The African Development Bank (AfDB) on Wednesday announced a US$50 million trade finance loan facility to Standard Chartered Bank (STB), which is targeted at aiding intra-Africa trade, improving regional integration, and contributing to the reduction in the trade finance gap in Africa. The agreement was signed on Wednesday, 8 September 2021.
“The AfDB believes this facility is very crucial for the continent given that a myriad of African small businesses struggle to access trade finance from the international banks who are more interested in large scale trade transactions to the neglect of SMEs and domestic firms”.
This aspirations of the AfDB to finance trade has become more evident since the signing of the African Continental Free Trade Area (AfCFTA) which kicked off in January 2021. The AfDB expects that this facility to aid SMEs and local African firms, businesses and companies to accelerate inter-country trade on the continent.
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The potential of inter-country trade on the African continent is grossly underleveraged. With the signing of the AfCFTA agreement in 2019, which commits countries to remove tariffs on 90% of goods, progressively liberalize trade in services, and address a host of other non-tariff barriers, a single African market of over a billion consumers and a total GDP of over US$3 trillion could be created.
This will make Africa the largest free trade area in the world.
Based on available data, intra-African exports as a percentage of total African exports only increased to 17% in 2017 from about 10% in 1995. When, however, compared to its export trade with other continents, a different picture is revealed. Trade with Europe was 69%, 59% for Asia, and 31% for North America.
This facility from the AfDB to STB is categorised as a Risk Participation Agreement (RPA) facility and meets the ADB’s 5 priority goals: (i) Light up and power Africa; (ii) Feed Africa; (iii) Industrialize Africa; (iv) Integrate Africa; and (v) Improve the quality of life for the people of Africa. Typical RPAs have a tenor of maximum of three (3) years with underlying transactions limited to 2 years. They also cover a maximum of 50% of the risk.
Both the African Development Bank and Standard Chartered Bank will share the default risk on trade finance grants to beneficiaries of the fund. With this fund, local banks in Africa that have difficulty providing trade finance facility to their customers may approach STB. Where these customers default, STB and consequently AfDB will share the default risk.
The AfDB believes this facility is very crucial for the continent given that a myriad of African small businesses struggle to access trade finance from the international banks who are more interested in large scale trade transactions to the neglect of SMEs and domestic firms. According to the AfDB, this funding gap reached US$81billion in 2019, and closing the gap is a major priority for the multilateral organisation.
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According to the AfDB’s Director for Financial Sector Development, Stefan Nalletamby: “We are excited about finalizing this facility with Standard Chartered Bank as it offers us the flexibility to use our strong AAA-rated risk-bearing capacity to increase access to trade finance and boost intra/extra- African trade on the continent, in support of the AfCFTA. This partnership is expected to catalyze more than $600 million in value of trade finance transactions across multi-sectors such as agriculture, manufacturing and energy over the next three years.”
The Director General of the Bank’s Southern Africa region, Leila Mokadem, added: “The advent of Covid-19, coupled with stringent regulatory/capital requirements and Know Your Customer (KYC) compliance enforcement, has seen many global banks reduce their correspondent banking relationships in Africa, while some are exiting the market altogether. There is therefore an urgent need for financing to reenergize Africa’s trade, which requires more participation of institutions like the African Development Bank.”
