The African Development Bank (AfDB) has approved the first ever facility under its new transaction guarantee instrument, which was formally launched in July 2021.

The US$7.5 million guarantee facility for the Central Africa Building Society (CABS) of Zimbabwe will provide guarantees of up to 100 per cent to international confirming banks against non-payment risks arising from the confirmation of letters of credit (L/Cs) and other trade finance instruments.

Emphasis on SMEs

Transactions must be originated by CABS on behalf of its clients under this facility that is particularly targeting Zimbabwe's small- and medium-sized enterprises (SMEs) as the ultimate beneficiaries.

The three-year tenor facility will provide guarantees for L/Cs and may also be extended to trade loans, irrevocable reimbursement undertakings and promissory notes.

Africa's trade gap

The AfDB's new transaction guarantee instrument aims to provide much needed opportunities for local financial institutions across Africa to build relationships with international correspondent banks, increase links to a global network of trade finance partners and reduce the need for cash collateral, thereby increasing access to finance for SMEs across the continent.

The facility also aims to help close Africa's huge trade finance gap, which the AfDB says is a result of lack of liquidity and risk mitigation facilities across the continent, exacerbated by recent market developments, including increased banking regulations and the Covid-19 pandemic.

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