The Asian Development Bank (ADB) has signed an agreement in Karachi with several international banks and the Pakistan Government to guarantee political risks associated with trade finance for small- and medium-size enterprises (SMEs) in Pakistan.

The ADB facility guarantees obligations up to US$150 million under open letters of credit (L/Cs) with maturity up to three years. It is of a revolving nature and will be available for up to six years. This is the first time ADB has used its recently revamped Political Risk Guarantee to support trade finance.

Lower financing costs

According to the ADB the facility will lower the financing cost of imports needed for export production, and help Pakistan become more export competitive. ADB will guarantee payment to international banks confirming L/Cs issued by Pakistani banks if the issuing bank fails to pay under the L/C as a result of events such as foreign exchange inconvertibility,transfer blockage or other pre-agreed political events.

The facility also aims to help keep Pakistan country limits open for international banks that are confirming import L/Cs, and ensure continued access to finance at competitive terms by Pakistan SMEs during periods of high volatility for risk premiums.

Boosting confidence

Senior financial/capital markets specialist for ADB, Werner Liepach, reckons that without this facility, offshore suppliers that sell much needed imports to Pakistan may, during periods of perceived political uncertainty, encounter difficulties in obtaining confirmation of certain L/Cs issued by Pakistani banks - or will do so at a high cost, thus penalising Pakistan companies versus their international competitors due to political factors beyond their control.

"An innovative aspect of this facility is that we are stripping out country risk from the L/C and transferring it to ADB. Thus, ADB assumes the political risk while the banks carry the commercial risk associated with the L/C," says ADB's export credit specialist, Martin Endelman. "Some of the international banks participating in the facility would not be here if they weren't covered by ADB's guarantee," he adds.

Participating banks

Founding banks participating in the facility are Credit Agricole Indosuez,Deutsche Bank, ING Bank, Societe Generale, Standard Chartered Bank, Sumitomo Bank, HSBC Holdings Group and Wells Fargo. These have entered into a Master Risk Participation Agreement with ADB and its agent, Standard Chartered Bank, which has been appointed following a competitive selection procedure to manage the operational aspects of the facility out of its Dubai Office on behalf of ADB. Other international banks are expected to join the facility within the next months.

Public private partnership

The facility is part of a comprehensive package of support that was approved by ADB last December to help Pakistan's SMEs become more export competitive through improvements in trade finance. Pakistan's SMEs are expected to help increase exports by around US$350 million annually and create over 100,000 jobs.

Marshuk Ali Shah, ADB's resident representative in Islamabad, also attended the 10 September signing ceremony and declared the facility "an important example of implementing ADB's private sector strategy, in partnership with the public sector, to which ADB is giving increased attention. It demonstrates ADB's flexibility in responding to the needs of the market," he added.

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