The African Development Bank (AfDB) has signed a USD 100 million agreement with Germany-based Commerzbank AG. The 2 banks will share the default risk on a portfolio of eligible trade transactions originated by African issuing banks and confirmed by Commerzbank.
According to the press release, this will help address critical market demand for African trade finance by supporting trade in vital economic sectors such as agribusiness and manufacturing. This help expands trade, strengthens regional integration and financial sector development, boosts African banks and small and medium enterprises (African SMEs) and also helps sustainable economic growth and government revenues.
The majority of African banks have small capital bases so sometimes they cannot get adequate trade limits from international confirming banks, blocking them from undertaking sizeable transactions. Although trade-risk distribution has grown worldwide, African trade finance banks have not benefitted significantly from this. AfDB can expand the capacity of African banks to back trade finance by using its “AAA” rating and sharing trade risk.
The unfunded Risk Participation Agreement (RPA) was signed on 29 May in Marrakech, Morocco, before the 48th AfDB Annual Meetings. It covers 3 years and is a 50/50 risk-sharing arrangement so that Commerzbank can match AfDB’s undertaking in every transaction, creating a maximum $200m portfolio. It is expected to facilitate about USD 1.2 billion of trade in equipment, raw materials, intermediate and finished goods over 3 years, including “roll-overs”.
Christof Gabriel Maetze, member of the Commerzbank Executive Management Board, said: “This facility is greatly relevant for boosting our business in Africa; with the funding, we are going to strengthen our business on the continent where we already deal with 51 countries.”
Tim Turner, AfDB Private Sector Operations Director, said: “Trade is a growth enabler and catalyst for development and this partnership with Commerzbank is yet another step by the Bank to increase the availability of trade finance and help remove a major barrier to trade in Africa, especially for small and medium enterprises (African SMEs) in low-income countries.”
The facility aligns with the African Union emphasis on promoting trade, as reaffirmed at the 18th summit in January 2012.
Commerzbank AG is a leading international bank and a leading provider of trade finance in Africa as a leading European bank in terms of issuing letters of credit (LC issuance and reimbursement) in Africa. Its headquarters are in Frankfurt, Germany and it has 6 representative offices in Africa: Cairo, Tripoli, Addis Ababa, Lagos, Luanda, and Johannesburg. It works with a network of over 500 African correspondent banks and its trade portfolio is approximately $6 billion. Commerzbank AG’s long-term ratings are A2/P-1 (Moody’s), A/A-1 (S&P) and A+/F1+ (Fitch).