The African Development Bank (AfDB) has approved a US$40 million trade finance transaction guarantee facility for Dashen Bank, a leading private bank in Ethiopia.

This initiative aims to bolster Dashen Bank's capacity to support the country's vital import and export sectors, with a particular emphasis on enhancing the use of letters of credit (L/Cs) in international trade.

Facility Overview

Under this agreement, the AfDB will provide guarantees of up to 100 per cent to international confirming banks against non-payment risks associated with L/Cs and similar trade finance instruments issued by Dashen Bank.

This mechanism is designed to mitigate the credit risk for international banks, thereby encouraging them to engage more readily with Ethiopian trade transactions.

Impact on L/Cs and SMEs

Ethiopian banks have historically faced challenges in securing adequate credit lines from international confirming banks, limiting their ability to issue L/Cs. The AfDB's guarantee facility addresses this issue by backing Dashen Bank's L/Cs, thus increasing the confidence of international confirming banks in Ethiopian trade transactions.

With reduced risk, Dashen Bank can issue more L/Cs, facilitating greater volumes of import and export activities.

The facility specifically targets small and medium-sized enterprises (SMEs) and local corporates, enabling them to access trade finance solutions that were previously out of reach.

Strategic impact

This partnership aligns with AfDB's broader efforts to deepen intra-African trade under the African Continental Free Trade Area (AfCFTA).

By empowering Dashen Bank to support a wider range of trade finance activities, the facility contributes to Ethiopia's economic growth and integration into regional markets.

The AfDB's US$40 million guarantee facility is set to play a crucial role in enhancing Ethiopia's trade finance infrastructure, particularly by strengthening the use and reliability of L/Cs, thereby supporting the country's import and export sectors.

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