The African Development Bank (AfDB) has signed a US$20 million trade finance facility agreement with Nigeria's FSDH Merchant Bank to support small- and medium-sized enterprises (SMEs) in the country's industrial and manufacturing sectors.

The facility aims to compensate for the diminishing number of international correspondent banks prepared to support letters of credit (L/Cs) for Nigerian business.

Facility structure

Under the facility, the AfDB will guarantee up to 100 per cent of non-payment risks from L/Cs and similar trade finance instruments issued by FSDH for the benefit of local import and export businesses.

The facility consists of a US$15 million trade finance line of credit to support SMEs and Nigerian corporates and a US$5 million transaction guarantee to support the confirmation of FSDH's trade finance transactions.

The AfDB estimates that over the next three years, the facility will catalyse more than US$200 million of trade finance transactions across several sectors, including agriculture, manufacturing, and energy.

Correspondent shortages

According to the AfDB's director general, Nigeria country department, Lamin Barrow, the "lack of sufficient correspondent banking lines of credit and inadequate access to foreign exchange have been identified as some of the major reasons banks in Nigeria do not finance trade finance requests from their clients."

He says that was why the AfDB established a dedicated trade finance programme in 2013 to provide critical liquidity and risk mitigation support to financial institutions in Africa for the benefit of SME and local corporate importers and exporters."

Catalysing African trade

Over the last decade, the AfDB has supported more than 120 financial institutions in 30 African countries and catalysed over US$10 billion of trade, according to Barrow.

He says the AfDB extended a US$50 million trade finance line of credit to FSDH in 2016, which supported 60 beneficiaries for over 370 trade transactions valued at US$375 million in terms of volume traded in critical sectors, including energy, agribusiness and health.

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