Guarantees for letter of credit (L/C) confirmations are included in a US$30 million facility for trade and small- and medium-sized enterprise (SME) finance approved by the African Development Bank (AfDB) for Family Bank in Kenya.

The facility is expected to help stem the exodus of global correspondent banks from Africa, boost intra-African trade, promote regional integration and contribute to narrowing the trade and SME finance gap in the East African nation according to the AfDB.

Three-part facility

The facility will provide a trade finance line of credit to support Family Bank's short-term trade finance activities; a targeted line of credit through the AfDB's Africa SME Programme, as well as a transaction guarantee, which will provide a risk-covered strategic platform to enable confirmation of trade transactions originating from the Kenyan bank.

The US$10 million transaction guarantee will allow AfDB to provide up to 100 per cent guarantees to confirming banks for the non-payment risk arising from the confirmation of L/Cs and similar trade finance instruments issued by Family Bank.

Short-term trade finance

AfDB will also provide up to US$10 million to support Family Bank's short-term trade finance activities of SMEs and local corporates, and an up to US$10 million targeted line of credit to support medium-term financing for SMEs in the health, renewable energy, and agriculture sectors.

Family Bank will use the short-term trade facility to complement the line of credit and provide shorter term trade loans along value chains of SMEs and local corporate businesses.

Correspondent fears

As a result of the pandemic and stringent regulatory and capital requirements, "many global banks reduce their correspondent banking relationships in Africa, while some are exiting the market altogether," AfDB's director general for East Africa, Nnenna Nwabufo, said soon after the development bank's board approved the facility.

" There is therefore an urgent need for financing to re-energise Africa's trade, which requires more participation of institutions like the AfDB," she concluded.

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