The Asian Development Bank (ADB) has formally launched its US$150-million Trade Finance Facilitation Programme (TFFP) in a bid to boost liquidity and improve stability in the trade finance system in the Asia-Pacific region.

The facility makes first use of the bank's partial credit guarantee (PCG) that aims to support and encourage a large number international and regional confirming banks to take commercial and political risk on local banks located in less well known countries or in markets vulnerable to crisis.

Three facilities

The TFFP, in which ADB's overall exposure limit is US$150 million, provides three facilities:

- A revolving PCG facility, under which ADB will guarantee to confirming banks the payment of letters of credit (L/Cs) and other documentary credits issued by accredited local banks in the Asian region, excluding the Central Asian Republics (CARs).

- A second revolving PCG facility, in the form of a risk-sharing arrangement with European Bank for Reconstruction and Development (EBRD), which will guarantee L/Cs issued by accredited local banks in the CARs.

- A revolving loan facility, under which ADB will offer short-term loans to the banks accredited for participation in the PCG facilities, to help fund the hard currency borrowing requirements of their private sector exporter and importer clients.

Participating banks

More than 40 leading international and regional confirming banks have signed up as 'founding partner banks' in the TFFP and by the end of the year, ADB hopes that around 30 local banks in priority emerging markets should be accredited under the scheme as issuing banks, making them eligible for ADB guarantee support and direct loans.

Markets specifically targeted by ADB in this respect include Afghanistan, Bangladesh, Bhutan, Cambodia, Mongolia, Nepal, Philippines, Sri Lanka, and Vietnam.

European model

The TFFP is modelled closely on EBRD's Trade Facilitation Programme (TFP), which has apparently proved very successful (DC World News, 11 may 2004).

According to principle director of ADB's office of co-financing operations, Philip Erquiaga, the latest programme also reflects a "close and growing high-level collaboration between ADB and EBRD."

Risk appetite

In common with the TFP, the TFFP aims to help local banks in difficult markets establish track records with international banks that have hitherto shown only a limited appetite for taking unsecured risk on certain local banks, even when the risk was associated with short-term trade finance.

The consequent lack of correspondent banking lines with international confirming banks has thus restricted the ability of local banks in more difficult markets to provide trade finance to their exporters and importers, thereby inhibiting trade and economic expansion.

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