AFRICAN DEVELOPMENT BANK ADB/BD/WP/2012/141/Rev.

1
8 January 2013
Prepared by: OPSM
Original: English

Probable Date of Board Presentation:

5 February 2013 FOR CONSIDERATION

MEMORANDUM

TO : THE BOARD OF DIRECTORS

FROM : Cecilia AKINTOMIDE

Secretary General

SUBJECT : TRADE FINANCE PROGRAM BUSINESS PLAN

REVISED VERSION*

Please find attached, the Revised version related to the above-mentioned document.
The revisions are highlighted.

Attch.

C.C. : The President

*Questions on this document should be referred to:

Mr. G. MBESHERUBUSA Vice-President OIVP Ext. 2034
Mr. T. TURNER Director OPSM Ext. 2051
Mr. S. KAYIZZI-MUGERWA Director EDRE Ext. 2064
Mr. A. RUGAMBA Director ONRI Ext. 2025
Mr. K. KAPOOR Director STRG Ext. 2045
Mr. M. KALIF Division Manager OPSM.4 Ext. 2217
SCCD:C.H.
 AFRICAN DEVELOPMENT BANK

Reference No: NA
Team members: Yaw Kuffour - OPSM (Team Leader)
Thouraya Triki – EDRE
Gabriel Mougani - ONRI
Gerald Ajumbo – ONRI
Cecile Ambert - OPSM

TRADE FINANCE PROGRAM

BUSINESS PLAN

MULTINATIONAL

December 2012

This report is made available only to staff members to whose work it relates. Any
further release must be authorized by the Director, OPSM.
 TABLE OF CONTENTS

List of Abbreviations i
Executive Summary ii

1. AFRICAN TRADE POTENTIAL & CHALLENGES

THE STRATEGIC CONTEXT 1
2. TRADE FINANCE MARKET: WHY THE BANK IS NEEDED 2
The State of Trade Finance in Africa 2
Rationale and Justification for the Bank’s Involvement 4
Development Impact 4
Additionality & Complementarity 6
3. BANK’S EXPERIENCE IN TRADE FINANCE 7
AfDB Group Experience in Trade Finance 7
Lessons Learned 8
4. OTHER MDB’s EXPERIENCE IN TRADE FINANCE 10
Experience and Focus of other Development Partners 10
5. THE PROPOSED TRADE FINANCE PROGRAM AT AfDB 12
Program Objectives 12
Program Design & Products 13
Operational and Guiding Principles 16
Operational Targets 18
Non Operational Targets 19
Resource Implications 19
6. CONCLUSION AND RECOMMENDATIONS 20
Figures
1. African Exports to Selected Partners 1
2. Impact of European Bank Deleveraging on Trade Finance 3
3. Outlook for Trade Finance Demand in 2012 4
4. Share of 10 products in African merchandise exports 5
Tables
1. Pricing of Trade Debt Instruments for Selected African Countries 2
2. TFI Components 8
3. MDB’s Trade Facilitation Programs 12
4. Operational Targets 18
Annexes
1. Logframe Matrix
2. Organogram
3. LOC Product Diagram
4. RPA Product Diagram
5. RPA Procedure Diagram
6. Trade Finance Operational Targets and Proforma Income Statement
 List of Abbreviations

AfDB African Development Bank (“the Bank”)

AsDB Asian Development Bank
CB Confirming Bank
CCFP Critical Commodity Finance Program
CFF Commodity Finance Facility
COCOBOD Ghana Cocoa Marketing Board
EBRD European Bank for Reconstruction and Development
FFMA Financial Management Department
FI Financial Institutions
FTII Funded Trade Investment Instruments
GECL Legal Department
GDP Gross Domestic Product
GTFP Global Trade Finance Program
GTLP Global Trade Liquidity Program
IaDB Inter-American Development Bank
IB Issuing Bank
ICC International Chamber of Commerce
IFC International Finance Corporation
IFI International Financial Institution
IMF International Monetary Fund
LC Letter of Credit
LIC Low Income Country
LOC Line of Credit
MDB Multilateral Development Bank
MRPA Master Risk Participation Agreement
ONRI NePAD, Regional Integration and Trade Department
OPSM Private Sector and Microfinance Department
REC Regional Economic Communities
RMC Regional Member Country
RPA Risk Participation Agreement
SMEs Small and Medium Scale Enterprises
TFFP Trade Finance Facilitations Programs
TFI Trade Finance Initiative
TF LOC Trade Finance Line of Credit
TFP Trade Finance Program
US United States of America
USD US Dollar
WTO World Trade Organization

i
 EXECUTIVE SUMMARY

Strategic Context: African trade experienced more than a threefold increase in value
over the last decade to stand at USD 1.2 trillion in 2010. This
growth was mainly stimulated by robust expansion in global
demand, new opportunities created by globalization and increasing
commodity prices. In 2010, trade (exports and imports) stood at
69% of Africa’s GDP, 11% higher than in 2000. This is good
news for Africa as higher export levels combined with easy
availability of production inputs are conducive for economic
growth and vital for sustainable development. However, while
African trade has grown significantly over the years, this growth
has not been without challenges, leaving Africa with a share that
hardly exceeds 3% of global trade in 2010. Notably, African firms
struggle to secure trade loans; and when financing is available, its
cost remains prohibitive and its tenor is short. Shortage in Trade
Finance for Africa mainly reflects the lack of financial and
technical resources of local financial institutions and a biased
perception of risk by international banks. These factors have
created a structural market gap preventing Africa from fully
capturing the growth-enhancing effects of trade activities.

Trade Finance Market: While there is dearth of consistent and reliable data on Trade
Finance, recent estimates suggest a funding gap in excess of
USD25 billion which translates to higher financing charges. About
a third of African countries encounter rates in excess of 10% on
trade loans offered on a non-sovereign basis, in addition to cash
collateral requirements which could be as high as 50% of the face
value of the loan. It is notable that recent developments in Europe
and the US have slowed the demand for African goods and
consequently reduced the demand for Trade Finance instruments.
Nonetheless, the funding gap remains substantial, and the situation
is not made any better by the multiple structural problems that
have been plaguing African countries, including non-convertible
currencies, inadequate policy and regulatory frameworks and
inefficient institutional arrangements.

Rationale for the Bank’s

Involvement: The Bank’s Long-Term Strategy positions private sector
development as pivotal to sustainable economic progress and as a
major contributor to inclusive and green growth. This, however,
requires open economies and the ability of countries to trade
effectively with one another. Trade Facilitation (including the
supply of affordable credit) is therefore essential to the continent’s
economic development and integration into the global economy.
The positive development impact of Trade Finance for Regional
Member Countries (RMCs) could be assessed from different
perspectives. First, Trade Finance enhances macroeconomic

ii
 resilience by enabling exports which often represent the main
source of income and liquidity for RMCs. Second, Trade Finance
is ‘pro-poor’ when the primary sources or destinations of trade
transactions are the least developed, poorest, underserved or
critical sectors and communities. This includes, for example,
interventions in fragile states or benefiting smallholders, or those
supporting imports of critical goods such as medication, energy or
food. And third, by addressing liquidity constraints on both
financial institutions and real sector enterprises, Trade Finance
contributes positively to private sector development. Indeed, on
one hand, by meeting investment and working capital needs of real
sector enterprises and by preventing supply shortages, Trade
Finance ensures continuity of operations, fosters growth in
turnover and employment creation. Against this backdrop, the
Bank’s intervention has become necessary to complement
contributions from other Multilateral Development Banks (MDBs)
who have not been able to meet Africa’s needs. For instance, in
2011, Afreximbank facility approvals stood at USD 2.37 billion
while requests for its credit facilities amounted to USD 20 billion.
Similarly, the IFC is not able to sufficiently cover Africa, with
approvals not exceeding USD1.4 billion for the entire continent, of
which over 80% are concentrated on few countries. Notably, out
of the 25 IDA eligible countries that have not received any
guarantees from MDBs’ and the IFC’s Trade Finance Facilitations
Programs (TFFP) to date, 17 are located in Africa.
Bank Experience in
Trade Finance: The Bank has long supported Trade Finance. Historically, it has
relied on its special purpose partner, Afreximbank, as the main
channel to serve Africa’s Trade Finance needs. In the wake of the
global financial crisis African Governors requested the Bank to
engage directly in Trade Finance to help offset the sudden collapse
in commercial financing for trade. In early 2009, the Bank
responded to this call by establishing its first Trade Finance
Initiative (TFI). With this initiative, the Bank contributed to
restoring trade flows in Africa and was widely commended for the
timeliness and scale of its interventions. To date, the Board has
approved USD 735 million of facilities under the USD 1 billion
TFI - USD 500 million for the Global Trade Liquidity Program
(GTLP), USD 200 million for Trade Finance lines of credit (TF
LOCs), USD 35 million for the Cocoa Board of Ghana
(COCOBOD). Counting roll-overs, the Trade Finance facilities in
which the Bank has participated have supported a total cumulative
volume of trade of over USD 2.5 billion, of which an estimated
USD 1.5 billion is attributable to the AfDB. This amount has
financed over 190 transactions in 19 RMCs with over 80%
benefiting Low Income Countries (LICs) and SMEs. In 2011
alone, AfDB-financed trade transactions amounted to
approximately USD 850 million, comprising USD 350 million

iii
 under GTLP-financed transactions and USD 500 million under
outstanding TF LOC.

Experience of other
MDBs: In the past decade, most MDBs (EBRD, IFC, AsDB and IaDB)
have developed TFFP to support trade transactions targeting
frontier Trade Finance markets. These programs have exposure
limits ranging from USD1 billion to USD3 billion. They typically
provide risk mitigation solutions (guarantees) to financial
institutions (i.e. both issuing and confirming banks) involved in
Trade Finance to facilitate the rapid endorsement of documentary
credit, particularly letters of credit – a major instrument used to
finance trade transactions involving players domiciled in
developing countries. The recent financial crisis has prompted an
increase in the exposure limits of these programs to provide
additional support to vulnerable companies and financial
institutions in developing countries. Under the TFFPs, MDBs
commonly assume risk in low income countries and/or provide
cover to non-rated or weak-rated banks in middle income
countries.

