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Transcript of The Trade Finance Bank for Africa Alternative Financing Model, Country Experiences Presented by Mr....
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Alternative Financing Model, Country Experiences
Presented by Mr. Kofi Adomakoh
Director, Project and Export Development Finance Afreximbank
AADFI/ADFIAP CEO Forum November 4th to 6th 2014 Kuala Lumpur, Malaysia
AADFI/ADFIAP CEO Forum November 4th to 6th 2014 Kuala Lumpur, Malaysia
Development Financing Alternative Models in a Changing World
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Content
1. Overview of Afreximbank;
2. Access to finance in Africa;
3. Structured Trade Finance “A Tool
to de-bottlenecking Africa’s
financing challenges”:
4. Alternative financing provided by
Afreximbank.2
In this presentation, I shall:
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (4)
It is headquartered in Cairo, Egypt and has branch offices
in Abuja (Nigeria) and Harare (Zimbabwe). It offers credit
(trade and project finance), risk bearing and trade
information/ advisory services.
By way of introduction, Afreximbank is a Pan-African
Multilateral Financial Institution created in 1993 as an
international public private partnership to promote and
finance intra- and extra- African trade.
The Bank
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Overview of AfreximbankHas preferred creditor status in its member countriesMission is to:
Stimulate a consistent expansion, diversification and Development of African Trade while operating as a first-class, profit-oriented, socially responsible financial institution, and a center of excellence in African trade matters.The Bank’s trade finance activities complements the work of other development banks, e.g IBRD, EIB and AfDB.The Bank works with African and non-African Export Credit Agencies, Development Finance Institutions, Commercial Banks and other Multilateral Institutions to support trade finance activities in Africa.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
2.Access to Finance: A challenge to Africa.
6
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
2.1 Access to Finance: A Challenge in Africa
Africa’s slow pace of development, particularly during 1980s
and 1990s has been attributed to weak state of infrastructure
across the continent.
The infrastructure gap in many parts of the continent stemmed
from inability of many countries to raise term funding as
many international creditors continue to perceive the continent
as high risk; and
the few funds available to African counterparties had short
tenors usually less than 1 year, high cost and with stringent
security requirements including cash collateral.
(7)
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
2.2 Explaining Africa’s Financing Challenges
Two major factors, political crisis and poor economic performance in
the 1980s and 1990, have contributed to the current challenges
confronting many African countries in accessing Term Funding for
infrastructure and economic development.
(8)
-2
0
2
4
6
8
1960 1970 1980 1990 2000 2010source: WDI, 2012
Trends in Africa's Economic Growth, 1960-2011, (percent)Economic Risk
In the 1980s and 1990s Africa
was generally regarded a
basket case and was shun by
many investors.
A continent that had achieved
sustained economic
expansion of over 5%
annually during 1960-1979,
could only manage a dismal
2% during 1980s and
early1990s.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (9)
Political Risk
Financing challenges in Africa is heightened frequent political
crises across the continent. For instance, in 2009 alone of the 76
socio-political crises scenarios recorded in the world most of
them took place in Africa (26 cases);
Political risk also arises from unanticipated changes in
regulations or failure by the government to implement tariff
adjustments because of some political considerations.
Politics induced quasi commercial risks may also arise when the
project is facing state-owned suppliers or customers, whose
ability or willingness to fulfill their contract obligations towards
the project is questionable.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Until post financial crisis in the mid-80s, banks involved in international finance relied on balance sheet lending and government guarantee.
Early 90s saw the introduction of Structured finance which was based on the transaction for which the finance is provided. Such techniques aim to transfer risks in financing transaction
from parties less able to support those risks to those more equipped to support them in a manner that ensures automatic reimbursement of advances from the underlying assets such as inventory and export receivables... This forms the pillar of structured trade finance.
Structured finance revolves around identify and mitigating risks associated with transactions..and convert wealth, in the form of commodities, into ready cash.
Traditional vs Structured finance.......
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
3. Structured Trade Finance as a Tool to de-bottlenecking
Africa’s financing challenges.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (12)
Art of transferring Risk in Financing Transactions from
Parties less able to Bear those Risks to those more
equipped to bear them in a manner that ensures
Automatic Reimbursement of Advances from the
Underlying transaction Assets.
It encompasses:
“Any structure whereby certain assets (inventory,
contract, export receivables etc) with more or less
Predictable cash-flows can be isolated from the originator,
Pledged (Sold, leased etc) and used to support the
Financing being raised (as collateral and/or source of
reimbursement or repayment) or to substitute it”(Emmanuelle Moors de Georgio)
STRUCTURED FINANCE
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (13)
Accordingly, Structured Finance Converts Uncertainty
to some “Certainty” (Predictable Cash-flow) and
thereby Mitigates Risks.
