The African Development Bank (AfDB) has launched a transaction guarantee instrument designed to provide up to 100 per cent cover for non-payment risk to regional and international banks for trade transactions, including confirmed letters of credit (L/Cs), initiated by local banks in Africa.

The instrument targets end-users including women entrepreneurs, environment-friendly enterprises, small- and medium-sized enterprises (SMEs) and local corporates. Priority will be given to low income and transition states.

Trade finance instruments

The guarantee will cover an array of trade finance instruments, including confirmed L/Cs, trade loans, irrevocable reimbursement undertakings, avalised bills and promissory notes.

Director of AfDB's financial sector development department, Stefan Nalletamby, says the new instrument enables the bank to use its AAA rated risk bearing capacity to increase access to trade finance and boost intra- and extra-African trade on the continent.

International correspondent relationships

The new instrument also aims to provide opportunities for local financial institutions 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 intervention also addresses Africa's persistently huge trade finance gap. This is mostly due to lack of liquidity and risk mitigation facilities across the continent and has been exacerbated by recent market developments, such as increased banking regulations and global shocks including the coronavirus pandemic.

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