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The Board of Directors of the African Development Bank (AfDB) approved on Wednesday, February 20 an unfunded US $200-million Risk Participation Agreement (RPA) with Standard Chartered Bank (SCB). The facility will help address critical market demand for trade finance in Africa by providing support for trade in vital economic sectors such as agribusiness and manufacturing. Moreover, it will foster financial sector development, regional integration, and contribute to government revenue generation.
The RPA between the two banks will allow them to share the default risk on a portfolio of qualifying trade transactions originated by issuing banks in Africa and confirmed by SCB. As a 50/50 risk sharing arrangement, SCB will match AfDB’s undertaking in every transaction, thereby creating a maximum portfolio of up to US $400 million. The Risk Participation Agreement will be for a period of three years.
The majority of African banks have small capital bases which constrain their ability to obtain adequate trade limits from international confirming banks and to undertake sizeable transactions that have significant development impact. Secondly, despite the growth in trade risk distribution globally, local banks in Africa have not significantly benefitted from this growth.
The AfDB’s value added lies in the use of its “AAA” rating to share trade risk and expand the trade finance capacity of banks in Africa, thereby expanding trade and strengthening regional integration. This facility will result in the provision of significant support to African banks and SMEs. Counting roll-overs, it will facilitate approximately US $2.4 billion of trade in intermediate and finished goods, raw materials and equipment to support economic growth.
The facility is in line with AfDB’s Regional Member Countries’ priorities to promote trade and in accordance with the African political objectives as reaffirmed during the 18th African Union Ordinary Session held in January 2012. It also aligns with the Bank’s Regional Integration Strategy, which seeks to consolidate the Bank’s engagement in trade finance in Africa.
Standard Chartered Bank is a universal banking group headquartered in London and strategically focused on Asia, Africa and the Middle East. It is a leading provider of trade finance in Africa and was named Best Trade Bank in Africa in 2011 (Trade and Forfaiting Review Awards 2011). SCB captures significant trade flows along the various trade corridors and facilitated over US $10 billion of trade in Africa in 2011 alone. It has 15 African subsidiaries and over 200 correspondent banking relationships in Africa. SCB has a long term rating of A1 (Moody’s) and AA- (Fitch and S&P).