Additionality and
Complementarity of
AfDB’s Program: The Bank was pivotal in the establishment of Afreximbank in 1993
to promote international trade in Africa. Afreximbank was
modeled along the lines of its sister institution in Latin America,
Foreign Trade Bank of Latin America (BLADEX), which was
established in 1979 to promote foreign trade throughout the
continent. This notwithstanding, IaDB established its own Trade
Facilitation Program in 2005 to complement the services of
BLADEX. Similarly, in the case of AfDB, rolling out an in-house
Trade Finance Program (TFP) will be complementary to the
Bank’s existing partnership with Afreximbank. Indeed, while the
TFP would aim to create additional risk capacity of around USD
1.4 billion, this is equivalent to less than 2% of the annual unmet
demand for Afreximbank’s credit facilities. There is thus ample
space for both programs to co-exist and be scaled up. The Bank’s
comprehensive approach to Trade Finance will also create a more
conducive enabling environment for Afreximbank’s activities.
Moreover, at the 18th African Union Summit of Heads of State and
Government in January 2012, there was a clarion call for the Bank
to play a more central role in trade facilitation in Africa. The
Bank’s previous interventions helped draw 4 main lessons that are
important to defining the Bank’s specific operational approach to
supporting Trade Finance: (i) the sheer magnitude of market
demand cannot be supported by one regional DFI alone and
requires the urgent and collective intervention of international
financial institutions; (ii) the Bank should maintain focus on the

iv
 wholesale approach; (iii) the Bank needs to build internal capacity
and create a dedicated team; and (iv) the Bank should adopt a
rationalized and simplified review and approval process to ensure
it delivers its role effectively.

AfDB’s Proposed
Program: Based on the achievements and limitations of programs offered by
sister institutions and Africa’s specific Trade Finance needs, the
Bank proposes to model the TFP along the contours of the program
of the Asian Development Bank (AsDB). The TFP would consist
of three main products, namely; (i) Risk Participation Agreements
(RPAs), (ii) Trade Finance Line of Credit (TFLOC), and (iii)
Commodity Finance Facility (CFF). The program would initially
focus on deploying Risk Participation Agreements (RPAs) with
major commercial Confirming Banks (CBs) engaged in supporting
documentary trade with African banks. Moreover, participation in
joint initiatives like the GTLP or its successor would be considered
where the potential for development impact is strong and
compelling. Eventually, the TFP could offer more bespoke risk
mitigation support (i.e. direct guarantees) for individual trade
transactions once it develops adequate execution capacity. In
addition to credit support facilities, the TFP will leverage the
Bank’s efforts spearheaded by ONRI to facilitate trade by: (i)
Reducing/removing cross-border obstacles that currently constrain
and increase trade risks, (ii) building the regulatory capacity of
governments, and (iii) undertaking the upstream work of building
capacity of the client institutions to manage risk and enhance
access.

Delivery Targets &

Resource Implications: Within 3 years, the Bank would seek to have in place RPAs with at
least 5 of the most active CBs thus creating on-going additional
risk capacity of around USD 1.4 billion for African Trade Finance.
The TFP would seek comprehensive Pan-African geographical
coverage with emphasis on under-served (higher risk) markets. As
a demand-driven program, the TFP would aim to support African
trade in a broad range of sectors with agriculture and SMEs
expected to be significant beneficiaries. It is notable that a number
of CBs have already expressed interest in scaling up their Trade
Finance operations for Africa if the Bank offers RPA as a product.
As regards trade facilitation measures, the Bank will target the
strengthening and the improvement of trade-related infrastructure
such as supporting the creation of one-stop border points,
integrated border management and the transit corridors. The Bank
will pursue measures aimed at removal of non-tariff barriers and
promote the proper application of sanitary and phytosanitary
measures in line with international conventions and practices.

v
 To achieve the set targets, the program will need a dedicated team
of 4 professionals (1 lead + 3 professionals) and 1 GS. In addition,
the Bank would require the services of a full-time consultant for a
period of 2 years to allow for a ramp up period of 9-12 months
prior to full staffing. At the outset, the program will be housed
within OPSM 4 to be close to other investment officers working on
financial institutions. The 4-year average annual cost of running
the TFP is estimated at approximately UA 1.2 million. However,
since the TFP is expected to generate revenues starting at UA 1.5
million in the first year rising to UA 10 million by the 4th year of
operation, the program should generate a net surplus almost
immediately.

Conclusion: LICs, fragile states and SMEs in Africa are expected to confront a
more constrained financing environment in the coming years
relative to the pre-financial crisis period. Access, cost and
available tenor of Trade Finance - factors that are of paramount
importance to Africa - are impacting on RMCs’ ability to engage
in export and import activities considered vital to their economies.
For Africa to improve its competitiveness, raise productivity,
achieve robust and inclusive growth, it is essential for RMCs to be
integrated in the global economy and have strong and well
diversified export base. But for this to happen, Trade Finance
must be accessible and affordable to those who need it.

vi
1. AFRICAN TRADE POTENTIAL & CHALLENGES - THE STRATEGIC
CONTEXT

1.1 African trade experienced more than a threefold increase in value over the last decade to
stand at USD 1.2 trillion in 2010. This growth was mainly stimulated by robust expansion in
global demand, new opportunities created by globalization as well as increasing commodity
prices. In 2010, trade (exports and imports) stood at 69% of Africa’s GDP, 11% higher than in
2000. This is good news for Africa as higher export levels combined with easy availability of
production inputs are conducive for economic growth, and vital for sustainable development.
African trade flows not only grew in value over the last decade but also diversified thanks to the
emergence of new partners and advances in regional integration. Figure 1 shows that intra-
African exports and exports to BRIC countries accounted, respectively, for 13% and 21% of
African exports in 2009 compared to 8% each in 2000.

Figure 1: African Exports to Selected Partners

45
Intra-African Exports
40

35
(As a % of total exports)

African Exports to
30 BRICs

25 African Exports to
China
20

15 African Exports to
Europe
10
African Exports to
5
USA
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Authors’ calculation using data from IMF, DOTs

1.2 However, while African trade has grown significantly over the years, this growth has not
been without huge challenges, leaving Africa with a share that hardly exceeds 3% of global trade
in 2010. Notably, African traders struggle to secure trade loans; and when financing is available,
its cost remains prohibitive. Shortage in Trade Finance for Africa mainly reflects the lack of
financial and technical resources of local financial institutions and a biased perception of risk by
international banks. These factors have created a structural market gap preventing Africa from
fully capturing the growth-enhancing effects of trade activities, particularly in terms of intra-
regional trade. The situation has been compounded by the global financial crisis. And while the
peak of the crisis has passed, the market has yet to correct itself. The ongoing sovereign debt
crisis, concerns about global recovery, the stringent Basel III capital requirements and the
EUR115 billion required recapitalization of European banks are creating additional pressures and
widening the structural gap. Given these worrying trends, the Bank has a leadership role to play

1
in delivering support to trade activities of RMCs by supplying much needed assistance through a
comprehensive TFP.

1.3 The remainder of the document is structured as follows. Section 2 presents an overview of the
Trade Finance market in Africa and provides justification for the Bank’s involvement, highlighting the
additionality and potential development impact. The third section evaluates AfDB’s experience in
Trade Finance including the lessons learned. The fourth section describes the trade facilitation
programs of other MDBs. The fifth section describes AfDB’s proposed Trade Finance Program with
emphasis on: the program’s objectives; design and products; guiding principles, operational and non-
operational targets and resource implications. Management’s conclusions and recommendations are
presented in the sixth section.

2. THE TRADE FINANCE MARKET: WHY THE BANK IS NEEDED

The State of Trade Finance in Africa

Supply of Trade Finance

2.1 While a significant proportion of trade transactions require some form of credit support
or guarantee in Africa, the supply of trade loans has not kept pace with demand resulting in a
funding gap estimated at about USD 25 billion.1 Trade Finance for Africa is not only scarce but
is also expensive and short tenured. According to a recent report published by the World Trade
Organization (WTO), interest rates charged on import loans offered to non-sovereign risks
exceed 10% for at least a third of African countries while cash collateral requirements could be
as high as 50% of the loan face value.2 More recent prices of trade debt instruments reported in
Table 1 for selected African countries illustrate also the prohibitive cost of Trade Finance for
RMCs. Similarly, a survey conducted by the Bank covering 74 commercial banks and Trade
Finance institutions in 2009 shows that finance is scarce for maturities exceeding 180 days.
Table 1: Pricing of Trade Debt Instruments for Selected African Countries
Country / issue Price range
Angola 48% 52%
Cameroon (non-HIPC) 14% 20 %
Congo (non-HIPC) 22% 26 %
DR Congo / Loans, Trade (non-HIPC) 16% 20 %
Kenya 39% 49%
Mozambique (non-HIPC) 20% 26%
Senegal / Loans, Trade (non-HIPC) 12% 16%
Tanzania / Loans, Trade (non-HIPC) 10% 13%
Uganda (non-HIPC) 14% 16%
Zambia (non-HIPC) 13% 20%
Libya 45% 55%
Source: Trade and Forfeiting review (2011) based on data provided by Omni Bridgeway. Trade debts and their documentation differ from case
to case and price ranges should therefore be considered as benchmarks only.

