The African experience

The AfDB explained that its involvement was primarily motivated by a desire to promote private sector development and regional integration. Through its equity involvement, the AfDB’s AAA credit rating boosts Afreximbank’s trade finance capability.

The African Development Bank set up its $1bn Trade Finance Programme (TFP) last year to cover a period of four years. It aims to encourage international and African banks to operate in the sector. 

In a statement, the AfDB revealed: “The TFP offers a wholesale approach to trade finance through the provision of risk mitigation facilities and liquidity support. The bulk of the operations are targeted at low income countries, African local banks, small and medium enterprises in critical sectors in the agriculture/agribusiness, light manufacturing and intermediate/capital goods in regional member countries.” There are three main elements to the TFP:

Risk Participation Agreements (RPAs): these are arrangements under which confirming banks and the African Development Bank share the default risk of a portfolio of trade finance transactions. The RPA is designed to give regional and international confirming banks partial cover for their trade finance operations in Africa, with the AfDB typically taking a 50% share of
the risk.

Trade Finance Lines of Credit (TFLOC): these are short-term lines of credit, offered to African financial institutions to facilitate their own trade finance operations. The AfDB seeks to support financial institutions with a strong focus on developing trade finance. Proceeds from TFLOC enable financial institutions to extend credit support to SMEs operating in either the import or export sectors of the economy.

Soft Commodity Finance Facilities (SCFF): these are a funded trade finance product targeted at commodity aggregators and export marketing agencies for soft and agri-based commodities, such as cocoa and coffee. These organisations, which deal directly with farmers, use SCFF loans to support the agri-commodity supply chain at the grassroots level, leading for example to the increased presale of produce.

Jean-Marie Masse, the senior advisor and programme manager at the European Investment Bank (EIB) manages his bank’s new Africa Energy Guarantee Fund (AEGF), which provides credit enhancement, insurance and reinsurance projects for African energy sector projects.

He says: “In the present market environment, banks are reducing their loans to the energy sector which are often longer term and higher risks than other financing alternatives. This is exacerbated for Africa, which is often peripheral to many large banks’ mainstream activities. Nevertheless, most infrastructure projects in Africa, including those in the energy sector, continue to involve European equipment and service providers along with their banks and these projects can benefit from an increase in the supply and the use of medium- and long-term credit guarantees and insurance. This can enable these banks to continue to engage in Africa and make projects happen.”

South Africa has two important agencies: the Credit Guarantee Insurance Corporation of Africa Limited (CGIC) and the Export Credit Insurance Corporation of South Africa (ECIC). The latter is a self-sustained state-owned national export credit agency. It underwrites bank loans, supplier credits and investments outside South Africa in order to enable South African contractors to win capital goods and services contracts in other countries.

The CGIC was set up in 1956 by a group of financial institutions to enable South African companies to compete on an equal basis with European exporters. It is still owned by a range of financial organisations, such as ABSA Bank, and insurance firms, including Munich Reinsurance Company of Africa. It accepts bond and credit risk underwritten by insurance companies in a number of countries and is a shareholder in Credsure and has set up arrangements with companies in a number of other African countries.

African private sector banks
Private sector banks are also playing a bigger role in the sector. First Bank of Nigeria, Access Bank and Guaranty Trust Bank are now all active in trade finance.

Modern communications also help to keep customers up to date with the progress of any deal. First Bank, for instance, offers its TradeAlert application to trade finance customers who want to monitor their foreign trade transactions by email or SMS. This enables them to monitor their letter of credit applications and track shipping documents.

In comparison with their international counterparts, African banks do not consider deals between leading African companies to be high risk but some Nigerian banks complain that they are constrained in the trade finance market because of the growing weight of capital requirements that has been placed upon them. However, banks in other countries are in a similar position because of the Basel III regulations and new domestic requirements.

As a bank set up with Pan-African aspirations from its inception, Ecobank has attracted a number of awards for its trade finance operations in recent years, particularly for its work in Nigeria.

Foluke Aboderin, the executive director of corporate banking for Ecobank Nigeria, said: “Our Pan-African orientation presents enormous opportunities for intra-African trade. We have been particularly active in the oil and gas sector but we are seeing increasing demand for our innovative financing solutions, including our online corporate banking service, Ecobank Omni, from other key sectors in the Nigerian economy, such as telecoms, power, manufacturing and agriculture.”

In 2013, Ecobank Nigeria facilitated $1.2bn of petroleum product import contracts and $450m in crude oil deals across the West African region. It also structured $100m of oil and gas deals on behalf of petroleum importers in Southern Africa.

Standard Bank is able to facilitate trade finance through its relationship with the Industrial and Commercial Bank of China (ICBC) and network of African subsidiaries. In addition, its corporate banking division specialises in agribusiness, oil and gas and mining and metals.

ICBC bought a 20% stake in the bank in 2008 and David Munro, the head of the bank’s corporate and investment banking division, says that its trade finance operations have benefited from the relationship.

However, China’s massive involvement in Africa has not had as big an impact on trade finance as might be expected. Most deals are the result of bilateral agreements between Beijing, Chinese state-owned companies, or Chinese development agencies and African governments. The private sector element is often limited.