AFRICAN DEVELOPMENT BANK ADB/BD/IF/2014/78

17 April 2014
Prepared by: OPSM
Original: English

Probable Date of Board Presentation

Not Applicable FOR INFORMATION

MEMORANDUM
TO : THE BOARD OF DIRECTORS

FROM : Cecilia AKINTOMIDE

Secretary General

SUBJECT : TRADE FINANCE PROGRAM PROGRESS REPORT *

Please find attached the above-mentioned report.

Attach:

Cc: The President

* Questions on this document should be referred to:

Mr. M. NIANG OIC OPSM Extension 2662

Mr. M. KALIF Manager OPSM.4 Extension 2217
Mr. Y. KUFFOUR Trade Finance Specialist OPSM.4 Extension 2285
Mr. L. DRAMMEH Investment Officer OPSM.4 Extension 1579

SCCD : K.M
 AFRICAN DEVELOPMENT BANK

TRADE FINANCE PROGRAM PROGRESS REPORT

OPSM DEPARTMENT

April 2014
 PROGRESS REPORT ON THE TRADE FINANCE PROGRAM

1. Introduction

This report provides an update on the Bank’s Trade Finance Program (TFP). It summarizes the
progress achieved to implement the TFP since its launch earlier this year. The report covers the first 5
months of program implementation from July – December, 2013.

2. Background

On February 20, 2013, the Board of Directors approved the Bank’s new Trade Finance Program as the
successor to the Trade Finance Initiative which was launched in 2009 in response to the global
financial crisis. The total size of the new Program is USD 1 billion1 for an initial period of 4 years. The
TPF seeks to help reduce the trade finance gap in Africa by providing guarantees and liquidity support
to local financial institutions for on-lending to mainly SMEs engaged in the tradable sector, thereby
promoting trade within Africa, and between Africa and the rest of the world. The Program is being
implemented initially using 3 main instruments:

i. Risk Participation Agreement (RPA) - guarantee (unfunded)

ii. Trade Finance Line of Credit (TFLOC) - funded
iii. Soft Commodity Finance Facility (SCFF) - funded

The TFP’s flagship product is the Risk Participation Agreement (RPA) which is an unfunded trade
finance guarantee facility. This product is expected to constitute up to 70% of all project approvals, and
it forms the basis of the analysis in this report.

Given the nature of the trade finance market globally, international trade finance guarantees are mostly
provided by and through global banks such as Citibank, Standard Chartered Bank and Commerzbank
that serve as preferred guarantors (confirming banks) for trade transactions across the world. It is for
this reason that these global banks feature prominently in the TFP as conduits for reaching the target
beneficiaries, which are financial institutions and exporters and importers in Africa.

3. Implementation Progress

As shown in the table below, since the approval of the Program 7 operations have been approved for a
total value of USD 590 million. Of this amount, USD 450 million is for Risk Participation Agreements
and USD 140 million is for Trade Finance Lines of Credit.

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The outstanding net exposure of all trade finance operations should not exceed USD 1 billion at any time.

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 Project Country Date Date RPA TFLOC
Approved Signed (USD’ m) (USD’ m)
Standard Chartered Bank Regional 20/02/13 29/05/13 200
Ecobank Transnational Inc. Regional 20/02/13 28/02/14* 100 100
UT Bank Ghana 22/05/13 29/07/13 20
Commerzbank Regional 22/05/13 29/05/13 100
Citibank Regional 24/07/13 28/02/14* 50
Shelter Afrique Regional 11/12/13 28/02/14* 20
Total 450 140
*Estimated signing dates

As at 31st December, 2013, four RPA projects were approved by the Board of Directors.
Commerzbank and Standard Chartered Bank booked their first transactions in July 2013 and have
started submitting monthly reports to the Bank. During the period under review these 2 partner
institutions booked in excess of 200 transactions for a total value of approximately USD 355 million, of
which USD 174 million was guaranteed by the Bank. The reports submitted provide granular details on
the underlying transaction sizes, sectors, end-beneficiaries, and the types, origin and destination of
goods to facilitate the tracking of key Development Outcome indicators.

Taking into account the anticipated revenue on the Ecobank Transnational Incorporated (ETI)
transaction, the signing of which is now envisaged by 28 February, 2014, total revenue attributable to
the Program for the 6 months of operation in 2013 is estimated at USD 2.3 million based on the
average utilisation of the RPAs and outstanding TFLOCs of USD 224.5 million. Discounting the ETI
transaction, gross revenue for the 6-month period is approximately USD 689,000 based on total
average assets of USD 124.4 million. The annualized gross income is estimated at USD 5.1 million.
According to the Business Plan, total revenue for the first full year of operation was projected at USD
3.4 million. Given the increasing utilisation of the RPAs by our partner confirming banks, this revenue
target would be exceeded by June 2014 when the Program would have had a full year of operation.

4. Development Outcomes

The Development Outcome indicators discussed hereunder relate to the RPAs for which ready
information is available as part of the monthly reporting requirements. Reporting for the Trade Finance
Lines of Credit is annual and the associated indicators will be included in subsequent progress reports.

