as well as the documentation risk.

The programme is specifically for “clean” LCs, without cash collateral, and with a maximum tenor of 180 days. To ensure efficiency, the programme has been set up on a wholesale basis, whereby individual LCs are solely dealt with by the confirming bank. “We don’t approve LCs on an individual basis – we review them on a monthly basis through monitoring. This gives somewhat more flexibility to the confirming bank, and is a more speedy process for them,” says Canters.

As such, the confirming bank sends FMO monthly overviews of the exposures under the limits, as well as financial updates it receives from the participating banks in order to analyse the credit risk. “This is different to what many of our colleagues at other development banks usually do,” Canters notes.

The programme is flexible in that documentation is structured so that issuing banks can be added globally. Both limits and products can be changed without the need for new documentation.

Exporta’s Africa Trade & Export Finance Conference
Exporta held its fourth annual Africa Trade & Export Finance Conference in Cape Town in early March.
Highlights included a keynote address by conference chairman Jean-Louis Ekra, president of the Afreximbank, on African trade and the opportunities for growth that exist for the continent; and a presentation by Thea Fourie, Southern African economist, IHS Global Insight, on what the future holds for Zimbabwe, and the conditions required to sustain the country’s economic recovery. A total of 100 delegates attended the conference, which was hosted at Cape Town’s The Table Bay Hotel.