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AfDB launches transaction guarantee for SMEs, trade transactions in Africa

The African Development Bank (AfDB), through its Financial Sector Development’s Trade Finance operations, has launched a Transaction Guarantee instrument, to provide up to 100% cover for non-payment risk to regional and international banks, for trade transactions initiated by local banks in Africa.

A statement on the AfDB website said the guarantee will cover an array of trade finance instruments, including confirmed letters of credit, trade loans, irrevocable reimbursement undertakings, avalised bills, and promissory notes.

In opening remarks at the virtual launch of the guarantee held 29 July, Bank Director for Financial Sector Development, Stefan Nalletamby, was quoted: “We are excited about this new instrument as it offers us the flexibility to use our strong AAA rated risk bearing capacity to increase access to trade finance and boost intra/extra- African trade on the continent. Our target end-users will be women entrepreneurs, environment-friendly enterprises, Small and Medium Sized Enterprises (SMEs) and local corporates through the facilitation of local participating banks. Priority will be given to low income and transition states.”

The Bank explained that the new instrument will provide opportunities for local financial institutions to build relationships with international correspondent banks, increase links to a global network of trade finance partners and reduce the need for cash collateral, thereby increasing access to finance for SMEs across the continent.

Our target end-users will be women entrepreneurs, environment-friendly enterprises, Small and Medium Sized Enterprises (SMEs) and local corporates through the facilitation of local participating banks. Priority will be given to low income and transition states.

This intervention is therefore strongly aligned with the Bank’s High 5s and its financial sector development strategy, whose main priorities are to broaden and deepen Africa’s financial systems by putting finance at the centre of the continent’s productive capacity.

Trade remains an important driver of Africa’s social and economic development despite the persistently huge trade finance gap. This is mostly due to a lack of liquidity and risk mitigation facilities across the continent and has been exacerbated by recent market developments, such as increased banking regulations and global shocks like the COVID-19 pandemic.

The launch event was organized in partnership with Making Finance Work for Africa (MFW4A). It included a panel discussion featuring seasoned trade finance experts from IFC, Afreximbank, Ecobank, ODDO BHF and Moza Banco.  The African Development Bank Group board of directors approved the new instrument in October 2020.

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