The African experience

The African experience

The global financial crisis saw a variety of global financial institutions reduce their African commitments, including in the trade finance sector, where Western export credit agencies are struggling to cope with demand closer to home. Stricter regulation and capital requirements have constrained the ability of international banks to operate in frontier markets.

China’s Eximbank remains as committed to the continent as ever but many other export credit agencies have not resumed their pre-crisis involvement. The AfDB hopes that African financial institutions will step into the vacuum and thereby help themselves by making progress that could otherwise have taken many years to achieve.

While foreign direct investment in sub-Saharan Africa fell following the global financial crisis, medium- and long-term (MLT) coverage in 2012 was already 9.8% higher than in 2008. North African coverage, however, remains much lower because of the fallout from the Arab Spring. MLT guarantees are defined as coverage designed to be in force for longer than two years.

Africa’s biggest banks are considering ways to expand their operations and are looking at any sectors that could previously have been overlooked. Trade finance is one obvious option.

The AfDB’s trade finance team head Yaw Kuffour says, “They are taking a second look at their balance sheet and trying to find ways of supplying additional credit to the market” but adds: “African banks still lack the critical mass and muscle to provide the necessary credit so there is a need for intervention. This is not an activity that can be left for the commercial players alone to solve and given the gap that exists, we need to step in.”

Jean-Marie Masse, a senior advisor and programme manager at the European Investment Bank (EIB), says of African trade: “For projects involving cross-border equipment and investments, particularly from Europe, banks can increase risk absorption capacity by using additional risk mitigation tools such as medium- and long-term guarantees and insurance. The linkage between banks and risk mitigation providers is often the hidden part of the iceberg when promoters pitch their projects to banks.”

However, large parts of the African continent remain without access to their own credit export agency and, indeed, to trade finance in general. The African Export Import Bank (Afreximbank) was set up in 1993 by a wide range of interested parties, including the AfDB, a number of African governments and private sector investors in an effort to plug this gap.

It sought to promote and finance trade between African states and between Africa and the rest of the world with goals of economic diversification, the promotion of value-added commodity exports and strengthening trade value chains.

With authorised share capital of $5bn, it describes its mission as stimulating “a consistent expansion, diversification and development of African trade while operating as a first class, profit-oriented, socially responsible financial institution and a centre of excellence in African trade matters”.

The bank is based in Cairo, with regional offices in Harare and Abuja. Afreximbank processed transactions worth $2.6bn in 2011 but received applications for $18.5bn, suggesting that it could do more if it had the capacity to do so. In April, it announced that 34 banks had joined the general syndication of a dual tranche $467m and €224.4m loan facility to help it repay existing debt and meet trade finance and general corporate purposes.

Afreximbank President Jean-Louis Ekra said: “Today is certainly a great day for us as a bank and for Africa as a continent.”

Comparing the deal to the Bank’s first syndicated loan in 2000, he said: “We are today celebrating a deal almost eight times as big”. It also appears to be the largest syndicated loan ever raised for a non-South African financial institution in Africa.

The bank has supported deals in a number of different sectors. It enabled Kenya Airways’ $1.9bn purchase of 20 new aircraft, comprising 10 Embraer 190s, nine Boeing 787-800 Dreamliners and a single 777-300ER. The Bank acted as the lead arranger for the financing facility.

Ekra commented: “We are confident that this delivery will enable you to strengthen and expand your route network and, as such, bring about increased business connections across the continent. This is consistent with Afreximbank’s commitment to supporting transactions that further Africa’s economic integration.” The first Dreamliner was delivered at the end of March.

Under its Construction and Tourism Linked Relay Facility (Contour), it granted a €24m loan to Gabonaise de Tourisme et de l’Hôtellerie (GTH), a Gabonese hotel group, in May. The money will be used to fund the redevelopment of the five-star Decapolis Rapontchombo hotel under the Decameron brand. The president of GTH, Jean-Pierre Lemboumba Lepandou, said that

Afreximbank’s support had encouraged Gabon’s sovereign wealth fund to consider making similarly large investments in infrastructure in its own country.

At the end of May this year, the AfDB stepped up its support for Afreximbank when it sanctioned a $280m trade finance package for the bank. This included $30m in equity investment, a $150m line of credit and a $100m unfunded risk participation agreement (RPA).

This medium-term liquidity should help to strengthen the RPA’s operations and those of the African issuing banks that it works with by supporting a least $2.2bn in trade in Africa over a four-year period.

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