AfDB provides $100m to finance trade in Africa
Trade financing in Africa received a major boost when the African Development Bank (AfDB) approved on Tuesday, May 22, a $100 million unfunded Risk Participation Agreement (RPA) between it and Commerzbank AG.
The two insitutions will share the default risk on a portfolio of qualifying trade transactions originated by issuing banks in Africa and confirmed by Commerzbank AG, the AfDB said in a press release.
The release states that, 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. It will foster financial sector development, regional integration, and increase government revenue generation, ultimately improving Africa’s sustainable economic growth.
According to the AfDB, 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,” it said.
The release also noted that, the facility which is expected to run 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 $200 million.
The facility will also result in the provision of significant support to African banks and SMEs. Counting roll-overs, it is expected to facilitate about $1.2 billion of trade in equipment, raw materials, intermediate and finished goods over the 3-year period.
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, the release stated.
By Pascal Kelvin Kudiabor