1
This is an estimate based on data from market intelligence surveys and professional organizations. So far, comprehensive
statistics about the state of the global and African Trade Finance markets remain unavailable.
2
World Trade organization (WTO), 2010, WTO experts group on Trade Finance, February 2010 report: Assessing and
monitoring Trade Finance programs.
2
2.2 The limited supply of Trade Finance for African traders is often attributed to the low
level of financial sector development on the continent as well as the reluctance of international
banks to deal with African counterparties, often perceived as highly risky. The high risk
perception is frequently exacerbated by the lack of rating of African financial institutions and
enterprises. And when African institutions are rated, their ratings seldom reach investment grade
level. Yet, prices charged by international banks do not necessarily reflect the real default risk of
African clients. Indeed, recent surveys show that default rates on Trade Finance transactions are
not higher in Africa. Additionally, the small size of several African economies often leads to
negligible trade volumes that generate insufficient returns to cover the cost of setting up country
limits, reducing further the appetite of international banks to cater to African clients.

2.3 The financial crisis-induced market dislocation, recent sovereign debt crisis and the new
Basel capital framework are making capital scarcer and providers of Trade Finance more
selective and less willing to meet the demand for Trade Finance from developing countries. This
is likely to reduce further the amount of Trade Finance available for Africa. For instance, only
six European banks accounted for over 50% of trade funding to the Middle East and Africa over
the first 3 quarters of 2011.3 These major international banks and their peers are responding to
this new environment by retreating to their home markets, shedding assets, and trimming their
credit lines for trade and SMEs. A joint survey launched in end-2011 by the International
Chamber of Commerce (ICC) and the International Monetary Fund (IMF), using inputs from 337
financial institutions, reveals that deleveraging of European banks is likely to put additional
pressure on the availability of Trade Finance for Sub-Saharan Africa (Figure 2). It is notable,
however, that the main transmission channel will be through banks whose primary business is
located outside the region. Obviously, small African banks and their clients will not be directly
affected by these developments as they are already excluded from these markets given their size
and limited track record.

2.4. The situation is not made any easier by other structural characteristics that have been
plaguing African countries, including non-convertible currencies, inadequate policy and
regulatory frameworks and inefficient institutional arrangements across the continent.

Figure 2: The impact of the European Bank deleveraging on trade finance industry in Sub-
Saharan Africa (% corresponds to the share of respondent FIs identifying the expected effect on
Sub-Saharan Africa)

Increase in demand for TF instruments 28%

Increase in demand for risk-mitigating products 52%
Became more cautious with certain sectors 55%
Increase in concerns about counterparties 63%
Increase in the cost of funds 69%
Became more selective with customers 75%
Decrease in available credit/liquidity 76%
Became more cautious with certain countries 79%

Source: ICC-IMF survey, January 2012.

3
International Finance Corporation, IFC Crisis response through Critical Commodity Finance Program and Global
Trade Liquidity Program.
3
Demand for Trade Finance

2.5 Expected shortage of Trade Finance supply for African players caused by the recent
developments in the Eurozone and the US is likely to be accompanied by falling demand for
Trade Finance instruments reflecting slower demand for African goods. With the notable
exception of Asia, the ICC-IMF survey shows a negative outlook for Trade Finance demand in
2012, including in Sub-Saharan Africa where 51% of respondents predicted deterioration or a
stabilization of demand for Trade Finance instruments in the region in 2012 (Figure 3). North
Africa and the CFA franc zone are most vulnerable as the European Union absorbs 58% and
36% of their exports, respectively.4 Some African commodity exporters are also dependent on
the US market and may suffer from a fall in US demand. The adverse economic effects of the
Arab spring are also likely to translate into lower demand for imported goods from North
African countries. Yet, despite the expected slowdown in demand for Trade Finance, the
funding gap remains enormous.

Figure 3: Outlook for Trade Finance Demand in 2012 (share of respondents)

Improvement Stabilisation Deterioration Not sure

Latin America and Caribbean (344) 32 38 8 22

Middle East and North Africa (365) 32 37 21 10
Developing Asia (362) 46 36 10 8
ASEAN5, China and India (374) 59 30 6 5
CIS (352) 19 47 17 17
Central & Eastern Europe (369) 18 43 28 11
Sub-Saharan Africa (345) 28 30 21 21
Advanced Markets: Others (368) 19 53 22 6
Advanced Markets: Euro Area (375) 16 31 48 5

Source: ICC-IMF survey, January 2012. Numbers in brackets correspond to number of respondents.

Rationale and Justification for the Bank’s Involvement

Development Impact of Trade Finance

2.6 The Bank’s Long-Term Strategy positions Private Sector Development as pivotal to
sustainable economic progress and as a major contributor to inclusive and green growth. Private
sector development requires among others, open economies and the ability of countries to trade
effectively with one another. Trade Facilitation (including the supply of affordable credit) is
therefore critical to sustained and inclusive growth in Africa. It facilitates the development of
trade links which would not otherwise exist between Africa and the rest of the World as well as
among RMCs. The GTLP alone, a Trade Finance program launched in 2009 by DFIs as a crisis
response tool and run by the IFC, financed over USD 3 billion (i.e., counting private commercial
participation) in African trade since its inception.5 The positive development impact of Trade
Finance for RMCs could therefore be assessed from different perspectives.
4
Vinaye Ancharaz, 2011, the impact of the US credit rating downgrade and European debt crisis on Africa, African
Development Bank brief.
5
Estimates as of December 2011.
4
2.7 First, Trade Finance enhances macroeconomic resilience by enabling exports which often
represent the main source of income and liquidity for RMCs. During the period 2000-2009, oil
and agricultural commodities comprised, on average, more than 50% of Africa’s exports making
the development prospects of RMCs highly dependent on the availability of commodity finance.
While one could argue that the gains from natural resource exports can sometimes be limited and
potentially distortive, available data show that Trade Finance does not only support exports of
natural resources but also benefits sectors with strong contribution to job creation and economic
development. Trade Finance also enables import of critical inputs, knowhow and equipment
which are key for economic growth. Moreover, trade loans allowing exchange of goods and
services between RMCs lead to enhanced regional integration. Regional integration efforts are
most successful when intra-regional trade represents a large share of total trade prior to the
regional integration initiative. According to research undertaken in the 1990s, those regional
integration initiatives in which trade has grown rapidly (i.e. APEC, NAFTA), trade expansion
preceded the regional integration and not vice versa.

Figure 4: Share of 10 Products in African Merchandise Exports (%) (Average 2000-2009)

Source: Authors’ calculation using data from UNCTAD

2.8 Second, Trade Finance is ‘pro-poor’ and ‘inclusive’ when the primary sources or
destinations of trade transactions are the poorest, underserved or critical sectors and
communities. This includes, for example, interventions in fragile states or benefiting
smallholders, or those supporting imports of critical goods such as medication, energy or food.
Sub-Saharan Africa imports annually over USD 30 billion in food while Cocoa, which remains
the main agricultural export crop in West Africa, constitutes the main source of income for about
20 million rural farmers in the region. Similarly, a large number of RMCs rely on imported fuel
to address their energy needs which are later used for basic daily activities such as transportation,
cooking, heating and water pumping. These trade operations require some form of Trade
Finance, which if not available, would have striking negative effects on local population’s
livelihood.

2.9 Third, by addressing liquidity constraints on both financial institutions and real sector
enterprises, Trade Finance contributes positively to private sector development. Indeed, on one
hand, by meeting investment and working capital needs of real sector enterprises and by
preventing supply shortages, Trade Finance ensures continuity of operations, fosters growth in
5
turnover, and enhances employment creation. In Africa, the need for Trade Finance is
particularly acute for SMEs which are often financially constrained. On the other hand, risk
sharing facilities and funded interventions benefiting African financial institutions help the latter
expand their Trade Finance activities which contribute to financial sector deepening and
broadening, reducing further African trade dependence on international financial institutions.
Ultimately, greater participation of local financial institutions should help soften the financing
constraint facing African traders.
2.10 Finally, trade flows supported by Trade Finance instruments have positive fiscal effects
through provision of tax revenues to African governments. For example, the line of credit
extended through the TFI to UBA helped generate USD 5 million per month in incremental VAT
revenues for the Government of Nigeria.
AfDB’s Additionality & Complementarity
2.11 By offering Trade Finance solutions, the Bank will help address the estimated USD 25
billion funding gap that has been undermining Africa’s trade potential and growth prospects.
The need is particularly acute given reducing liquidity on the Trade Finance market and retreat
of private financiers. In 2011, Afreximbank facility approvals stood at USD 2.37 billion while
requests for its credit facilities amounted to USD 20 billion.6 By engaging more actively in
Trade Finance, the Bank would complement Afreximbank’s efforts while using its comparative
advantages. For instance, the Bank’s AAA rating allows it to raise resources at lower rates while
its Preferred Creditor Status gives its RPAs not only the capacity to offer capital relief for
international confirming banks to scale up their operations in Africa, but also protection against
political risk. This would help channel resources to RMCs that Afreximbank is unable to cater to
due to excessive political risk. The value added of the TFP is discussed in Box 1.
Box 1: Launching the TFP versus scaling up Afreximbank’s operations?
Historically, the Bank has relied on its special purpose partner, Afreximbank, as the main channel to serve Africa’s Trade
Finance needs. Given the importance of trade and in view of the large and growing structural gap in the trade finance market,
management considered two main options for further intervention: (i) scaling up the Bank’s support to Afreximbank or (ii)
initiating an in-house Trade Facilitation program in line with other regional DFIs. After a careful evaluation of the options,
management concluded that these options are not mutually exclusive but complementary for the following reasons. First, the
Bank’s involvement in Trade Finance so far has shown that the magnitude of the market gap dwarfs the capacities of actors such
as Afreximbank, which in its latest strategic plan (involving capital increase) seeks to support up to 5% of the market by 2016.
Serving Africa’s trade finance needs would require the collective intervention of IFIs. Although the TFP aims to create
additional risk capacity of around USD1.4 billion, this is equivalent to less than 2% of the annual unmet demand for Afrexim’s
credit facilities.
Second, the credit enhancement effect of guarantee instruments often used to facilitate Trade Finance (i.e. support documentary
credits) highly depends on the international reputation and rating of the issuing institution. With its AAA rating the Bank’s
guarantees would offer significant capital relief to international banks involved in trade finance activities on the continent. For
Afreximbank to be able to offer credit enhancement similar to the AfDB its capital structure would need to change significantly to
trigger a credit rating upgrade. This would entail significant additional support in terms of fresh capital from high quality
shareholders. Given the weak credit quality of the majority of Afreximbank’s shareholders - with an estimated average rating of
B+ at June 2011- attaining the required rating upgrade is not quite feasible in the medium term.
Moreover, not only is there ample space for both programs to co-exist and be scaled up but also the Bank is able to deliver a
more comprehensive package working with governments and commercial financial institutions to simultaneously (a) enhance the
quality of the regulatory and institutional environment affecting trade and (b) provide technical assistance to address soft
barriers to trade such as inefficient customs procedures. The recent establishment of a trade finance team within ONRI focusing
on enabling environment issues is intended to mirror OPSM’s transaction-oriented Trade Finance team. The Bank will also
leverage its local presence in delivering this comprehensive service to the benefit of all institutions involved in Trade Finance in
Africa, including Afreximbank.

