Article

by Bonnie Galat

The International Finance Corporation (IFC) is a member of the World Bank Group, legally and financially independent. Established in 1956, IFC is the only global multilateral focused on private sector development in the emerging markets. First conceived as a provider of project finance, IFC has adapted to the evolving needs of its private sector clients and now provides a full range of innovative financial products and advisory services tailored to entrepreneurs and companies throughout the developing world.

In 2004, IFC made a strategic commitment to dedicate significant resources to a new product line to support trade. The Global Trade Finance Programme (GTFP), as it is called, began operations in October 2005. The programme provides risk mitigation through the issuance of IFC guarantees which cover the payment risk of selected banks in the emerging markets related to trade transactions. Guarantees can be issued up to the full value of the transaction, and tenors can go out to three years. Since its inception, there has been steady growth in the use of the GTFP, leading to a doubling of the programme's revolving ceiling to USD 1 billion after its first 12 months of operation.

Growth

The growth in volume and staffing reflects a continued build-out of the coverage provided under the GTFP to support a broad spectrum of trade flows with emerging markets. The goal is to create a vast network of bank partnerships that can be easily and flexibly accessed via the GTFP platform. On an as-needed basis, banks can tap risk mitigation and identify bank counterparties for eligible transactions across new and challenging trade corridors, especially the nascent South-South trade.

The GTFP continues to increase the number of participating financial institutions. As of August 2007, coverage was available on 79 banks from 42 developing countries which had joined the programme. Around 110 major international banks had also signed the master agreements to be able to tap the risk mitigation on an as-needed, per-transaction basis, highlighting one of the programme's major benefits, a network of potential partnerships that both global and local banks can access to deliver trade finance solutions to their clients. The programme is designed to have a rapid response time. In its first two years of operation, nearly 1000 guarantees have been issued, the vast majority on a same-day basis.

Impact

The abundant liquidity of the past several years that has been fueling the global markets has not evenly impacted all banks in all countries; therefore, there is still the demand and need to support many emerging market players. For example, in Latin America the programme has been especially valued by small- to mid-sized issuing/borrowing banks, as it enables them to increase the volume and value of trade transactions with enhanced tenors and competitive pricing terms and to build relationships with a global network of confirming/ lending banks.

In many markets, growing trade volume cannot always be fully accommodated due to restrictive credit and/or country exposure limits which do not increase in tandem with expanding business opportunities; hence, the value of leveraging limits through risk-sharing with IFC, which has been especially helpful for trade with countries like Nigeria, Bangladesh and Russia.

Stabilizing influence

IFC believes that its crisis-readiness is enhanced by having the GTFP in place. History shows that when a country experiences a liquidity crisis, banks quickly manage their exposure down as a defensive measure, one most easily accomplished by pulling or reducing short-term trade lines. Under the GTFP, IFC can guarantee the payment risk of the issuing bank up to the full value of a transaction. This enables the continued flow of trade credit into the market at a time when imports may be critical and the country's exports can generate much needed foreign exchange.

As a recent example, over the past year international banks actively sought risk mitigation for trade with Lebanon. The continued support provided by IFC to the Lebanese banks in the GTFP sent a stabilizing signal to the international bank community.

The trade facilitation programme is leading the way for IFC's engagement in post-crisis countries, serving as an appropriate short-term, lower-risk entry product that can have a significant and early development impact. Banks in Sierra Leone, Liberia, Mozambique, Kosovo and Cambodia have joined the GTFP in 2007, and additional institutions in other post-crisis countries are slated for future inclusion.

Variety of instruments

The majority of transactions executed under the GTFP have involved the issuance of guarantees for import financing; however, pre-export financing has been growing as a component and is expected to increase as the programme develops further. The programme has supported imports and exports of a varied range of goods from basic foodstuffs to high-tech equipment. A variety of underlying instruments can be accommodated: L/Cs, drafts, bills of exchange, promissory notes, etc. Advance payment guarantees and bid & performance bonds issued by banks in the programme can also be guaranteed.

Africa

Although this is a global programme, IFC has placed a significant focus on Sub-Saharan Africa, going where there is the greatest need. In particular, there has been a dynamic flow of trade to Nigeria, where international banks are challenged in providing credit lines commensurate with the dynamic trade profile of the country and therefore need risk mitigation because of country and bank exposure constraints. The programme's activity on the continent has also been gaining momentum, as coverage has broadened to include banks from Angola, Ghana, Kenya, Liberia, Mauritania, Mozambique, Tanzania, Sierra Leone and Uganda.

The experience thus far suggests that GTFP is delivering on its promise to bridge several important gaps in trade,

including: (i) expanding the financing available to local banks in less advanced markets to support their clients, particularly small- and medium-size enterprises; (ii) enabling local banks to do business on an unsecured basis, thus releasing cash collateral requirements that can then be extended as working capital for clients; (iii) supporting nascent trade corridors (one-third of the transactions have been "South-South" trade (between emerging markets)); and (iv) providing capacity building of local banks through trade finance training.

Success stories

Most compelling are the stories behind the data:

- the export of agricultural equipment handled between a Japanese bank and a Mongolian bank working with each other for the first time; and motorcycles from China to Tanzania, representing a first for both banks;

- shipments of medicine and other goods to Lebanon and, as importantly, continuing support for the Lebanese banks in the GTFP which actively handle an extensive flow of goods within and beyond the region between many different countries;

- Many examples of facilitating nascent trade corridors such as light trucks from Thailand to Liberia; rice from Pakistan to Sierra Leone; bottles from Kenya to Uganda; a diverse range of exports from Brazil to developing countries in all regions; and the robust flow of goods to Nigeria from many emerging markets, including pharmaceuticals from India, steel coils from Ukraine, aluminum from Ghana, metal sheets from Turkey, palm oil from Indonesia and generator sets from Egypt.

Implications of Basel II

Under Basel II, risk weighting will be based on country and individual bank risk, which means that confirming banks will likely need to set aside additional

regulatory capital in excess of what they currently apply to cover short-term trade transactions with non-OECD banks. The GTFP and its recent increase to USD 1 billion helps position IFC to respond to market needs as they evolve.

Bonnie Galat is Head of Marketing & Sales, Global Trade Finance Programme, International Finance Corporation (IFC) in Washington, D.C. GTFP's web site with updated coverage and contacts is www. ifc.org/GTFP