Traders in around 10 developing countries in the Asia Pacific region could benefit from improved access to letters of credit (L/Cs) by the end of 2004 under a trade finance facilitation programme (TFFP) launched by the Asian Development Bank (ADB).The TFFP is designed to complement other ADB initiatives in the financial and trade finance sectors as well as various policy reform and capacity-building programmes established elsewhere in the region over the past few years.

Improved terms

The TFFP will enable local banks in several ADB developing member countries (DMCs) to offer importers and exporters better access to reliable and reasonable trade finance terms and boost liquidity and stability in the regional banking system. ADB's overall exposure limit will be US$150 million in the programme within which three facilities will be offered: Three facilities

Under the revolving partial credit guarantee (PCG) facility, the ADB will provide guarantees to international confirming banks to cover the payment of L/Cs issued by approved local banks in the Asian region but not the Central Asian republics (CARs).A second revolving PCG facility, in the form of a risk-sharing arrangement with the European Bank for Reconstruction and Development (EBRD) will guarantee L/Cs issued by approved local banks in the CARs.

A revolving credit guarantee facility, under which ADB will offer short-term loans to banks approved for participation in the PCG facilities, aims to help fund the hard currency borrowing requirements of their private sector exporter and importer clients.

2004 targets

About 30 local banks in 10 DMCs are expected to participate in the TFFP by the end of 2004. For each local bank, a TFFP limit, along with PCG and revolving credit sub-limits, will be established. These limits will be based on ADB's assessment of need and the creditworthiness of the local bank.Limited risk appetite

The ADB says the programme was inspired by the limited appetite of international banks - especially since the Asian financial crisis of the late 1990s and more recent events in Argentina - for taking unsecured short-term trade finance risks on local banks in less well-known markets or countries vulnerable to crisis. The development bank says the lack of trade lines with international confirming banks has restricted the ability of local banks in developing countries to provide trade finance to importers and exporters, thus inhibiting trade and economic expansion in those countries.

Making a difference

The programme could make a difference to banks and traders according to Director General of ADB's Private Sector Operations Department, Robert Bestani. "Through the TFFP, ADB can make an impact across a broad range of countries in the region," he says. "By supporting a large number of issuing banks in developing countries, the benefits will filter down to an even larger number of entrepreneurs and businesses," he adds.

As well as helping re-establish trade finance lines, the TFFP is designed to assist local banks in Asia Pacific region that according to the ADB have been slow to integrate with the global trading system.

Complementary

The TFFP complements existing ADB initiatives in the financial and trade finance sectors in the region, such as the Small and Medium Enterprise Trade Enhancement Finance Project for Pakistan, approved in 2000, and public sector loans made by the development bank to banking sectors around the region.

"The programme is part of a broader strategy to use financial intermediation to promote private sector development, and, through this, economic growth," says TFFP Mission Leader, Pamela Bracey. "The TFFP will also support intra-regional trade, which will, in turn, boost regional cooperation and underpin ADB's efforts to increase commercial integration in Asia," she adds.EBRD similarities

According to ADB's Senior Cofinancing Officer, Martin Endelman, confirming banks that already participate in EBRD's Trade Facilitation Programme, will "quickly appreciate how the TFFP works and how it can help them extend more lines to local banks in our DMCs."The TFFP is apparently similar to the EBRD programme and will, according to ADB, provide comprehensive cover for political and commercial risk to a wide variety of international and regional banks confirming L/Cs issued by participating local issuing banks.

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