The letter of credit (L/C)-based scheme operated by the European Bank of Reconstruction and Development (EBRD) that promotes foreign trade to, from and within central and eastern Europe and the Commonwealth of Independent States (CIS) appears to be going from strength to strength.

The amount of business written under the Trade Facilitation Programme (TFP) is increasing on a year-on-year basis, and development banks across the world are realising that this EBRD facility is one worth copying.

Business development

Last year the TFP had its best year so far with a business volume of EUR 500 million while the total number of transactions increased from 939 in 2002 to 1,089 in 2004.

"In 2005 the programme will continue to develop," says TFP's operation leader, Rudolf Putz. He expects more than 1,000 transactions this year with a business volume of between EUR 400-500 million.

Growth areas

"The trend in 2005 is that the average transaction size is becoming smaller," says Putz, who explains that deals are commonly written for amounts of between EUR 300,000-400,000. "We're seeing our largest growth in small countries such as Armenia, Georgia, Moldova and Tajikistan," he adds.

One of the most remarkable aspects of the TFP is that so far, EBRD has never had to pay up as a guarantor, indicating that the actual risks in at least some developing countries are lower than those perceived by the major banks that steer clear of TFP's area of operation.

Making a difference

A facility such as the TFP can make a big difference too. "Until two or three years ago there was no trade finance at all in countries such as Tajikistan, Armenia and Georgia," says Putz, who points out that this lack of finance can spell disaster, particularly in manufacturing economies.

"Machinery may take one year to manufacture and deliver," he explains and in circumstances where the only payment options are cash or advance payment, manufacturers are left without working capital and cannot do business.

Under TFP, however, a manufacturer can accept an order and start work on it, safe in the knowledge that provided specified terms are kept, payment is guaranteed.

Global rollout

The TFP started out with EBRD providing guarantees to international confirming banks, taking the political and commercial payment risk of international trade transactions undertaken by issuing banks in EBRD's area of operation - now it is trying to move its exporting clients into new and wider markets.

"Exporters from the EBRD region can now sell to third countries," says Putz, who explains that linkages are now being developed with banks in Africa and Asia with a view to facilitating trade between countries in EBRD's area of operation and those in developing markets worldwide.

Currently EBRD is the only development bank operating a trade finance initiative like the TFP. But the development bank established after the dissolution of the Soviet bloc is now talking to other development banks - including the Asian Development Bank, the African Development Bank, the International Bank for Reconstruction and Development and the International Finance Corporation - encouraging them to develop similar schemes.

Export benefits

Schemes established by these development banks would dovetail with TFP, thus allowing exporters in its area of operation to do business in other areas where reciprocal arrangements exist.

This could particularly benefit EBRD area manufacturers of equipment that might not be of acceptable quality in Europe or North America but would be considered acceptable quality in by potential purchasers parts of Africa, Asia or South America.

Potential purchasers in those areas, if they were able to access to a scheme similar to TFP, would be able to arrange trade finance thus they would be able to do business with an EBRD area exporter who would be guaranteed payment, provided certain terms are met.

On a mission

Putz is on a mission to convince banks of the merits of the TFP. Recently he says he had the chance to introduce the TFP to around 170 members of the International Chamber of Commerce's Commission on Banking Technique and Practice.

The June meeting in Dublin enabled him to reach representatives of banks who had not yet heard about the TFP, either because Putz and his team did not know them or because they had never thought about financing trade with Eastern Europe due to their lack of trade finance facilities in this region.

Since his presentation in Dublin, Putz says he is dealing with several requests for more information about TFP, including from banks in Thailand, Pakistan and China.

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