Whether it is due to concerns about capital requirements, liquidity problems or just a lack of awareness about a particular region, many banks are still reluctant to lend trade finance to countries beyond the large BRIC economies or top-tier corporates in emerging markets.

The World Bank’s IFC is aiming to tackle this lack of appetite by launching a series of new products providing extra risk and liquidity capacity for lower income countries, particularly for small and medium-sized enterprises and agri-businesses, both of which are working capital intensive sectors of the economy.

Speaking at the IFC’s annual trade finance seminar held in Washington DC in March, Lars Thunell, executive vice-president and CEO of the IFC, told delegates: “We are clearly living in a world of high demand for our services. Trade finance is unfortunately often only available to the largest companies operating in the developing markets.”

Trade finance is unfortunately often only available to the largest companies operating in developing markets.”

He argued that trade finance can be used as an effective development tool for low income countries such as Rwanda, Mali or Niger, and act as an “entry point” for banks and corporates to access the global economy.

New innovations

Over the last two years the IFC has been ramping up its efforts to boost the lending capacity of banks, establishing funded and unfunded risk sharing programmes to help banks grow their trade finance portfolio in emerging markets.

As well as the long-standing global trade finance programme established in 2005 to guarantee risks on trade-related payment obligations of financial institutions in emerging markets, the IFC also set up a global trade liquidity programme (GTLP) in 2009.

The GTLP was originally a funded risk sharing scheme set up with other banks, governments and multilaterals to provide liquidity and guarantees for a portfolio of trade transactions. It was put together in the aftermath of the financial crisis to prevent world trade collapsing due to a lack of finance.

In mid-2010 the GTLP entered into its second phase, which is more of an unfunded scheme risk-sharing programme.

To complement these existing schemes and to reach those banks and corporates potentially overlooked by the larger initiatives, the IFC has now developed four new products that aim to provide short-term trade finance at every stage of the corporate supply chain, from supplier, collateral manager, buyer and seller, to distributer and end-customer. They cover structured trade finance; supplier finance, warehouse receipts and a distributor finance programme.

These products along with the GTLP schemes are part of a new short-term finance department, established by the IFC at the end of 2010.

Supplier finance

Supply chain finance programmes are already fairly common in OECD markets, with an increasing number of corporates preferring to do business on open account terms as opposed to letters of credit.

A typical supplier finance programme will involve suppliers’ receivables being discounted by the bank on a non-recourse basis, once the buyer has accepted to pay on due date. This technique helps mitigate supplier performance risk, reducing the credit risk to the buyer alone.

The premise of supplier finance is that it is a lower cost form of financing trade, and it allows suppliers to leverage on the buyer’s superior credit rating in order to access working capital.

These SCF techniques have not yet gained as much ground in the emerging markets compared to the developed world. Buyers are not prepared to take on the risk of emerging market suppliers, and a commonly-cited problem is that the banks providing SCF programmes lack the necessary on-the-ground expertise to on-board smaller suppliers.

This is where the IFC steps in with its new US$500mn global trade supplier finance programme.

Speaking to delegates at the Washington DC seminar, Priyamvada Singh, lead, global trade supplier finance, commented: “What IFC is doing is augmenting programmes you have already developed. We can help you expand your SCF programme to other emerging markets.”

The IFC is looking to partner with banks that have already established supplier finance schemes, but are seeking to expand into new emerging markets. It can help banks by educating SMEs in new markets about the benefits of using a supplier finance scheme. It will also have the regional expertise to work with commercial banks and buyers to assess and on-board potential suppliers.

The multilateral will provide the bank with additional credit capacity to support clients’ suppliers from higher risk countries. It will provide risk sharing of up to 100% of a client’s account receivables and could also provide liquidity and discount the accounts receivables itself.

Warehouse financing

A further scheme newly established by the IFC is set to target the capacity of banks to finance agri-commodities in poorer countries.

The new global warehouse finance programme allows the IFC to provide up to 50% of the guarantee on a bank’s agri-commodities portfolio, where it is secured against warehouse receipts or collateralised inventory schemes such as collateral management agreements.

Eligible transactions under the scheme do not have to be cross-border, but can involve the financing of domestic distribution of the commodity.

One of the aims of this scheme is to help traders break into a new risky market, where the trader can use the 50% IFC guarantee to convince its bank to support their expansion.

The IFC guarantee can be used by banks close to hitting their maximum single obligor limit to extend more credit to a commodity trader client.

Makido Toyoda, lead, global warehouse finance at the IFC, explained to delegates at the Washington DC seminar how the product can cover imports of commodities as well.

“For example, you have a client trader exporting sugar from Brazil to Ghana, and then the trader sells it on to Mali. You have to keep the sugar in Ghana, sign a CMA agreement, and sell sugar bit by bit into different African countries.”

Toyoda told GTR in mid-April that following the launch of this new programme in September last year, the IFC is on the verge of closing its first deal. Presently the scheme only has board approval for up to US$200mn, but if there was a demand for a larger amount the IFC could consider raising additional funds via its programme partners.

Structured trade finance

The IFC board has approved a third new product that aims to support structured trade finance transactions by providing both funded and unfunded risk participation with a partner bank. The partner institution will arrange escrow accounts, collateral management and insurance requirements of a transaction.

The initiative will support large-scale cross-border and domestic trade of strategic commodities, where the commodity itself is used as collateral against the lending.

A further unapproved programme in the pipeline is focusing on distributor finance. This will provide funded or unfunded risk participation with partner banks, and provide SME distributors with a variety of financing through local banks. GTR

IFC highlights

Over US$10bn of guarantees raised since launch of the IFC’s global trade finance programme (GTFP)
Over 200 issuing banks in 84 emerging markets involved in GTFP
US$8.8bn-worth of trade supported by the GTLP since 2009
6,500 trade transactions closed under the GTLP since its inception
36% of GTLP trade volume supported trade in lower income countries (as of September 30, 2010)