The African Development Bank (AfDB) is continuing its efforts to facilitate letter of credit (L/C) flows in Africa by approving a trade finance transaction guarantee facility for Banque Commerciale du Burundi (Bancobu).

The facility is one of the AfDB's responses to concerns about shrinking L/C availability in Africa since the terrorist attacks of 9/11 led to stricter compliance requirements that prompted some international banks to exit African markets. This process was accelerated by the 2008 financial crisis and, most recently, by the Covid pandemic.

SMEs and corporates

The facility for Bancobu, which is based in Burundi's economic capital, Bujumbura, aims to provide support for the import and export trade finance requirements of the East African country's small- and medium-sized enterprises (SMEs) and corporates.

Under the facility, AfDB will provide up to a 100 per cent guarantee to participating banks for the non-payment risk arising from the confirmation of L/Cs and similar trade finance instruments issued by Bancobu.

The facility is expected to support imports of critical inputs, including fertiliser, pharmaceuticals, solar energy panels, farm machinery and other intermediate goods that Burundi needs to revive its agriculture and manufacturing sectors.

Correspondent banks reluctant

Lack of adequate credit lines from international confirming banks has hampered Bancobu's ability to support its clients according to an AfDB statement.

Acting director for financial sector development at AfDB, Ahmed Attout, says the Covid pandemic has accelerated the process adopted by many global banks to reduce their correspondent banking relationships in Africa, while some are exiting the market altogether.

Bancobu itself was 49 per cent owned by ING Belgium until 2004, when these shares were bought by Burundian shareholders.

Support rollout

The support for Bancobu is the latest in a series of facilities provided by AfDB to support trade finance in Africa.

These include a US$10 million trade finance transaction guarantee facility for Banco Fomento de Angolas (DC World News, 23 December 2022) and a similar US$15 million facility for Bank One of Mauritius (DC World News, 4 January 2023).

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