6
Afreximbank 2011 annual report available at http://afreximbank.com/afrexim/en/Publication/AnnualReports.aspx.
6
2.12 The Bank’s intervention is also needed to complement contributions provided by other
MDBs. For example, while the London G-20 summit’s proposal in April 2009 to mobilize USD
250 billion for global Trade Finance was a laudable initiative, its effect has not been felt by small
exporters in several developing regions, including in Africa.7 Similarly, the amount of trade
guaranteed by TFFPs offered by MDBs, particularly the IFC remains the lowest in Africa and
does not exceed USD 1.4 billion, out of which USD 900 million is concentrated on Nigeria.
Moreover, out of the 25 IDA eligible countries that have not received any guarantees from
MDBs and the IFC TFFP to date, 17 are located in Africa. Hence, the Bank’s extensive
experience in Africa, its existing human and financial resources and network of well-established
commercial banks could be leveraged to quickly launch a TFP at a time when a timely and
sustained response is needed.

3. BANK’S EXPERIENCE IN TRADE FINANCE

AfDB’s Experience in Trade Finance

3.1 Historically, the Bank has relied on its special purpose partner, the Afreximbank, as the
principal channel for serving Africa’s Trade Finance needs. However, in the wake of the global
financial crisis African Governors requested the Bank to actively engage in Trade Finance to
help offset the sudden collapse in commercial financing for trade. In early 2009, the Bank
responded to this call by establishing its first Trade Finance Initiative (TFI). Overall, the Bank
was able to play a vital role in supporting efforts aimed at restoring trade flows in Africa and was
widely commended for the timeliness and scale of its interventions.
3.2 The TFI was initially designed with two main components as summarized in Table 2.
The first component comprised a program to offer up to USD 500 million in the form of lines of
credit to African financial institutions specifically targeting trade operations. These TF LOCs
are a variation of the Bank’s standard long-term lines of credit, traditionally used to offer African
financial institutions long-term resources to fund investments in RMCs. Total TF LOCs
approved by the Bank as of 31 December 2011 stood at USD 250 million representing 50% of
the USD 500 million envelop initially earmarked for this component. These TF LOCs were
disbursed as follows: USD 100 million to United Bank of Africa (UBA) targeting eight countries
in the West, Central and East African sub-regions (including three fragile states) and USD 150
million to Afreximbank to extend liquidity and credit support for trade transactions in RMCs.

3.3 The second component of the TFI was a commitment of up to USD 500 million to the
GTLP, out of which USD 200 million was approved by the end of 2011. To date, the Bank has
disbursed USD 150 million as follows: USD 100 million to Standard Bank of South Africa and
USD 50 million to Afreximbank. In addition, a USD 50 million facility has been signed with
Citibank and is expected to disburse shortly. As market demand shifted from liquidity support to
guarantees, the Bank provided the option to convert the unutilized portion of the GTLP (USD
300 million) into an unfunded risk sharing scheme (guarantees) to respond to clients’ evolving
needs as well as crowd in international commercial banks. Under the guarantee scheme, the

7
World Trade organization (WTO), 2010, WTO experts group on Trade Finance, February 2010 report: Assessing
and monitoring Trade Finance programs.
7
Bank would share the risk, on a portfolio basis, of qualifying trade-related transactions originated
by African financial institutions.

Table 2: TFI components as of December 2011 (USD million)

Component Envelope Approved Disbursed % of % of Envelope

Approvals
TF LOC/COCOBOD 500 285 285 100% 57%
GTLP 500 200 150 75% 30%
Total 1000 485 435 89% 43%
Source: AfDB

3.4 In addition to the TF LOCs and participation in the GTLP, the Bank also supported
Ghana’s COCOBOD to secure financing for the purchase and export marketing of the country’s
2009 cocoa harvest. In September 2009, the Bank and a syndicate of commercial financiers
successfully mobilized a USD 1.2 billion pre-export facility for COCOBOD. The Bank’s USD
35 million participation in this globally syndicated Trade Finance operation provided confidence
to commercial lenders during the crisis even though the final pricing was tenfold higher than the
pre-crisis level. Notably, in 2010, the Bank sold down USD 12.5 million, representing 50% of
the remaining COCOBOD exposure, to Nedbank of South Africa, pricing it at par. This was the
Bank’s first sell-down operation and has provided a useful pilot transaction that will pave the
way for future sell down operations. This facility provided much needed liquidity into the
commodity finance market, thereby protecting and catalyzing trade in a key export commodity of
an RMC.

3.5 Overall (i.e. counting roll-overs), the Trade Finance facilities in which the Bank has
participated have supported a total cumulative volume of trade of over USD 2.5 billion of which
an estimated USD 1.5 billion is attributable to the AfDB. This amount has financed over 190
transactions in 19 RMCs with over 80% benefiting LICs and SMEs. In 2011 alone, AfDB-
financed trade transactions amounted to approximately USD 850 million, comprising USD 350
million under GTLP-financed transactions and USD 500 million under outstanding TF LOCs.

Lessons Learned
3.6 While the Bank is a new entrant to the Trade Finance market compared to other MDBs,
the pressing nature of the global financial crisis forced it to move quickly up the “learning
curve”. The learning process has been greatly facilitated by the sharing of experience with
partner institutions including sister IFIs, which have been active in the Trade Finance industry
for many years. Based on the Bank’s own experience, interactions with existing and potential
clients and the observations of experts in African Trade Finance, as well as consultations with
specialized trade institutions, the following lessons have emerged and are key to the Bank’s
continuing relevance in the Trade Finance arena, and its ability to respond effectively and in a
timely manner to the evolving needs of clients.

3.7 The Bank has an on-going role to play in Trade Finance: Although the crisis that
dislocated the Trade Finance market appears to have eased somewhat, the structural gap that
exists between demand for Trade Finance and market supply, created by the persisting market
failure, is still considerable. Many of the international banks that once played a pivotal role in
Trade Finance are facing serious challenges in their domestic markets and some are even exiting

8
the market. As a result, there is a continuing need for institutions such as the Bank and other
IFIs to remain engaged in the Trade Finance market.

3.8 The Bank must build internal capacity for Trade Finance: The Trade Finance market,
like other markets, keeps evolving in part as a reaction to emerging global and regional
conditions, and partly as a response to clients’ shifting needs. Since the implementation of the
Bank’s Trade Finance operations the binding constraint in this market has oscillated between a
liquidity constraint and a risk-appetite constraint, and often at a more rapid pace than anticipated.
For financial institutions to remain relevant in constantly evolving markets, they must be able to
nimbly adapt their products and services to changing market conditions. Institutions such as the
Bank that operate in the Trade Finance market without a dedicated team have found themselves
continuously “chasing the market”. Therefore, the Bank needs to invest in building a critical
mass of internal capacity across the institution commensurate with its standing as a pre-eminent
African financial institution.

3.9 The Bank should continue to rely largely on the wholesale approach: The Bank’s
own experience with the GTLP and the experience of other IFIs demonstrate the effectiveness of
a wholesale business model for Trade Finance to reach SMEs. The wholesale model focuses on
programs and products that leverage the institutional capacity and market presence of other
financial intermediaries active in the retail end of the Trade Finance industry. The Bank should
also develop other trade instruments and programs that build on the experience of sister
institutions such as the Asian and Inter-American Development Banks. Instruments using
guarantees on portfolios of trade transactions can be an effective way to leverage the capacity of
commercial institutions without creating undue moral hazard. This way, the Bank would
minimize the resource commitment to ramp up its Program.

3.10 Trade Finance requires agile teams, flexible processes and standardized
documentation: Trade Finance transactions are by nature very time-sensitive and require rapid
response. The existing credit review and approval process of the Bank was designed for
transactions with long lead times, and are thus not suitable to Trade Finance transactions which
tend to have short lead times and require speedy response. In order to meet market timing
constraints, the review process has to be streamlined and transaction level approval needs to be
delegated. All other MDBs have a flexible and rationalized approval process which allows for
quick turnaround.

3.11 The Bank should help to build knowledge of Africa’s Trade Finance markets: The
Bank’s experience in gathering data to inform the TFI and this business plan has shown how
difficult it is to obtain timely, consistent and reliable data on Trade Finance. As a result, the
Bank had to rely on qualitative and anecdotal evidence. The absence of data on Trade Finance
transactions constrains a proper assessment of market needs and the ability of a range of actors to
participating in the Trade Finance market. The lack of solid Trade Finance data is not unique to
Africa; rather it is a global concern. The WTO, the Bankers’ Association for Finance and Trade
and ICC have started to collect data and are working with sister institutions such as the AsDB in
specific regions. The Bank, led by ECON, should consider playing a similar role with these
institutions to build knowledge on African Trade Finance.

