The African Development Bank Group (AfDB) has approved a US$175 million trade finance funded risk participation agreement (RPA) facility with the Trade & Development Bank (TDB), the trade and development financial institution operating in eastern and southern Africa.

The facility is expected to boost letter of credit (L/C) flows and reduce Africa's trade finance gap, which the AfDB estimates at around US$81 billion.

Outline agreement

The AfDB's RPA is an arrangement under which it and a partner bank share the default risk on a portfolio of trade finance transactions designed to give regional and international commercial banks partial cover for their trade finance operations in Africa.

The partner bank performs the credit risk analysis on the issuing banks and originates, processes, and monitors the transactions.

Target market

In this agreement, AfDB will provide liquidity of up to 50 per cent (the other 50 per cent to be matched by TDB), to issuing banks on a risk share basis, to support trade activities of local corporates and small- and medium-sized enterprises (SMEs) in member countries of the Common Market for Eastern and Southern Africa (Comesa).

Compared to multinational corporates and large local corporates, SMEs and other domestic firms have greater difficulty in accessing trade finance according to the AfDB.

Together, the two institutions will provide US$350 million to support trade transactions with the aim of catalysing more than US$2.1 billion in value of trade finance transactions across several sectors, including agriculture, manufacturing and energy over the next three years.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.