During the first 6 months of implementation, the TFP supported 230 trade transactions involving 30
financial institutions in 7 RMCs for a cumulative trade value of approximately USD 355 million. Of
this amount intra-Africa trade accounted for approximately USD 77 million, representing 23% of total
trade supported. We expect this percentage to increase as the program gets more traction. Nonetheless,
it is worth noting that the percentage achieved so far compares favourably to the continent’s overall
intra-Africa trade trend. According to the World Trade Organization intra-Africa trade constituted only
13.5% of Africa’s total trade in 2011.

Using transaction size of less than USD 500,000 as a proxy for SME transactions, 80% of all supported
transactions are attributable to SMEs.

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Similarly, over 90% of all transactions have a tenor of less than 6 months which signifies the short term
nature of trade finance transactions in general. The program has also provided significant support for
the import and export of essential commodities and intermediary goods that are vital to the social-
economic development of RMCs. For example, ‘Food & Live Animals’ and ‘Building & Construction
Materials’ respectively account for 25% and 26% of total value of trade supported. ‘Mineral fuels &
lubricants’ represents 18%, while ‘Chemicals’ which includes pharmaceuticals and fertilizer, and
‘Machinery, Communication and Transport equipment’ each accounts for 12%.

5. Pipeline

As presented in the table below, the current trade finance pipeline is robust with 11 potential operations
for a total value of USD 800 million at various stages of processing.

Project Country Projected RPA TFLOC

Board Date (USD’ m) (USD’ m)
Commercial International Bank Egypt Regional 23/04/14 50
Afreximbank Regional 23/04/14 100 150
Banque pour le Commerce et
Mauritania 07/05/14 10
l’Industrie
Banco Santander Regional 30/04/14 40
Attijariwafa Bank Regional 30/04/14 50
UniBank Ghana 16/04/14 10
First Rand Merchant Bank Regional 07/05/14 50
BNP Paribas Regional 07/05/14 100
Standard Bank Regional 21/05/14 100
Union de Banques Arabes et
Regional 21/05/14 100
Françaises
Wells Fargo Regional 18/06/14 40
Total 630 170

Including the current pipeline, it is expected that by the end of the first half of 2014, total projected
approvals should reach the USD 1 billion mark, although net exposure is expected to be no more than
USD 800 million2.

Meanwhile, in addition to building a pipeline and executing operations, the trade finance team has also
been participating in various international seminars and conferences to showcase the program, build
partnerships and develop a steady pipeline of new deals. The Trade Finance webpage on the Bank’s
website has been revamped and updated to provide stakeholders with more up-to-date information.

2
Given the revolving nature of the portfolio, the effective deployment of an RPA is expected to average about 60-80% of
the maximum exposure.

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6. Implementation key success factors

Although the TFP is still in the early stages of implementation, the experiences to date validate the key
factors that underpinned the design of the program and provide useful learning opportunities for the
Bank. These key success factors and lessons include the following:

 A wholesale business model that is market-driven and which leverages off the respective
strengths of the Bank and commercial partners has the best chance of success. The alternative
model is the retail approach which would have required the Bank from the onset to also provide
direct guarantees on an individual transaction basis. This approach would have not only slowed
down implementation, but it would have also required significant human resource commitments
and elaborate execution capacity development from inception.

 A streamlined review and approval process that enables speed without loss of quality due
diligence is critical for success. The Bank’s current process for Trade Finance transactions
which eliminates the Project Concept Note (PCN) stage therefore appears to be working
adequately.

 Other MDBs have been active in the trade finance market for many years. The Bank has been
able to accelerate the process of building institutional capacity by learning from their
experiences. There is therefore room for further learning and sharing of best practices among
the MDBs.

 The trade finance market is quite specialized and requires dedicated resources to run an
effective trade finance program. The Bank has successfully re-deployed some staff from within
the OPSM Financial Institutions Division to the TFP but the consequence has been a loss of
capacity in other areas of financial intermediation. Nonetheless, further strengthening of the
trade finance team is still required to mitigate operational risks as implementation progresses.

 The trade finance business has attractive risk-reward characteristics due to the low risk profile
of trade transactions. On the one hand the Bank has yet to experience any losses on its trade
finance operations (including the replaced 2009 Trade Finance Initiative) and on the other trade
finance offers very good prospects for generating much-needed revenue. For example, on an
annualized basis the program is expected to generate USD 5.1 million of gross revenue by the
end of the first year of operation on the back of a relatively smaller total risk asset base.

7. New Initiative

In keeping with the Bank’s emerging role as a knowledge broker on the continent, the Trade Finance
team is collaborating with EDRE and ONRI to conduct a comprehensive survey on the trade finance
gap in Africa. The objective is to shed more light on Africa’s trade finance demand-supply dynamics
and to provide more insight to various market players with a view to reducing the perennial trade
finance gap on the continent. The survey was launched in October 2013 and the response rate from the
respondent financial institutions in Africa has been very encouraging. The results of this survey are
expected to be published by June, 2014.

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8. Conclusion

Since its approval in early 2013, the Bank’s TFP has made good progress towards implementation and
lessons drawn from our early experience indicate the Program is on track to achieve the desired
objectives. By the end of the first year of operations in mid-2014 approximately USD 1 billion of
operations are expected to have been approved, and demand remains very strong. The interim
Development Outcomes are satisfactory and demonstrate the importance of trade finance to the socio-
economic development of the RMCs. In addition to these core financing activities, the Bank’s trade
finance team has been actively promoting the program and also working with other departments in the
Bank and external partners to develop and share knowledge about the trade finance market in Africa.