9
4. OTHER MDBs’ EXPERIENCE IN TRADE FINANCE

Experience and Focus of other Development Partners

4.1 Over the past decade, most MDBs have developed TFFPs aimed at supporting trade
transactions at the periphery of Trade Finance markets. The programs typically provide risk
mitigation solutions (guarantees) to financial institutions (i.e. both issuing and confirming banks)
involved in Trade Finance to facilitate the rapid endorsement of documentary credit, particularly
letters of credit – a major instrument used to finance trade transactions involving players from
developing countries. Following the recent financial crisis, the exposure limits of these programs
have been increased to provide additional support to vulnerable companies and banks in
developing countries. Under the TFFPs, MDBs commonly assume risk in low income countries
and/or provide cover to non-rated or weak-rated banks in middle income countries. Examples of
these programs are discussed below.

4.2 European Bank for Reconstruction and Development – Trade Facilitation Program:
The EBRD Trade Facilitation Program was launched in 1999 and seeks to promote trade within
Central, Eastern Europe and the Commonwealth of Independent States and between these
regions and the rest of the world. The program provides guarantees to confirming banks covering
part of the political and commercial risk of transactions undertaken by participating issuing
banks in countries where the EBRD operates.

4.3 The program is open to issuing banks registered in EBRD member countries including
banks with majority foreign ownership and subsidiaries of foreign banks. The EBRD admits
banks into the program based on the financial standing of the issuing bank, the quality of its
governance structure and their level of activity in Trade Finance. All international banks are
eligible to join the program as confirming banks and selected banks from the region with
extensive experience in Trade Finance may also act as confirming banks.

4.4 In addition to offering credit guarantees of up to 100% in some cases, the EBRD also
provides issuing banks with the necessary liquidity for pre-export finance, post-import finance
and financing for the local distribution of imported goods.

4.5 Since its inception, the program has supported more than 9,500 transactions for a total
value in excess of EUR 5 billion. The EBRD currently works with about 120 issuing banks in 20
member countries. It also has relationships with at least 500 confirming banks. The program is
operated by a team of 12 people with the occasional support of consultants. To accommodate
growing demand, the EBRD increased the exposure ceiling of its Trade Finance Program from
EUR 800 million to EUR 1.5 billion in 2009.

4.6 Inter-American Development Bank (IaDB) – Trade Finance Facilitation Program:

Commenced in 2005, the TFFP offered by the IaDB extends credit guarantees in the form of
Stand-by Letters of Credit in favor of confirming banks to cover risk on eligible Trade Finance
instruments originated by Latin American issuing banks. The TFFP provides cover of up to
100% on a selective basis and is arguably the most successful program of IaDB’s financial
institution programs. The program also offers liquidity funding in the form of direct loans to
qualifying issuing banks and has a technical assistance component which offers trade capacity
building programs for issuing banks and their SME clients. The facilities extended by the TFFP
10
have maturities up to 3 years with the flexibility to push tenors out on a case by case basis.
Moreover, IaDB has been working with the AsDB to increase information exchange between
Asian and Latin American banks in order to support growing trade links between Latin America
and China.

4.7 The IaDB’s program presently covers over 70 issuing banks and is expected to reach 100
by 2013. The cumulative exposure limit is USD 1 billion with outstanding facilities averaging
around USD300 million.

4.8 International Finance Corporation – Global Trade Finance Program (GTFP): The
GTFP provides confirming banks partial or full credit guarantees covering payment risk on
banks in emerging markets for trade related transactions. Operating since 2005, the GTFP has
evolved into a global network comprising over 160 issuing banks in 80 countries across
emerging markets. In November 2008, the IFC doubled its GTFP exposure ceiling to USD3
billion and in June this year has increased that yet again to USD 5 billion.8

4.9 The demand for the GTFP is strong in all regions including Africa. Although several
ADF countries have benefited from at least one guarantee from the GTFP, a considerable
number of Sub-Saharan countries have not had their needs fully met under the program as a
result of resource constraints. A major drawback of the GTFP is that eligibility is restricted to
private sector FIs as well as private sector related trade transactions.

4.10 The GTFP is operated by a team of 48 officers handling the front, middle and back-office
activities of the program.

4.11 To complement the GTLP, the IFC is rolling out a new program called the Critical
Commodity Finance Program (CCFP). The CCFP seeks to target the agriculture and energy
sectors and will leverage on the GTLP’s operational platform and program structure.
Beneficiaries will include input providers, producers, aggregators, traders as well as emerging
market banks. The main difference with the GTLP is that the CCFP provides direct support to
real sector companies as opposed to emerging market banks exclusively. IFC proposes to
initially commit USD 1 billion under phase one of the CCFP which was expected to come on
stream by mid-2012.

4.12 Asian Development Bank – Trade Finance Program: The TFP offered by the AsDB has
been in existence since 2004. It provides loans and guarantees to over 200 partner banks to
facilitate credit extension to companies engaged in international and cross border trade,
particularly in Asia’s most challenging markets.9 The TFP works exclusively through banks
mainly for two reasons. First, AsDB considers banks as essential intermediaries in trade and

8
More recently, it entered into an insurance arrangement with the commercial market to purchase cover of up to
USD 600 million on trade related transactions to free up headroom to enable it meet growing demand for Trade
Finance in emerging markets while remaining compliant with its internal prudential limits.
9
The TFP offers (i) Credit Guarantees (CGs) offering up to 100% risk protection against nonpayment by approved
participating banks, in support of trade transactions, (ii) Risk Participation Agreements (RPA) for confirming banks,
providing up to 50% risk protection against non-payment of a financial obligation issued by a bank in support of a
trade transaction. Unlike the CG product, the Risk Participation Agreement (RPA) provides risk protection on a
portfolio basis rather than on a transaction-by-transaction basis, and (iii) Revolving Credit Facilities (RCF) primarily
providing loans to issuing banks located in AsDB's developing member countries (DMCs) to fund the banks'
advances to importers and exporters for pre-shipment and post-shipment financing.
11
does not want to displace them by reaching out directly to the real sector. Second, working
through financial intermediaries enables the AsDB to leverage their resources and compliment
the respective areas of strength of the parties involved. With a dedicated Trade Finance team
and a response time of less than 72 hours, the AsDB has established itself as a key player in the
international trade community, providing fast, reliable, and responsive Trade Finance support
during both economic downturns and times of growth.

4.13 The AsDB’s TFP has grown rapidly from USD28 million in 2007 to over USD1 billion
currently. It is estimated to have supported over USD2.9 billion in trade (including co-financing)
in 2010. The AsDB TFP team is comprised of 10 officers and 9 field consultants who undertake
due diligence on potential issuing banks and assist with the preparation of the credit application.
The core team comprises the head, 3 relationship managers, each with one middle office support
and two general operations staff.

4.14 Table 3 summarizes the main characteristics of the TFFPs offered by sister MDBs. While
the amounts reported for approval look important, Africa coverage remains poor.
Table 3: MDBs Trade Finance Facilitation Programs (Cumulative to end 2010)
IFI Start No of Trade lines & Issuing Confirming No of countries
Year Transactions G’tees ($bn) Banks Banks covered
EBRD 1999 9,800 8.8 115 644 20
IFC 2005 7,400 9.5 199 210 82
IaDB 2005 1,052 1.1 69 239 18
AsDB 2004 2,433 5.2 101 101 14
Source: WTO Experts Group on Trade Finance – Feb 2010 Report

5. THE PROPOSED TRADE FINANCE PROGRAM AT AfDB

Program Objectives

5.1 The objective of the proposed TFP is to address the shortage of Trade Finance for RMCs
by offering both funded and unfunded solutions. The proposed program will seek to encourage
international financial institutions’ Trade Finance activities in Africa and therefore enhance the
flow of capital from developed countries to strengthen banks in RMCs and fund trade operations
initiated by African companies. Experience of sister institutions has shown that programs that
focus on risk sharing help commercial banks understand trade asset performance and have
encouraged them to increase activity in least developed markets. The TFP will primarily but not
exclusively target smaller banks in low income countries for their SME clients and “aggregators”
that support a network of small farmers and traders.

5.2 The program is also designed to support countries in times of crisis by providing
countercyclical assistance. During political or economic crises, one of the first things affected is
the provision of trade lines by international banks and insurers. As a result of this reduction or
cancellation of credit lines to RMCs and RMC banks, companies in these countries may not be
able to import vital food and medicines or inputs for export production. Losing Trade Finance
lines results in a loss of import and export contracts, which shrinks employment, gross domestic
product, government revenue, and foreign exchange earnings. Although the TFP alone cannot
prevent the worst effects of a crisis, it can help to lessen some of them.

12
Program Design & Products

5.3 Based on an assessment of the achievements and limitations of programs offered by sister
institutions and Africa’s specific Trade Finance needs, the Bank proposes to model the TFP
along the contours of the program of the AsDB. The TFP would selectively offer three main
products, namely; (i) Risk Participation Agreements (RPAs), (ii) Trade Finance Lines of Credit
(TF LOCs), and (iii) Commodity Finance Facilities (CFFs). The program would initially focus
on deploying risk participation agreements (RPA) with the main commercial confirming banks
(CBs) engaged in supporting documentary trade with African banks. The RPAs will mainly be
unfunded risk participations agreements (guarantees on portfolio of trade transactions).
However, the Bank may also consider funded risk participations should the market so demand.
Moreover, participation in joint initiatives like the GTLP or its successor would be considered
where the potential for development impact is strong and compelling. Eventually the TFP could
offer more tailored risk mitigation solutions for individual trade transactions once it develops
adequate execution capacity.10

5.4 In addition to financing activities, the TFP will also complement the Bank’s other
initiatives which seek to facilitate trade by: (i) reducing/removing cross-border obstacles that
currently constrain and increase the risks that undermine trade, (ii) building the regulatory
capacity of governments, and (iii) undertaking the upstream work of building capacity of the
client institutions to manage risk and enhance access to finance.

