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The International Finance Corporation’s (IFC) Global Trade Finance Programme (GTFP) is spending a lot of time and effort in Latin America, as Luis Waldmann finds out. 

The International Finance Corporation’s (IFC) Global Trade Finance Programme (GTFP), which was bolstered to US$1bn in January from US$500mn, is focusing on smaller Latin American banks that finance small and medium-sized exporters.

Early on, IFC had planned to quickly build the programme by extending trade support to existing relationships, ie, bank clients that were already in its portfolio.

However, it quickly became apparent that many of those banks did not need trade support due to global markets being very liquid. To reach banks that needed trade support and to add value, IFC had to direct its support to smaller banks that have less access and are less known to the international bank community, says Bonnie Galat, head of marketing and sales for the GTFP.

She adds: “This is a demand-driven programme. We get used when we are needed; we get left behind when we are not needed. So to have the programme utilised it is critical to target it to the right set of banks in each country.”

Helping smaller locals

In countries such as Brazil, IFC is helping the smaller local banks expand their access to international funding and use it to support small and medium-sized exporters, explains Antonio Alves, trade finance specialist for Latin America at the Washington, DC-based institution.

About 80% of all transactions have supported small and medium-sized customers. An average transaction equals about US$900,000 and the majority have supported small importers and exporters, Galat reports.

Although GTFP issuing banks may be accorded terms as long as three years, the average transaction has been for six-month periods, representing classic trade terms.

Plain vanilla transactions such as confirmation of import letters of credit for the major local banks are rarely needed due to the great liquidity in some countries in Latin America, says Alves.

Therefore, IFC is using its guarantee to support and increase the intra-regional trade flow, meaning import and export among Latin American countries. IFC is also supporting the south-south trade flow, ie, commerce between emerging countries, which account for approximately one third of the IFC guarantee demand, he says.

“IFC’s challenge is to identify where the need is and to come up with innovative ideas and trade structures to help local banks increase their trade capacity,” Alves says.

When an exporter needs a confirmed letter of credit and the approached bank is not able to take on that risk, IFC can provide full or partial payment guarantee – provided the issuing bank is enrolled in the programme, Alves notes.

Seal of good housekeeping

Banks interested in enrolling must pass a two-phase appraisal process. IFC initially scrutinises the bank on its trade operations including an assessment of trained staff and procedures and practice that are in line with best industry standard.

Second, the multilateral institution carries out a full credit assessment of the institution on which IFC will take risk, including a review of management, strategy, governance, financial health and performance, as well as AML compliance systems and portfolio management.

“It’s a seal of good housekeeping for banks to show up on our list,” Galat says.

Being part of the programme raises the profile of second-tier banks among bigger international institutions, she comments. If weaknesses are identified in the trade operation review, GTFP can provide training and technical assistance.

In the end, IFC decides how much and what tenor the trade line will be for an approved bank. Once the documentation is signed, the issuing banks may use the GTFP to support its letters of credit or to access pre-export and pre-import financing from international banks that will fund against a partial or full IFC guarantee, says Alves.

For instance, an international bank may choose to fund a new relationship bank on a 50:50 basis with IFC as a means to leverage its credit lines or to build a track record slowly with a new bank or gain familiarity in a new market, where it may need to mitigate risk, Alves explains.

The programme’s main exposure within Latin America is Brazil, where pre-export financing is most utilised. Other countries in the region with banks in the GTFP are Argentina, Ecuador, Bolivia and the Dominican Republic.

By June 2007, the GTFP expects to add issuing banks in Venezuela, Uruguay, Mexico, Haiti, Jamaica and Trinidad and Tobago.

Latin America is the second most active region after Africa, which is the recipient of 65% of the issued guarantees. Latin America makes up 18%, the Middle East accounts for about 13% and Eastern Europe has roughly 3%.

In June 2006, the programme had just four Latin American issuing banks that booked US$44mn in that fiscal year. In June 2007, the GTFP will have as many as 23 issuing banks in the region. Latin America presently has 14 registered banks. Alves is expecting that this will significantly increase the utilisation of the programme in the region.

The GTFP uses, as its principal instrument, IFC guarantees issued to cover the payment risk of banks in the emerging markets.

The trade transactions can be evidenced by a variety of underlying instruments, often an import letter of credit. In Latin America pre-export financing and import financing have been increasingly utilised, says Alves.

In its first 16 months of operation, 110 banks from around the world have joined the programme and over 600 guarantees have been issued. In all, Latin America presently accounts for 18% of the aggregate guarantees issued. Some US$85mn has been booked so far in the fiscal year running through June 2007. The programme has not had any claims since its inception in 2005, says Galat.