African Trade Finance Banks Urge MDBs To Take On Greater Levels Of Risk
To improve the credit support to banks on the continent, the African trade finance banks are asking Multilateral Development Banks (MDBs) to act determinative and requesting them to address the issues of potential insolvency in the private sector. As an initiative, the African Development Bank Group has collaborated with the World Trade Organization and other multilateral development banks to bridge the trade finance gap due to COVID-19 Pandemic.
Recently, several African-focused MDBs with trade development institutions have presented a report urging, it is extremely crucial to switch in focus towards the private sector and MDB programs to boost the smaller businesses. The report is consisting of findings from conversations with 70 trade finance heads.
Since the beginning of the COVID-19 pandemic, multilateral development banks are taking initiatives to improve essential import & exports through their trade finance programs as international correspondent banks have reduced lending in many countries. In the presented report by MDBs and development institutions, financial support worth billions has been announced to boost up the continent’s trade. For example, The African Development Bank (AfDB) has approved a US$10bn COVID-19 response facility in April. Plus, it has also agreed to provide up to US$ 1 bn to ensure trade finance liquidity and reduced risks to local banks in all member countries.
The other organizations that are contributing include the Arab Bank for Economic Development in Africa (BADEA), the West African Development Bank (BOAD), the East African Development Bank (EADB), the International Chamber of Commerce (ICC), the International Trade Center (ITC), the International Islamic Trade Finance Corporation (ITFC), and the Trade and Development Bank (TDB).
However, notwithstanding measures presented by multilateral and different trade financial institutions, various trade finance bankers are willing to get more support from MDBs in the private sectors for the purpose to avoid a “second wave insolvency crisis”. The paper says that none of any small to medium-sized banks that have been interviewed for the paper were familiar with the available MDB support or risk-sharing programs. As per the author, “This could reflect the fact that, while MDB support to the private sector was not absent, support to governments has been more prominent”
In addition to this, some banks believed that the announced current support on offer from MDBs does not have any far effect, and a big share of enterprises is continued to be excluded from being accessed to trade finance because of the COVID-19. The interviewed banks for the report have also explained their limitations on their capacity to extend credit outside of their familiar or big clients because of the macro-prudential constraints. It enables the requirement for MDBs to initiate more noteworthy levels of risk loading.
To plot the purpose behind the bank's interests, the report explains, “50/50% arrangements are considered insufficient as of now to beat the macro-prudential reporting limits for SME loaning or for persuading confirming banks ”.
The report says that this type of risk loading could appear as an assurance or low-rate risk participation agreements (RPAs). It further says, “a diligent and result-oriented risk-reduction nudge from MDBs is explicitly devoted to COVID-19 recovery would be timely ”
In addition to this, “these offered facilities to banks could enable them to securely grow trade credit and simplify the access to confirmation counter-parties while adjusting to reporting needs”. Carl Chirwa, head of international banking at Mauritius-based Bank One said that an extension in the risk participation or assurance plans will be an aid to the banks working on the continent. He further says that there are approximately 40 African countries with banks like Bank One who require DFI risk reducing solutions to become capable in trade finance businesses. Since COVID-19 enabled country risks and sovereign default risks have risen considerably making risk-sharing solutions a requirement.
Chirwa says, “I would love to do more, but I can’t do that myself, and I’m not prepared to go in and take all the risk. But DFIs can help because they mostly have professional accredited status in these countries, which we as banks can really leverage to be able to provide solutions”.
The report presents several recommendations to MDBs to help encourage access to trade finance in the short term. It includes considering MDB funding to arrive at micro, small and medium enterprises (MSMEs) that have typically been locked out of the trade credit markets because of their collateral drawbacks, bank-ability, or ineffectively planned applications.
The report also notes that preceding the COVID-19 pandemic, different MDB initiatives had been introduced including those associated with women empowerment and investment funds to support such types of businesses, until the outbreak caused long-term risk premiums to rise.
Due to this, MDB is required to downsize its contribution towards smaller financial institutions dealing with importing/exporting MSMEs. Other recommendations for supporting the private sector with access to trade finance include boosted due diligence along with various campaigns to bring awareness about available MDB support for SMEs. Af DB and the African Export-Import Bank (Afreximbank) released a report in September stating that smaller businesses in Africa are experiencing extended obstacles with regards to trade finance. A particular study indicated that the rejection rates for trade finance applications for SMEs are increasing in Africa and the bank's contribution to the activities is diminishing. It is claimed that the continent’s trade finance gap which was estimated to be more than US$81bn is also increasing.