Risk Participation Agreements (RPAs)

5.5 Under an RPA, the AfDB would share the credit risks (usually up to 50% but can be
increased based on the specific merits of a transaction) on a portfolio of eligible trade
transactions originated by partner CBs. The RPA product is designed to provide partial cover to
regional and international commercial banks and relies on those banks to perform credit/risk
analysis on the issuing banks, as well as originate, process and monitor those transactions.
AfDB’s role is to issue guarantees in favor of a number of carefully selected commercial banks,
whose credit origination, corporate governance and administration processes are robust and meet
the Bank’s requirements11.

5.6 The Bank’s direct support to trade financiers through RPAs with eligible CBs will attract
additional risk appetite into the market, especially for low-income country or small market
financial institutions. Working through CBs is practical, requires fewer head count and is a cost
effective way of scaling up Trade Finance in the Bank. As confirmed by the AsDB, their RPA
program allowed them to “learn about the issuing banks in a cost effective way.” Moreover, this
support will not displace commercial bank lines. Typically, international commercial banks only
use MDB’s Trade Finance facilities when they “are fully booked elsewhere” because of the fee-
sharing involved. This was underscored by the recent survey conducted by the Bankers’
Association for Finance and Trade on commercial banks. The survey indicated that banks
“prefer to keep commissions” and will only seek recourse to MDB programs when they need
additional credit facilities.

10
This includes the use of credit guarantees to support individual trade transactions.
11
A schematic description of the RPA is contained in Annex 4
13
5.7 The principal risk associated with this product type is the due diligence processes of the
CB with which the Bank will work. As credit risk will be shared between the financial
institutions that are confirming Trade Finance instruments and the Bank, risks associated with
the transactions will be based on the CBs ability to assess specific transaction risk factors.
Accordingly, significant due diligence of CBs and their due diligence process will be necessary.
This risk is mitigated by the fact that the Bank and the CBs will be sharing risks and thus the
Bank avoids the moral hazard of taking 100% of the risk of the underlying trade transaction.
Further, as the Bank is guaranteeing a portfolio of risks, individual transaction risks are
minimized through a diversification effect.

5.8 Another risk associated with RPAs is the lack of contractual relationship between the
AfDB and the IBs. Under this arrangement, the AfDB will depend solely on the CBs in
executing and documenting underlying transactions. This risk is mitigated by building protective
measures in the RPAs to ensure that in the event of a default at the IB or CB level, the AfDB will
have the appropriate mechanism to seek redress.

5.9 In the event of default by an IB and upon payment of guarantee claim on pro-rata portion
by the Bank, the CB will continue to service the asset and will pursue recoveries on behalf of
itself and the Bank. The Bank will act in accordance with the Bank’s policies for Provisioning
Loans and Guarantees as well as the Bank’s Guidelines for Writing-Off Loans and Equity
Investments for Non-sovereign operations (ADB/BD/IF/2007/21). In addition, the RPAs will
have an option to assign AfDB their pro-rata share so that it can pursue recovery directly with
African financial institutions.
5.10 The key legal document required for the RPA will be a Master Risk Participation
Agreement (MRPA) to be signed between the Bank and the eligible CB. The Master Risk
Participation Agreement will include provisions for inter alia each party’s pro rata risk
participation, eligibility criteria of trade transactions to be placed under the portfolio and
eligibility criteria for issuing banks amongst others. Under the RPA, the Bank will enjoy the
same privileges and immunities as in lending transactions.

5.11 The Bank in July 2011 signed a Memorandum of Understanding with the AsDB and
thereafter a Confidentiality Agreement after which the latter generously made available to the
Bank its entire package of Trade Finance materials including policies, manuals, guidelines, legal
documentation and IT system. This is hugely beneficial to the Bank as it will help to minimize
implementation bottlenecks and risks and reduce the resource commitment to ramp up the TFP
operations.

5.12 Fees and commissions charged under the TFP will be risk based and comply with the
Bank’s pricing principles, and the Bank will share fees/commissions received with the CBs, on a
portfolio basis, quarterly in arrears. The Bank’s fees/commissions will be equivalent to its risk
participation in the guaranteed portfolio while a negotiated amount of each commission will be
ceded by the Bank to the CB as a management/administrative fee. The plan is to build some
flexibility into the fee structure so that it can be used to target specific markets and beneficiaries.
If, for example, the Bank wishes to stimulate finance availability in certain markets/sectors it can
increase the fee paid to the CB. Furthermore, to stimulate intra-African trade, the Bank could
increase the commission paid on all intra-African trade operations in which it participates.

14
5.13 The Bank shall base its choice of CB partners on the following criteria:

5.14 Size of African Trade Portfolio: As the Bank seeks to have the most impact across
markets and co-financing will leverage AfDB’s risk appetite, the Bank should focus on those
financial institutions that have a sizeable portfolio of trade assets.

5.15 Breadth of African Market Coverage: In order to help commercial banks establish asset
performance track records in smaller and more remote markets and underserved market
segments, the Bank would evaluate overall market coverage and support to SMEs when
determining which banks to work with.

5.16 Intra-African Trade Market Coverage: Trade Finance operations supporting intra-
African trade do not only produce the usual positive benefits expected from trade activities but
also enhance regional integration. Accordingly, the Bank shall focus on supporting financiers
who finance relatively more intra-African trade.

5.17 Quality of Credit Process: The Bank is lending its AAA rating to CBs by guaranteeing a
portion of their portfolios. The Bank is taking risk on these banks’ ability to extend and
administer credit well. Consequently, the quality of credit processes as measured by external
ratings, among others, will be an essential element in choosing partners. Moreover, the Bank
will ensure that the CB has in place the policy framework that requires its management and
employees to adhere to appropriate standards in preventing the use of its products and services
for money laundering and terrorist finance purposes through improved controls, client
identification, and proper record keeping.

5.18 Applying the portfolio guarantee approach will allow AfDB to learn more about the
issuing bank infrastructure and develop specific issuing bank products at a later stage. Thus, the
RPA approach offers a low cost entry into the market. It is notable that AsDB’s business grew
rapidly after introduction of the RPA product but its composition has shifted toward direct
support to issuing banks as it has moved up the learning curve.

Trade Finance Lines of Credit (TF LOC)

5.19 The proposed TF LOCs is a variation of the Bank’s existing lines of credit. However,
unlike traditional LOCs which have long tenors and can be utilized to support credit extension to
industrial and infrastructural projects, TF LOCs will have a maximum tenor of 4 years and will
be deployed exclusively to finance trade-related transactions. The TF LOC will leverage the
operational platform – in terms of SAP architecture and legal documentation - of the
conventional LOCs for its roll-out. Loans under the TF LOC will be used by beneficiary
Financial Institutions (FIs) to finance trade transactions which will include, but not limited to,
pre and post-shipment financing, capital expenditure, factoring, import loans and the distribution
of imported goods. Given the short tenors of trade transactions (80% of which have a maturity of
less than 1 year), FIs will have the flexibility to re-use the proceeds until the maturity of the
facility12.

5.20 Eligibility for a TF LOC will be based on demonstrable presence in the Trade Finance
arena, acceptable credit standing, satisfactory corporate governance practices and potential good

12
See annex 3 for a schematic description of the LOC product
15
development outcomes, including targeted support for financing along the value chain among
others.

5.21 Like conventional LOCs, front-end and commitment fees not exceeding 1% (100 bps)
will be applicable to TF LOCs. The credit spread (margin) on a TF LOC will reflect the Bank’s
assessment of the risks, facility ranking, final maturity and other characteristics of the facility.

Commodity Finance Facility (CFF)

5.22 Under the CFF, the Bank will support exports and imports of agricultural commodities
and inputs across RMCs. This will include the provision of pre-export financing to aggregators
such as Ghana’s Cocobod for the purchase and export marketing of soft commodities13. By
improving access to affordable financing for the agricultural sector in Africa, the CFF will
contribute to enhancing food security on the continent. It is estimated that Sub-Saharan Africa
alone imports over USD30 billion of food per annum.

5.23 The CFF is targeted at aggregators – often, parastatals - in RMCs. Eligibility will be
based on stand-alone commercial viability, acceptable level of operational autonomy from the
government, satisfactory corporate governance practices, and potential good development
outcomes among others.

5.24 The pricing will reflect the transaction risks and respect the Bank’s flexible cost-recovery
pricing policy for non-sovereign operations. Front–end and commitment fees shall apply.

Operational and Guiding Principles

5.25 Program Size: Given the growth in trade volumes across the continent and sizeable
shortfall in the supply of Trade Finance caused by international banks retreating from the market,
sufficient scale is required to confront the structural gap in the Trade Finance market. As such,
the program proposes to commence with an aggregate exposure limit of USD1 billion to be
operated as part of OPSM’s lending program and utilized across the various products based on
the specific demand of each product. This flexibility is necessary to enable the Bank respond
effectively to the evolving demand of the market. This limit may be reviewed after the 4th
anniversary of the program.

5.26 Tenor: The maximum tenor of loans and guarantees provided under the program will be
four (4) years. Notwithstanding the maximum possible tenor for instruments under the TFP as a
whole, it is anticipated that the average tenor for transactions originated by issuing banks under
the RPAs would be in the range of 90 to 360 days. As a result, numerous transactions are
expected to be covered under the RPAs. As regards TF LOCs, beneficiary banks have the
flexibility to reuse / rollover proceeds of the facility until final repayment.

