Malawi's commercial banks will be better able to access letters of credit (L/Cs) under a new World Bank imports backstopping facility backed by a US$60 million grant from the International Development Association, the multilateral development bank's vehicle for supporting the world's poorest countries.

The contingent financing to import fertilisers and pharmaceuticals will address critical shortages in the market which, if left unaddressed, have the potential to hinder Malawi's economic recovery.

Correspondent difficulties

Specifically, the project provides backstopping support on the payment obligations of local issuing banks to their correspondent banks.

Currently, correspondent banks lack confidence to extend L/Cs to banks in Malawi due to the high-risk profile of local banks.

The new facility will provide correspondent banks with the assurance that the World Bank, standing behind the Malawi's central bank, will assume the payment obligations of the local issuing banks in the unlikely event that local banks default on their payment obligations for essential commodities.

Building on existing programmes

The facility builds on existing World Bank, International Finance Corporation (IFC), and government of Malawi programmes on enhancing access to trade finance, including the IFC's Global Trade Finance Programme (GTFP).

Under the GTFP, the IFC - a member of the World Bank Group - will guarantee L/Cs and other trade finance instruments.

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