US$ 100m facility to address Africa’s trade finance approved by AfDB

BY EDMUND SMITH-ASANTE

The Board of Directors of the African Development Bank (AfDB) Tuesday, May 22, approved a US$ 100 million unfunded Risk Participation Agreement (RPA) between the bank and Commerzbank AG, a leading international bank headquartered in Frankfurt, Germany, to boost trade finance in Africa.

Under this facility, the two banks will share the default risk on a portfolio of qualifying trade transactions originated by issuing banks in Africa and confirmed by Commerzbank AG, which 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.

It will further foster financial sector development, regional integration, and increase government revenue generation, and thus ultimately improve Africa’s sustainable economic growth. 

Explaining the importance of the facility in a statement issued in Tunis where the bank is headquartered, AfDB said “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. Moreover, despite the growth in trade risk distribution globally, local banks in Africa have not significantly benefitted from this growth.”

“AfDB’s additionality 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,” the statement indicated.

According to AfDB, this RPA facility, running over a 3-year period, is a 50/50 risk sharing arrangement that will enable Commerzbank AG to match AfDB’s undertaking in every transaction, thereby creating a maximum portfolio of up to US$ 200 million.

The bank says the facility will also result in the provision of significant support to African banks and SMEs. Further, counting roll-overs, it is expected to facilitate about US$ 1.2 billion of trade in equipment, raw materials, intermediate and finished goods over the 3-year period.

Moreover, the proposed facility aligns with AfDB’s Regional Member Countries’ priorities to promote trade as was reaffirmed by the African Union at its 18th Ordinary Session in January 2012. It is also in line with the Bank’s Ten-year Strategy and Regional Integration Strategies which seek to consolidate its engagement in trade finance in Africa.

Commerzbank AG is a leading provider of trade finance in Africa with a trade portfolio of approximately of US$ 6 billion and an active network of over 500 correspondent banks on the continent.