The FINANCIAL — TUNIS, TUNISIA – The Asian Development Bank (ADB) and the African Development Bank (AfDB) have signed an agreement to help AfDB set up a trade finance program to boost African trade and, more broadly, South-South trade.
AfDB is scaling up its trade finance activities to channel critical trade support to companies across the African continent, much as the ADB’s program has done in developing Asia.
Companies in developing countries have difficulties in getting the trade finance they need from banks in order to buy key components from overseas or to sell their goods to other countries. This prevents them from participating fully in global trade which grew 14.5% in 2010, its fastest annual pace on record.
ADB’s Trade Finance Program provides guarantees and loans in support of trade in developing Asia through over 200 partner banks. Under the just-signed Memorandum of Understanding, ADB will share all legal document templates, operation manuals, information technology, and know-how related to its Trade Finance Program with AfDB.
ADB and AfDB expect cooperation to grow in the future, including sharing access to their programs to link banks in both regions. ADB already has such an agreement with the Inter-American Development Bank.
"Partnerships are key to promoting economic growth, and using the Trade Finance Program framework developed by ADB will help AfDB to achieve in Africa the success ADB has achieved in Asia, but much faster and at a fraction of the start-up cost," said Philip Erquiaga, Director General of ADB’s Private Sector Operations Department which oversees the Trade Finance Program. "In time, we would expect the relationships between developing Africa and developing Asia to expand, resulting in much greater South-South trade which could help ease global economic imbalances."
By transferring all tools and knowledge of the Trade Finance Program, the two development banks will reduce duplication of effort and cost and will share best practices, as encouraged under the 2005 Paris Declaration on Aid Effectiveness and the framework to achieve the Millennium Development Goals.
Speaking at a ceremony in Tunis to mark the handover of documents, Tim Turner, Director, AfDB’s Private Sector Department underscored the importance of trade finance in Africa. "By scaling up its trade finance activities, the African Development Bank is supporting an important growth-enabling activity, which has been affected by the recent global financial crisis," he said. "By leveraging the experience of strategic partners, such as ADB, AfDB will not only be reducing the financial commitment necessary to ramp up its activities but also facilitate the expansion of African trade with Asia."
ADB’s Trade Finance Program provided support for $2.8 billion worth of trade in 2010, up from $1.9 billion in 2009. It focuses on countries where trade finance is less readily available. As such, the program does not assume any risk in the People’s Republic of China, India, Republic of Korea, Malaysia or Thailand. The five most active users of the program last year were banks in Bangladesh, Viet Nam, Pakistan, Sri Lanka and Nepal. The program also aims to support smaller firms that typically have more trouble accessing trade finance and to promote trade between developing countries. Around 270 of the 783 deals supported by the program last year involved small and medium-sized enterprises, while half were conducted between two developing Asian economies.
In 2009, AfDB’s Board of Directors approved the Bank’s Trade Finance Initiative (TFI) to provide up to $1 billion of support to African commercial banks and other financial institutions to reinvigorate their trade finance operations. Under the TFI, the Bank initially allocated $500 million for short-term trade finance lines of credit (TF LOC) and $500 million for the Global Trade Liquidity Program (GTLP) in cooperation with the International Finance Corporation (IFC).
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