One of Ethiopia's largest banks, Dashen Bank, is to benefit from an African Development Bank (AfDB) US$40 million transaction guarantee facility to support its trade finance activities in the country.

The AfDB will provide a guarantee of up to 100 per cent to confirming banks for the non-payment risk arising from the confirmation of letters of credit (L/Cs) and similar trade finance instruments issued by the Ethiopian bank.

The facility will provide support, via Dashen Bank, to Ethiopian small- and medium-sized enterprises (SMEs) and local corporates' import and export trade finance requirements.

Aims and benefits

The AfDB's transaction guarantee product is an unfunded instrument that provides up to 100 per cent non-payment risk cover to confirming banks for trade finance transactions of eligible Africa-based issuing banks.

Through its transaction guarantee, AfDB leverages its AAA rating to provide its watertight guarantee for African local banks' trade finance transactions, thereby reducing the need for cash collateral.

AfCFTA ambitions

The facility will also support intra-African trade, thus directly contributing to the successful implementation of the African Continental Free Trade Area (AfCFTA), which seeks to boost trade amongst African countries by reducing tariffs, eliminating barriers to trade, and promoting economic integration across the continent.

The long-term goal of the AfCFTA is to create a unified, borderless market that enhances Africa's economic growth and development.

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