by Mark Ford

In April 2009, world leaders at the G20 summit in London signed off on a package to mobilize a US$250 billion trade finance package to tackle the severe shortage of trade finance caused by the global financial crisis. The package targeted small- and medium-sized enterprises (SMEs) and trade between less-developed countries (LDCs) and countries in the rest of the world that bore the worst brunt of the crisis.

Now, a bevy of multilateral development institutions (MDIs), along with some export credit agencies (ECAs), appear to be bringing substantially more letters of credit to SMEs and LDCs. These comparatively new players in the L/C market also seem poised to support economic rebuilding efforts in the aftermath of revolutions in the Arab world.

Global growth

The G20 package did not involve US$250 billion of new money. It was based on mobilizing that amount of funding over two years. The bulk of the money would come via ECAs and MDIs, both of which have seen their roles change in the last three years.

Whereas ECAs, which are generally state-backed, historically insured export credits extended by banks, the financial crisis triggered a move for them to provide finance directly. Meanwhile, several MDIs sought to specifically boost L/C business by providing full or partial guarantees to confirming banks to cover payment risk on banks in emerging markets. A large proportion of these guarantees have now been applied to L/Cs.

This idea of L/C guarantees predates the last financial crisis. In 1999, the European Bank for Reconstruction and Development (EBRD) launched its Trade Facilitation Programme (TFP) to help nascent market economies grow in Eastern Europe and the Commonwealth of Independent States.

But what is significant for the L/C market today is how similar schemes have burgeoned over the last couple of years and how they are introducing new participants - both banks and businesses - to the L/C market. More than 700 confirming banks throughout the world have now joined the TFP, including 130 banks in 23 of EBRD's countries of operations.

IFC aid

The International Finance Corporation (IFC) introduced its Global Trade Finance Programme (GTFP) to provide guarantees for L/Cs and other trade financing instruments in 2005. As the financial crisis worsened, in March 2008 the IFC said it had issued US$2 billion of cumulative guarantees. Since then, the program has reached new heights. At the beginning of this year, the GTFP passed its milestone US$10 billion mark. In fiscal year ending June 2011 (FY11) it issued a total of US$4.6 billion worth of guarantees, an increase of US$1.2 billion over the previous fiscal year.

The program has now provided more than 3,000 trade finance guarantees on behalf of issuing banks, and the IFC's focus is clearly on SMEs in the developing world. IFC executive vice president and CEO, Lars Thunell, says the "guarantees have allowed banks to increase their support to small- and mid-sized firms and enabled trade that otherwise would not have happened, especially in the poorest countries."

Nearly 80 per cent of the GTFP's FY11 support went to SMEs, while support for trade in the poorest countries was worth US$2.4 billion - 40 per cent more than in the same period in the previous year.

In the same financial year, the volume of guarantees provided by the GTFP to sub-Saharan Africa grew to US$931 million in 25 countries, all but one of which rank amongst the world's 79 poorest countries. Latin America was the dominant region during the fiscal year, representing 31 per cent the program's business. In the Middle East and North Africa, the IFC guaranteed more than 40 per cent more global guarantees and commitments than in the previous year, while guarantees for the West Bank and Gaza increased by 70 per cent. The GTFP has also grown in central and southern Europe and in Asian LDCs, including Bangladesh and Nepal.

While the IFC's achievements are impressive, its GTFP is not universally acclaimed. In a recent survey of trade finance by the African Development Bank (AfDB), some commercial banks said they found the IFC useful, but somewhat expensive and slow to respond.

Amongst the 74 African banks surveyed, several indicated that the lack of IFC support for public sector transactions was a constraint. Smaller and newer banks said they lacked the track record and balance sheet size to work with IFC. Some respondents, many of which the AfDB said are participants in the GTFP, noted that there is client interest in certain countries where the IFC does not operate.

But for others, the program seems to have made a significant difference. One Ghanaian banker says that one of her clients, a power producer, was only able to import the electrical equipment it needed after the IFC guaranteed an L/C for the client.

Other schemes

Other MDIs operating broadly similar L/C guarantee schemes include the AfDB and the Asian Development Bank (ADB). Recognizing the similarities, the AfDB - which introduced its TFP some years after ADB did - is to adopt and share with ADB all legal document templates, operation manuals and information technology. ADB and AfDB expect cooperation to grow in the future, which may augur some consolidation of the various MDIs' L/C guarantee activities.

ADB's programme has also expanded rapidly over the last year or so and provided support for US$2.8 billion worth of trade in 2010, up a substantial 47 per cent from 2009. The AfDB's Trade Finance Initiative (TFI) was only announced in 2009 and aims to provide up to US$1 billion of support to African commercial banks and other financial institutions to reinvigorate their trade finance operations.

Arabian challenges

Now the AfDB has a new focus. In July, it said that it and the World Bank would each provide a US$50 million line of credit in support of Tunisian SMEs to help mitigate the post-revolution funding challenges in the aftermath of the overthrow of former President Zine el-Abidine Ben Ali. The Tunisian Central Bank will finance the SMEs through financial institutions.

The Islamic Development Bank (IDB) will step in to facilitate L/C transactions and provide a range of other trade finance facilities to help Libya under its Transitional National Council (TNC). Libya is the bank's second largest shareholder and could benefit from the Documentary Credit Insurance Policy (DCIP) available from IDB subsidiary, the Islamic Corporation for the Insurance of Export Credit and Investment (ICIEC).

Under the DCIP, the ICIEC guarantees L/C confirmations by foreign banks. Cover is broadly available for many transactions, including for LDCs where banks would not normally confirm L/Cs without the ICIEC's support. Libya owns 9.47 per cent of the IDB; the only larger shareholder is Saudi Arabia with a 23.61 per cent stake.

Concerns have been expressed throughout the crisis by the TNC and Libya's Central Bank that mechanisms should be in place so that L/Cs can enable oil exports as soon as possible. These institutions will no doubt want to co-opt whatever assistance is available to ensure that smooth L/C flows become part of the country's commercial landscape.

Mark Ford's e-mail is