5.27 Security and Ranking: In accordance with the standard practice of the Bank, facilities
under the TFP will, in the main, constitute unsecured senior obligations of the borrower or
obligor. Nonetheless, the Bank reserves the right to obtain security if deemed appropriate in a
given situation. Under the RPA, the Bank will assume the risk of the domestic IBs and not the
CB. Concerning TF LOCs and CFFs, the Bank will assume the corporate risk of the FI or

13
See annex 5 for a schematic description of the CFF product
16
Borrower and not the risk of the individual trade transactions financed under those products.

5.28 Currency: Instruments under the TFP will be denominated in one of the Bank’s lending
currencies. All disbursements and repayments (to the extent that they are funded facilities) will
be made in the particular currency of the instrument.

5.29 Pricing: In Trade Finance, pricing is volatile reflecting the fluid conditions in that
market. It is therefore important that the program retains sufficient flexibility to take quick
decisions on pricing in tandem with the market. Under RPAs, pricing would depend on the
credit quality of the underlying transactions and the Bank would not consider transactions whose
pricing does not adequately reflect the risk. For TF LOCs and CFF, the pricing will reflect the
assessment of the underlying risks and will be determined in accordance with the Bank’s
standard flexible cost-recovery pricing policy for operations without a sovereign guarantee.

5.30 Monitoring and Evaluation: As is customary with facilities extended by the Bank,
instruments (loans and guarantees) under the TFP will be monitored regularly and supervised at
least once annually. The Bank will ensure that the instruments are utilized for the intended
purpose. The oversight will involve multiple departments and will monitor the commercial
viability of the obligors and the program’s effectiveness on the ground and as well as its
development impact. Beneficiaries of the program will be required to track and report on
development outcomes periodically. The Bank’s rules on project completion reports and ex-post
evaluation will apply.

5.31 Risk Management: Trade Finance programs of sister MDBs have been largely default
free. This default history underscores the low risk profile of Trade Finance operations because
of their asset-backed nature, short tenors, and their self-liquidating nature. Nonetheless, the
proposed program will comply with the Bank’s risk management guidelines and prudential
exposure limits. Exposures created under the respective TF products will be measured on a
“loan equivalent basis” and will be combined with other exposures in determining the overall
compliance with the Bank’s single obligor, country and sector limits. Capital charges will be
ratings driven as is the practice, but due consideration would be given to the low-risk nature of
trade transactions.

5.32 Transaction Review and Approval Process: For the program to achieve its goal of
responding rapidly and effectively to clients’ evolving needs, shifting market demands and crisis
situations in RMCs, it needs the flexibility to execute transactions and intervene in a swift
manner. Trade transactions by their nature have very short lead times, and to subject the
proposed program to the Bank’s existing review and approval process for standard operations
will be self-defeating. The program should be able to deliver rapid response when it is called
upon to do so. With this in view, it is proposed that prior approval for project concept be waived
under this program. Proceeding directly to due diligence and subsequently to the Project
Appraisal Report stage should be the norm and not the exception under the TFP. OPSM in
consultation with other units within its ecosystem will prepare a separate set of guidelines that
will govern the review and approval process of the TFP for consideration by senior management.
All new transactions will be approved by the Board of Directors.

5.33 E&S Categorization: To facilitate the rapid response desired under the program, an
exclusion list approach to ESMS categorization is proposed. This way, the program is able to
exclude potentially “high-risk” transactions while avoiding being encumbered by the onerous
17
ESMS requirements of the Bank. This is similar to the approach adopted by other DFIs such as
the AsDB. Nonetheless, in selecting counterparties the Bank would ensure that as part of its due
diligence only institutions with acceptable ESMS standards are admitted into the program.

5.34 System Requirements: Given the initial business dimensions and AsDB experience
during the last 7 years, an Excel based system should be sufficient. For the interface with the
Bank’s SAP platform and general ledger, the program team will need to work with the IT team to
capture data on outstanding facilities and commissions due. However, given the low transaction
volume expected initially, this will not require significant up-front investments.

5.35 ADOA Review: Given the rapid response required under Trade Finance
transactions and practical challenges involved in obtaining portable, consistent and reliable data,
EDRE in consultation with OPSM has designed a Trade Finance specific ADOA framework.
This framework preserves the integrity of the Bank’s ADOA principles. The Trade Finance
ADOA framework will be shared with the Board of Directors.

Operational Targets

5.36 The early focus of the TFP would be on deploying RPAs with the main CBs engaged in
supporting documentary trade with African banks. Within 3 years the Bank would seek to have
RPAs in place with at least 5 of the most active CBs in African trade thus creating on-going
additional risk capacity of around USD 1.4 billion for African Trade Finance. The TFP would
seek comprehensive Pan-African geographical coverage with emphasis on under-served (higher
risk) markets. As a demand-driven program, the TFP would aim to support African trade in a
broad range of sectors with agriculture and SMEs expected to be significant beneficiaries. It is
notable that a number of CBs have already expressed interest in scaling up their Trade Finance if
the Bank offers RPAs.

5.37 In parallel to the RPAs but on a lesser scale, the TFP would offer TF LOCs and CFFs.
As noted elsewhere, joint initiatives like the GTLP and its successors would be considered on its
own merit under the TFP.

5.38 Taking into account the desire to manage the growth of the program in a manner
consistent with the team’s delivery capacity, the following are the expected operational
milestones over the course of the first four years of operations (Table 4):

Table 4: Operational Targets (In USD million, Outstanding)

Year 2012 2013 2014 2015
RPAs* 55 160 330 590
TF LOCs** 50 140 200 290
CFFs*** 15 50 90 120
Total 120 350 610 1,000
* Targeting the 5 Confirming Banks. Target assumes steady trade.
** Includes facilities combined with other regional operations.
*** Only on a selective basis.

5.39 In terms of development outcomes, based on the above operational targets, the program is
expected to support about 1000 trade transactions representing a total value of trade in excess of

18
USD2.5 billion over the business plan period. In addition, a significant number of SMEs are
expected to benefit from the TFP.14

Non Operational Targets

5.40 In line with the main recommendations of the Roundtable on Trade Finance held in Tunis
in October 2010, the implementation of the TFP will be reinforced to deliver support for intra-
regional trade, build the capacity of SMEs to access Trade Finance and assist African FIs,
especially small banks and DFIs, to create the platform necessary for the provision of Trade
Finance solutions to their clients.

5.41 To foster a positive link between trade facilitation and the TFP, the Bank will work
collaboratively with the regional economic communities (RECs) to harmonize financial policies
and regulations both at the national and regional levels as a way of facilitating cross-border
financial transactions and enhancing cross border trade. The Bank will strengthen inter-REC
cooperation to speed up the implementation of regional trade agreements particularly, the trade
regulations governing commerce such as preferential Rules of Origin that presently add costs to
cross border trade due to non-compliance by some RMCs. The Bank will also support trade
facilitation through: (i) improving logistics and transport, simplification of customs documents
procedures and harmonization of trans-border regulations and modernization of customs
operations, and (iii) support to private sector development/revitalization, especially in the export
sectors hit hard by the financial crisis, (iv) support for capacity building in trade policies,
negotiations and implementation of trade agreements, and (v) monitoring and evaluation of AFT
programs at regional level.

5.42 To raise efficiency gains for economic operators and other stakeholders such as RMCs
the Bank will assist in the creation of one-stop border points, integrated border management,
transit corridors and also provide training to officials. The Bank will collaborate with the RMCs,
RECs and other development partners to eliminate non-tariff barriers. It will also provide
capacity and share knowledge products on non-tariff measures so as to improve deepening of
information on product standards and technical regulations such as the sanitary and phytosanitary
measures that are usually imposed by RMCs.

5.43 ONRI will develop a comprehensive logical framework, which will capture the TF
measures in the various RISPs, the Department's TF program and the Bank’s inputs in the
African Union action plan for intra-African trade.

Resource Implications

5.44 To achieve the set targets, the TFP will need a dedicated team of 4 professionals (1 lead +
3 professionals) and 1 General Service staff. In addition, the Bank would require the services of a
full-time consultant for a period of 2 years to allow for a ramp up period of 9-12 months prior to
full staffing. At the outset, the program will be housed within OPSM 4 to be close to other
investment officers working on financial institutions.

14
A monitoring system will be set up to measure and assess the impact of intra-regional transactions as well as the
number of SMEs and FIs supported by the TFP
19
5.45 The 4-year average annual cost of running the TFP is estimated around UA 1.2 million.
However, since the TFP is expected to generate revenues starting at UA 1.5 million in the first
year rising to UA 10 million by the 4th year of operation, the program should generate a net
surplus almost immediately (see Annex 6 for the proforma income statement). The net revenue
from the program could be deployed to support ongoing technical assistance programs, including
capacity building programs in Trade Finance for African banks and their SME clients.

The following are the expected milestones over the course of the first three years.

Head of Trade Finance Team, Trade
Finance Consultant, a GS and an
Investment Officer identified and in
place
RPA template document finalized
RPA executed with two commercial
banks
Ongoing TF LOC and renewal as
necessary of GTLP
2 additional Investment Officers in RPA signed with at least 5
place commercial bank
RPA signed with 3 commercial banks Bespoke Credit Guarantee
opportunity dimensioned
Direct Credit support to commercial
banks to support intra –African trade
as part of regional integration
investments - at least one transaction
executed
At least one CF transaction executed

6. CONCLUSION AND RECOMMENDATIONS

6.1 LICs, fragile states and SMEs in Africa are expected to confront a more constrained
financing environment for trade in the coming years relative to before the financial crisis.
Scarcity of Trade Finance and its prohibitive cost are negatively impacting on RMCs’ ability to
engage in export and import activities considered vital to their economy. For Africa to improve
its competitiveness, raise productivity, achieve robust and inclusive growth, it is essential for
RMCs to be integrated in the world economy and have a strong and well diversified export base.
But for this to happen, Trade Finance must be accessible and affordable to those who need it.

