Standard Chartered Bank and the OPEC Fund for International Development (OFID) have signed a US$500mn framework risk participation agreement to help increase confidence and improve capacity levels in trade finance, particularly in the emerging markets.
Under the terms of the scheme, OFID will guarantee letters of credit issued by banks in the emerging markets, while Standard Chartered will confirm the LCs and act as the risk distribution agent.
Both Standard Chartered and OFID will take on equal levels of risk, both contributing US$250mn-worth of credit support. It is estimated that the programme will facilitate incremental trade volumes of over US$2bn.
A total of 150 issuing banks over 25 countries and in turn 20,000 corporates should benefit from the scheme.
The new programme was launched in Istanbul during the IMF and World Bank meetings, with Karen Fawcett, Standard Chartered’s head of transaction banking, and Suleiman A-Herbishm, director-general of OFID, signing the agreement.
Fawcett told GTR in Istanbul that deals such as this “allow us to put far more volume through the existing credit appetite we have”.
“We’re on the ground, we have appetite for this, but there’s far more demand [for funds] than we can cope with ourselves,” she added. Geoff Parry, global head of trade assets, at Standard Chartered in Singapore, further explains the motivations behind the scheme.
“Our goal is to make sure there is capacity and confidence in the trade finance markets,” he comments.
“If you are an exporter or importer, you may have opportunity to buy or sell goods, but if your bank doesn’t have capacity, does not have enough support in the markets, or you don’t think there is any support – the likelihood of developing new trade flows lessens.” He adds: “This partnership aims to demonstrate confidence to the market globally that there is support for them when they want to trade.”
Parry sees the potential for trade and cross-border business growing, but demand for the necessary trade finance to facilitate these flows can not solely be met by commercial banks. Some form of risk sharing between commericial players, the public sector and multilaterals is still required to support world trade.
“With OFID, we can inject that capacity and confidence to help start new trade flows and rekindle old trade flows that may have stalled because of lack of support in local trade finance markets.”
The scheme is an unfunded risk-sharing programme, but will cover both funded and unfunded transactions carried out by emerging market banks and corporates.
For instance, the scheme will cover a corporate that wants to export to a certain country and is looking to cover payment risk, on an unfunded basis, of the obligor.
The programme will also cover transactions where a client needs money to import goods, which would mean, as Parry explains, from a bank perspective, “money is flowing out the door”, essentially a funded deal.
This is one of the fundamental differences between the OFID scheme, and Standard Chartered’s first joint initiative with a development organisation launched in the first half of 2009. During the G-20 talks in April, the bank announced its involvement in the US$1.25bn global trade liquidity programme (GTLP) supported by the International Finance Corporation (IFC).
However, this trade finance scheme was a funded programme, whereby Standard Chartered, among other banks, is actually contributing 60% of the required funding, with IFC (and other multilateral agencies) contributing 40% of the funding.
Another difference is that the OFID programme covers both public and private sector transactions. This is due to the fact that many emerging market clients are trading oil, and these traders are often government entities and would use public sector banks to finance these trade deals. The OFID scheme is equipped to cover these state-backed oil transactions.
And, although the scheme generally covers short-term deals, it is additionally capable of covering deals with a tenor of 360 days-plus. Through this capability, it can support trade flows of quasi-capital goods that require longer payment tenors due to having longer production cycles.
Parry adds that the OFID scheme is not constricted to supporting US dollar denominated transactions, and can also include many other major currencies including UK sterling, Singaporean dollar and euros.
“We want to play a role rebuilding trade flows,” says Parry, explaining that the scheme should be easy for customers to access, and above all, won’t incur additional unforseen costs.
“We certainly don’t want to be doing anything that makes it harder or more expensive for clients,” he says.
“This extra capacity of the programme is delivered through Standard Chartered’s global network. If you are a corporate client or bank client wanting to do more business, the capacity is available.”
“There is no additional cost for the programme, so it is priced on normal commercial terms. It is delivered seamlessly to customers,” he adds.
Further aiding easy access to the scheme, Parry explains that the initiative is an automatic risk participation programme, with the necessary criteria for participants pre-set by both OFID and Standard Chartered.
Parry elaborates: “So if you are an exporting client and you go to your bank and say ‘can you confirm this LC’? There are three answers banks can give.
“The best is yes, the second best answer is no, and the worst answer is ‘I don’t know, I’ll ring OFID in a few hours and find out later in the day’. To an exporter, these few hours represent a long time, but under this scheme we will be able to give them an instant answer.”
He adds: “This scheme would directly inject capacity where it was needed and aims to be easy for clients to use and also cost effective.”
This promise of speed and efficiency will prove to be reassuring to the trade finance markets. Particularly as a recent World Trade Organisation (WTO) report highlighted complaints about the level of bureaucracy preventing the effective use of the GTLP programme launched earlier this year. Commercial banks had commented that the additional capacity provided by the multilaterals had not been fully utilised due to “the procedures in place, the distribution of risk sharing, a lack of flexibility and, at times, red tap”.
In terms of the OFID programme, Parry foresees usage of the programme to “ramp up” over the coming weeks and months, and he expects “very good usage in a short space of time”.
The role of these risk-sharing schemes, he believes, is still very important, despite a few positive recovery signs in the wider financial world.
“They bring very good, real commercial value to the trade finance community, helping create confidence and new trade flows.”
He adds, “There is always a need for developing markets to have a stable and constant risk coverage. We see this programme as an evergreen programme, and will form a core means of support for the developing world.”