The International Finance Corporation (IFC) and Standard Chartered Bank have announced they will establish a new US$40 million trade finance facility aimed at helping Nigerian commercial banks expand and improve their trade finance services.

Over a period of three years, IFC will provide a guarantee to Standard Chartered Bank for up to US$20 million of the total facility amount of US$40 million.

According to a statement issued by the IFC, its risk sharing arrangement will effectively double participating Nigerian banks' letter of credit (L/C) confirmation capacity with Standard Chartered Bank.

High transaction costs

Nigerian companies are blighted by high transaction costs according to the IFC. It reckons that this is because international banks have inadequate trade finance confirmation lines and concentrate these on their own subsidiaries.

Consequently, the private sector arm of the World Bank argues that Nigerian companies have to fund a bulk of transactions with upfront cash collateral borrowed at high domestic interest rates.

Company benefits

Companies using the new trade finance facility may enjoy several benefits according to IFC's director for Global Financial Markets, Declan Duff. "The facility will have a major role in increasing the availability and tenor of trade finance lines to Nigerian banks, helping bring them closer to the international mainstream," he says.

"The L/Cs confirmed under the facility will improve financing for local firms, including small and medium-size companies, helping them develop their business operations," he adds.

Bank benefits

Banks will also benefit from the new facility according to IFC's director for Sub-Saharan Africa, Haydée Celaya who says it will improve the ability of local banks to provide trade services.

"Despite the ongoing development of democracy and a commitment to market-oriented economic reforms, Nigeria has not been able to attract a significant level of trade confirmation lines from international commercial banks," she says.

"With this facility, IFC will further contribute to building the reputation of Nigerian banks in international markets and provide continued support to the country," she adds.

Major step

Standard Chartered says it sees the facility as a major step in improving access to trade finance in the Nigerian market.

According to a statement issued on behalf of a senior bank officer, the facility will address the current shortage of L/C confirmation lines for local banks in Nigeria, where Standard Chartered says it plays an important role in trade and as a bankers' bank.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.