Trade Finance Initiative

The financial crisis, which began to hit the trade finance markets in 2008, is expected to cause a sharp slow-down in trade in 2008 and 2009. The tightening of global credit has reduced capital inflows and curtailed the availability of trade finance. This sudden shortage of trade finance is already having a very detrimental impact on African economies. In response, the African Development Ban (AfDB) established, on 4 March 2009, a multiphase USD 1 billion Trade Finance Initiative (TFI).

In the first phase of the TFI, the Bank launched a new trade finance line of credit (TF LOC) that will allow African commercial banks and Development Finance Institutions (DFIs) to use AfDB resources to support trade finance operations. The Bank also launched a “multi-purpose” line of credit that enables the borrower to use the proceeds for trade finance as well as long-term project and corporate finance operations.

In response to the urgency of the crisis, and in line with the Board resolution for the TFI and in parallel with the deployment of the Bank’s TF LOC, several other programs/proposals are being developed. In this context, the Bank hosted a roundtable meeting of Development Finance Institutions (DFIs) and commercial banks to discuss the state of Africa’s trade finance markets and to assess a possible joint initiative with the IFC under the name of the Global Trade Liquidity Program (“GTLP”). As a result of several high-level discussions with institutional partners, the GTLP’s feasibility was endorsed by the Bank and IFC, among others, as an appropriate crisis response.

The Bank is now investing a USD 500 million in the GTLP as the second phase of the TFI. This is justified by the urgency to alleviate the trade finance constraints being experienced by Regional Member Countries (RMCs). Channeling Phase II TFI resources through the GTLP will speed up processing and ensure a timely response to the crisis. This is a critical objective given the urgent need to prevent a full-blown economic crisis in Africa.

The Bank’s participation in providing such a critical support to the trade finance business on the African continent by investing an initial USD 500 million in the GTLP will make the Bank GTLP’s single-largest contributor to African trade finance. The Bank’s presence in the transaction will also help to increase the share of GTLP resources targeted for Africa.

The funded GTLP program aims to mobilize USD 5 billion of resources from its Participants, which by virtue of the Program’s structure, will  catalyze up to USD 50 billion of revolving trade finance operations over a 3–year period, of which USD 15 billion will be targeted for Africa.

By providing liquidity and sharing risk with African financial institutions, the GTLP will facilitate Africa’s exports and imports at a time when the global financial crisis is cutting off critical funding.

Terms and conditions of the new Trade Finance Line of Credit product

• Eligibility-African financial institutions (commercial banks and DFIs) that are engaged in trade finance may apply for a TF LOC under the TFI. In reviewing credit applications, the Bank will use its standard selection criteria including strategic alignment, commercial viability, development outcomes, additionality, and complementarity. All FIs must meet the Bank’s credit standards (risk rating 6 or better) and the risks of each transaction will be evaluated on a case-by-case basis. All applications will be subject to the Bank’s prescribed review and approval processes and procedures.
• Use of Proceeds-The proceeds of a TF LOC will be used by the recipient FI for trade finance operations. This includes, but is not limited to, standard import and export finance operations including pre- and post-shipment finance. Given the short-term nature of trade finance (90% is less than one year), the FI will be permitted to “re-use” or “revolve” the proceeds until the contractual repayment dates of the facility.
• Maturity-Given the short-term nature of most trade finance operations, the standard final maturity of TF LOCs will be up to 3.5 years. Shorter final maturities can be expected.
• Repayment Terms-TF LOCs may have amortizing repayment terms with an agreed grace period on principal repayments (typically up to one year) or may be repaid in a single (bullet) installment at final maturity. In line with standard practices, the Bank may charge a prepayment fee for early repayment and a penalty for late repayment.
• Disbursement Terms-Like standard LOCs, a TF LOC will usually disburse in two tranches. The first tranche (generally up to 50%) will be drawn after the conditions precedents have been met. The second tranche will be disbursed after the Bank has verified that the use of proceeds of the first tranche complies with the terms and conditions of the legal agreement.
• Pricing-Like standard LOCs, a TF LOC will attract up-front fees of up to 1% of the committed amount and will be priced with a margin over a standard interest rate reference such as LIBOR in the currency of the facility.
• Program Size and Availability-As a new product to respond to the financial crisis, the Bank will initially limit the total volume of TF LOCs to USD 500 million over a pilot period of one year (50% of the USD 1 billion total Trade Finance Initiative).