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UNION DE BANQUES ARABES ET FRANCAISES


Overview

  • Reference: P-Z1-HAB-021
  • Approval date: 07/05/2014
  • Start date: 07/05/2015
  • Appraisal Date: 12/02/2014
  • Status: OngoingOnGo
  • Implementing Agency: UNION DE BANQUES ARABES EST FRANCAISES
  • Location: France

Description

An unfunded Risk Participation Agreement (RPA) between the African Development Bank (AfDB) and Union de Banques Arabes et Françaises (UBAF or the Confirming Bank). Under the proposed RPA the two banks would share the default risk on a portfolio of eligible trade transactions originated by African Issuing Banks (IBs).


Objectives

To provide guarantees to and with UBAF in support of trade transactions in RMCs.


Rationale

The proposed Risk Participation Agreement (RPA) is designed with a view to contributing to the reduction in Africa's TF deficit by enhancing the risk bearing capacity of UBAF to provide increased limits to African Issuing Banks (IBs). This facility will support inclusive growth, enhance macro-economic resilience in at least 18 RMCs through support of exports which positively impacts the current account, including Fragile States (FS), and help promote intra-African trade and regional integration.

The proposed RPA is a risk sharing facility of USD 50 million to be provided by AfBD while UBAF, the Bank's partner in the Project, will provide at least matching capacity through the execution of an RPA. Under this arrangement, UBAF would underwrite the credit risk on a portfolio of qualifying trade transactions generated by an agreed list of local issuing banks in RMCs, with the AfDB guaranteeing up to 50% of the value of these transactions against credit default. Payment/ reimbursement obligations would be eligible if they are generated from TF products such as Letters of Credit (LC) confirmations, trade guarantees, avalized bills of exchange, factoring and forfaiting, trade facilitation loans, invoice and supply chain finance among others. The RPA would be denominated in EUR and the underlying transactions may be conducted in EUR, USD or any of Bank approved currencies as may be agreed upon from time to time. The RPA tenor is 3 years while that of individual transactions would not exceed 2 years.

The first beneficiaries of this RPA are African IBs whose ability to grow their TF business has been constrained by inadequacy of available confirmation lines from international banks. The facility is thus expected to positively contribute towards the enhancing the trade origination risk capacity of these IBs. The second and ultimate beneficiaries are African firms and SMEs who depend heavily on these local IBs to fulfill their TF commitments.


Benefits

The 2008 global recession and the ensuing European debt crisis have left in their trail a host of substantially weakened banks and financial institutions with eroded balance sheets, divested of their appetite for risk and pervasive dearth of liquidity in financial markets. These crises have also engendered the emergence of a stricter supervision regime by regulators worldwide and have led to the imposition of stiffer capital charge requirements for lending by banks and financial institutions. Balance sheet constriction and new capital charge requirements prescribed by Basel 3 have substantially diminished banks' capacity to finance capital flows linked to Trade Finance (TF). This carries particularly severe consequences for African financial intermediaries and indigenous firms active in the tradable sector who rely on the availability of TF instruments to facilitate export and import of intermediate goods and critical inputs. The loss of capacity of many European and American banks (and the outright disappearance of some others) hitherto traditional suppliers of TF to Africa has in turn forced local banks in Regional Member Countries (RMCs) to prioritize their available limits usually opting to serve the needs of the multinationals and blue chip companies ahead of local firms and Small and Medium Enterprises (SMEs) . In many cases where funding is available, it comes at prohibitive costs and with stringent collateral requirements.

Many international banks have rationalized country limits RMCs largely due to the perceived risks of doing business in Africa. TF generally is a short term self-liquidating asset class however the risk acceptance criteria of most international banks penalizes African banks severely on grounds of sovereign risk and weak balance sheets in the process, depressing available country and counterparty limits which are a function of the applied risk weighting criteria. TF has also become an easy target for banks seeking to deleverage their balance sheets due to its short-term nature and the ease with which exposure limits could be scaled back compared to other products. The shortage of TF threatens to inhibit Africa's growth, particularly in key sectors such as the export of soft commodities and light manufacturing. SMEs bear the brunt since creditors give preference to transactions generated from large corporations and Multinational Companies (MNCs).

The proposed project will help to provide some much-needed relief to entrepreneurs by providing additional trade finance capacity.


Key contacts

BA Mohamadou - PIFD3


Costs

Finance source Amount
ADBUSD 32,312,266
DeltaUSD 32,312,734
TotalUSD 64,625,000
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