AfDB launches new Transaction Guarantee to support SMEs and trade in Africa

AFRICA – The African Development Bank (AfDB), through its Financial Sector Development’s Trade Finance operations, has launched a Transaction Guarantee instrument designed to provide up to 100% cover for non-payment risk to regional and international banks, for trade transactions initiated by local banks in Africa.

The guarantee will cover an array of trade finance instruments, including confirmed letters of credit, trade loans, irrevocable reimbursement undertakings, avalized bills and promissory notes.

In opening remarks at the virtual launch of the guarantee held 29 July 2021, Bank Director for Financial Sector Development, Stefan Nalletamby stated: “We are excited about this new instrument 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. Our target end-users will be women entrepreneurs, environment-friendly enterprises, Small and Medium-Sized Enterprises (SMEs) and local corporates through the facilitation of local participating banks. Priority will be given to low income and transition states.”

The new instrument will provide much-needed opportunities for local financial institutions to build relationships with international correspondent banks, increase links to a global network of trade finance partners and reduce the need for cash collateral, thereby increasing access to finance for SMEs across the continent.

This intervention is therefore strongly aligned with the Bank’s High 5s and its financial sector development strategy whose main priorities are to broaden and deepen Africa’s financial systems by putting finance at the center of the continent’s productive capacity.

Trade remains an important driver of Africa’s social and economic development despite the persistently huge trade finance gap mostly due to lack of liquidity and risk mitigation facilities across the continent and has been exacerbated by recent market developments, such as increased banking regulations and global shocks like the COVID-19 pandemic.

“Our target end-users will be women entrepreneurs, environment-friendly enterprises, Small and Medium-Sized Enterprises and local corporates through the facilitation of local participating banks. Priority will be given to low income and transition states”

Stefan Nalletamby – Director for Financial Sector Development, AfDB

The launch event was organized in partnership with Making Finance Work for Africa (MFW4A) and it included a panel discussion featuring seasoned trade finance experts from IFC, Afreximbank, Ecobank, ODDO BHF and Moza Banco.  

The African Development Bank Group board of directors approved the new instrument in October 2020.

It is estimated that Africa accounts for circa 3% of global trade and has a lower proportion of intra-regional trade than any other part of the world and the continent remains overly dependent on the export of raw materials, with growth levels fluctuating in line with international commodity prices.

To demonstrate the power of trade to the economic transformation of the African continent, if Africa were to increase its share of world trade from 2 to 3 percent, that 1 percentage point increase would in nominal terms generate about US$70 billion of additional income, which is about three times the total amount of development assistance the continent receives from the rest of the world each year.

Progress is being made gradually, however, with the recent commencement of free trade under the African Continental Free Trade Area (AfCFTA) on the 1st of January 2021.

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