The Asian Development Bank (ADB) has formally launched its US$150 million Trade Finance Facilitation Programme (TFFP).

The programme aims to boost the liquidity and stability of the trade finance system in the Asia and Pacific region (DC World News, 14 January 2004) and promote trade in developing member countries (DMC).

Regional risks

The TFFP marks ADB's first use of its partial credit guarantee (PCG) to support and encourage a large number of international and regional confirming banks to take commercial and political risk on local banks in less well-known countries or markets vulnerable to crisis.

More than 40 leading international and regional confirming banks were designated as founding partner banks at the TFFP launch, and by the end of 2004 some 30 local banks in priority emerging markets should be accredited under the programme as issuing banks, making them eligible for ADB guarantee support and direct loans.

Facilities

Markets covered under the TFFP include Afghanistan, Bangladesh, Bhutan, Cambodia, Lao, Mongolia, Nepal, Philippines, Sri Lanka, and Vietnam. ADB's overall exposure limit will be US$150 million under the programme, which will offer 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.

European model

The TFFP is modelled closely on EBRD's successful Trade Facilitation Programme (DC World, 11 May 2004) and the arrangements for central Asia within the TFFP reflects the increasing amount of collaboration between ADB and its European counterpart.

The scheme responds to the tightening of trade finance services by international and local banks forced to adopt more stringent lending standards following the late 1990s Asian financial crisis.

Lack of facilities

At that time many trade finance providers were forced to raise their fees or reduce their country or bank limits, including tenors of their trade facilities. As a result, many Asian countries have been slow to integrate into the global trading market and thus unable to participate in its growth.

The lack of correspondent banking lines with international confirming banks, meanwhile, has restricted the ability of local banks in certain developing countries to provide trade finance to their exporting and importing clients, thus inhibiting trade and economic expansion.

Encouraging international banks

The TFFP aims to encourage confirming banks and exporters to expand their business with local banks they are not familiar with.

International, regional and local banks inDMCs are eligible to join the programme as confirming banks. There are no costs to join the programme.

Local banks

TheTFFP is open to local banks located in ADB member countries. Potential participants must already provide trade financing and are subject to extensive due diligence and approvals by ADB.

Participating local banks must meet several eligibility criteria, including a clear shareholder structure and the ability to demonstrate good corporate governance.

More details for banks considering participation in the programme can be found on ADB's web site at www.adb.org/PrivateSector/Finance/trade_fin.asp

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