Based on the foregoing, Senior Management recommends for the Board’s approval the proposed
TFP with the following key features:

(i) An aggregate exposure limit of USD1 billion for the program to be operated as part of
OPSM’s overall lending program.
(ii) A four year initial phase
(iii) A dedicated team of at least 5 people comprising 4 PLs staff and 1 GS staff in the
initial phase15.

15
The support of a consultant will be needed during the ramp up phase of the program prior to the full complement
of staff.
20
Annex 1
RESULTS-BASED LOGICAL FRAMEWORK
Country and Project Name: Multinational, Trade Finance Business Plan
Purpose of the project: To provide finance and guarantees through and alongside regional and international banks and domestic banks in support
of trade transactions in RMCs.
PERFORMANCE INDICATORS RISKS /
RESULTS CHAIN MEANS OF
Indicator VERIFICATION MITIGATION
Baseline Target MEASURES
(including CSI)
Expansion in trade No / volume of underlying AfDB Reports
IMPACT

n.a. USD11 billion

through increased trade transactions
reach/access to financed
affordable finance
Outcome 1
Trade as a percentage of Trade to GDP ratio 67% (2011)  70% by AfDB, IMF and WB reports  Stability of political
GDP increased in RMCs 2015 environment
 Prudent economic and
fiscal policies pursued
and maintained
Outcome 2
Interventions in ADF Number of ADF countries n.a. At least 25 by 2015 Partner and AfDB Reports  Program implementation
countries and fragile states proceeding according to
OUTCOMES

plan
Outcome 3
SMEs’ access to Trade SME trade transactions n.a At least 8000 by AfDB supervision and monitoring  Current market gap
Finance improved supported 2015 reports persisting
 Program implemented
according to plan

Outcome 4
Trade transactions Number of trade n.a. At least 15000 by Client and AfDB supervision and  Current market gap
increased transactions supported 2015 monitoring Reports persisting
 Program implemented
according to plan

-1-
 Outcome 5  Stability of political
Increased export earnings Exporters’ and n.a USD1.3bn Client/Govt./AfDB supervision environment
government export and monitoring reports  Prudent economic and
revenue fiscal policies pursued
and maintained
 Program implemented
according to plan
Outcome 6
Export diversification Sectors supported under n.a At least 4 Client / AfDB supervision and  Prudent economic and
enhanced the TFP monitoring reports fiscal policies pursued
and maintained
 Current market gap
persisting
 Program implemented
according to plan

Outcome 7 Number of intra-African n.a. 200  Current market gap

Intra-African trade trade transactions Client and Bank supervision and persisting
increased and regional monitoring reports  Program implemented
integration enhanced according to plan

Output 1  Current market gap

Deployment of RPAs Outstanding exposure AfDB supervision and monitoring persisting
n.a USD590m by 2015
under RPAs reports  Program implemented
according to plan


OUTPUTS

Output 2 Current market gap

Deployment of TF LOCs Outstanding exposure AfDB supervision and monitoring persisting
n.a. USD290m by 2015
under TF LOCs reports  Program implemented
according to plan

Output 3  Current market gap

Deployment of CFF Outstanding exposure AfDB supervision and monitoring persisting
n.a. USD120m by 2015
under TF LOCs reports  Program implemented
according to plan
1. Develop and implement a Trade Finance Program INPUTS
2. Deploy at least 5 RPAs with International Banks by 2014 
ACTIVITIES

A dedicated team of 4 PLs and 1 GS plus consultant support

3. Book transactions with a combined exposure of about USD1bn by the end of 2015. during the initial phase.
KEY

 Establishment of an exposure limit of USD1 billion for the

program
 A rationalized and simplified review and approval process

-2-
Annex 2
ORGANOGRAM OF THE TRADE FINANCE TEAM

Division Manager,
OPSM4
PL2

Trade Finance Team

Trade Finance Head of Trade
Assistant Finance
GS5 PL2

TF Investment TF Investment TF Investment

Officer Officer Officer
PL3 PL5 PL5
Annex 3
TRADE FINANCE LOC PRODUCT

AfDB
3
2
D
o
c RMC Bank makes a
AfDB assumes RMC bank risk, not request for financing from
RMC exporter/Importer risk as AfDB
per AfDB approved obligor limits
RMC Bank
4 1

Various importers and exporters

On-lends to RMC importer/ exporter request Trade Financing from
RMC Exporter/Importer RMC Bank

Note: Transactions will be subject to the approved appraisal and review process under the TFP
Annex 4
RISK PARTICIPATION AGREEMENT PRODUCT

7
1
AfDB
Binds AfDB to Admission is subject
Risk to meeting eligibility
9
Participation criteria.
(often at 50%)
as per AfDB Submits monthly report
endorsed detailing AfDB Exposure
RMC bank exporter
Limits 6 Takes Political and Commercial
Risks RMC Banks
International/Confir
RMC Banks
ming Bank RMC Banks
5 RMC Bank
Issues payment Obligation (such
8
as L/C) 4 3

Confirms/ guarantees RMC Takes Request opening of a payment

Bank Payment Obligation Importer obligation (such as L/C) in favor of
(Such as LC) risk Exporter
2

Negotiates purchase of goods

Exporter
Ships goods Importer

1
0

Note: Admission of transactions and RMC banks will be subject to agreed eligibility criteria.
Annex 5
PROCEDURE FOR RISK PARTICIPATION AGREEMENT PRODUCT

(1) (2)
RPA signed between
TFP delegates AfDB (3) (4)
AfDB and International Confirming
endorsed Bank obligor International /Confirming
International Bank submits monthly
Limit to International Bank binds AfDB to risk
Confirming Bank report detailing AfDB
Confirming Bank participation, subject to
exposure, revenue and
TFP delegates AfDB
providing legal
endorsed RMC bank limits
representation and
and the underlying
warranties that all
transaction is eligible as
transactions are “eligible”
per RPA
transactions
(8)
At month-end FFCO
prepares report and
reconciles versus OPSM

(7)
TFP team and FFCO enter
transaction in the Bank’s
(9)
IT system to
TFP team and OPSM 5
monitor/Administer
submit exposure report
transaction/portfolio
(6)
OPSM 5 / ALCO reviews
exposure report and verifies
AfDB endorsed credit availability
an Board Approval exposure
limit
(5)
TFP team reviews and
reconciles international
monthly exposure report
against its AfDB endorsed
RMC Bank obligor Limit.

(8)
At month end TFP Team
and OPSM 5 Prepare a
report
Annex 6

TRADE FINANCE OPERATIONAL TARGETS AND PROFORMA

INCOME STATEMENT
TRADE FINANCE OPERATIONAL TARGETS & PROFORMA INCOME STATEMENT
Year 2012 Year 2013 Year 2014 Year 2015
In US Dollars
Annual Volumes Signed and Committed
LOCs 100,000,000 100,000,000 100,000,000 200,000,000
Commodity Finance 30,000,000 50,000,000 50,000,000 80,000,000
RPAs 125,000,000 250,000,000 400,000,000 600,000,000
Total 255,000,000 400,000,000 550,000,000 880,000,000

Cumulative Signed and Committed %Committed 2015

LOCs 100,000,000 200,000,000 300,000,000 500,000,000 24%
Commodity Finance 30,000,000 80,000,000 130,000,000 210,000,000 10%
RPAs 125,000,000 375,000,000 775,000,000 1,375,000,000 66%
Total 255,000,000 655,000,000 1,205,000,000 2,085,000,000 100%

Annual Volumes Disbursed / Utilized

LOCs 50,000,000 100,000,000 100,000,000 150,000,000
Commodity Finance 15,000,000 40,000,000 50,000,000 65,000,000
RPAs (Utilized) 53,295,455 159,886,365 330,431,821 586,250,005
Total 118,295,455 299,886,365 480,431,821 801,250,005

Annual Volumes Repaid

LOCs 12,500,000 37,500,000 62,500,000
Commodity Finance 3,750,000 13,750,000 26,250,000
RPAs
Total - 16,250,000 51,250,000 88,750,000
%Outstanding 2015
Avg LOCs Outstanding 50,000,000 137,500,000 200,000,000 287,500,000 29%
Avg Commodity Finance 15,000,000 51,250,000 87,500,000 126,250,000 13%
Avg RPAs Outstanding 53,295,455 159,886,365 330,431,821 586,250,005 59%
Total Avg Outstanding on TF activities 118,295,455 348,636,365 617,931,821 1,000,000,005 100%

Revenue from LOCs

Front end fee on LOCs 1,000,000 1,000,000 1,000,000 2,000,000
Commitment Fee on lochs 250,000 250,000 250,000 500,000
Interest Margin on LOCs 1,000,000 2,750,000 4,000,000 5,750,000
Gross Income on LOCs 2,250,000 4,000,000 5,250,000 8,250,000

Revenue from Comdty Finance

Front end fee on Comdty Finance 300,000 500,000 500,000 800,000
Commitment Fee on Comdty Finance 75,000 125,000 125,000 200,000
Interest Margin on Comdty Finance 300,000 1,025,000 1,750,000 2,525,000
Gross Income on Comdty Finance 675,000 1,650,000 2,375,000 3,525,000

Revenue from RPAs 479,659 1,438,977 3,304,318 5,862,500

Total Revenue 3,404,659 7,088,977 10,929,318 17,637,500

Direct Costs
Staff Payroll (245,000) (440,000) (440,000) (440,000)
Benefits (130,000) (260,000) (260,000) (260,000)
IT Support (100,000) 0 0 0
Consultant (150,000)
Loss Provision (236,591) (697,273) (1,235,864) (2,000,000)
Total Costs (861,591) (1,397,273) (1,935,864) (2,700,000)

Net Operating Income 2,543,068 5,691,705 8,993,455 14,937,500

Net Return on Capital 168 bps/year

Annual Net Return 8,041,432 USD/year
Net Income to Direct Costs 4.7x times