Less bankable deals therefore become more bankable.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Through use of structuring techniques, financiers can control their level of risk
Without structured finance:
financier financier
Potential borrower
With structured finance:
Will the borrower reimburse?
financier
Potential borrower
With secured finance:
How to control collateral?
$
Goods
Will the borrower produce?
Potential borrower
$
Offtaker
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Practical use of structured trade finance:
There are no distinct standardized types of structure trade finance transactions since one essential principle of these transaction is the ability to tailor a structure that will satisfy the needs and circumstances of all parties involved, provided that perceived or real risks are mitigated. We are going to present some basic forms of structured finance, their concept, and transactions flow.
1. Export receivables-backed financing.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Exporter
XYZ Bank
Payment after 30-90 days from B/L date through an escrow
account
Letter of Undertaking (remedial procedures in case of non-performance)
Shipment Buyers (Oil Refineries)
Letter of Acknowledgment
Payment at shipment
Assignment of contract/A/R etc..
Structured Receivables-Backed Financing
Shipment
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
EXAMPLE: Receivables-backed Financing
1. Underlying transaction: To trade naphtha and crude oil.
2. Lender: XYZ Bank.
3. Facility Amount: US$ 50 million for credit facility.
4. Exporter: Oil company
5.. Importers: oil refineries worldwide.
7. Tenor: 30-90 days from B/L date.
8. Collateral: Outstanding account receivables.
9. Facility Period: 1 year.
10. Each transaction amount: Over US$5 million.
This financing is given to the exporter once goods are shipped and repayment is done automatically by importer through an escrow account. This creates an automatic
reimbursement procedure.
This enables exporters to use future trade flows to raise self-liquidating export-backed financing at better cost and tenor. It also enables financiers to externalize country and credit risks by the assignment of export contracts and receivables, and by receiving payment in an offshore escrow account.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
4. Alternative Financing Model provided by
Afreximbank
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (19)
Instruments
Trade Expansion & Diversification
Scheme
Export Development Scheme
Dual Recourse
Non-Dual Recourse
Note Purchase Programme;
Receivable Purchase /
Discounting Programme
Syndications Programme;
Special Risks Programme;
Financial Future Flow Pre-Financing
Programme; and
Local Currency Programme
Export Development
Programme;
Project-Related Financing
Programme;
ECA Loan Facilitation
Programme;
Asset-Based Lending
Programme;
Country Programme;
AFRICOIN
Guarantee Programmes; and
Advisory Services.
BANK’S STRUCTURED PROGRAMMES & FACILITIES
The Instruments are categorised into two Groups/Schemes:
• Export Development Scheme; and
• Trade Development and Diversification Scheme.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Export Development Schemes
1. Export Development Programme (EDP)
The EDP combines Credit, Risk
Bearing, Twining, Market
Access as well as Advisory
services geared towards
facilitating non-commodity export
production, especially export
manufacturing.
(20)
Facilities under the EDS are targeted at promoting
industrialization and improving Africa’s export
competitiveness. Broadly most of the facilities under the EDS
have tenor not exceeding 7 years. Some of the programmes
are discussed hereunder
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (21)
2. Project-Related Financing Programme
Through this programme, the
Bank provides limited recourse
project financing in support of
export projects, including mining,
manufacturing and other trade
related infrastructure projects.
3. Guarantee Programmes Related to Obtaining Large Contracts
a. Bid Bonds;b. Advance payment guarantees; and c. Performance guarantees
This programme is designed to create or improve the capacity of African
entrepreneurs to bid for large businesses/contracts in Africa. In this regard,
the Bank provides the following guarantee facilities:
Export Development Schemes
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
4. Country Programme This programme is designed to assist the Bank’s member countries in peculiar difficulties not amenable to solutions offered individually by the Bank’s menu of products. This programme has been used to assist several countries in some difficulties, including Zimbabwe, Côte d’Ivoire and Sierra Leone.
5. ECA Loan Facilitation Programme Through this programme, the Bank works with other ECAs to
promote the acquisition of essential goods, especially capital goods by African Institutions.
Using this programme, the Bank provides guarantees to enable ECAs finance eligible imports of Africa.
The Bank may also take Line of Credit for direct disbursement to its clients for importation of goods from the country of origin of the creditor ECA.
(22)
Export Development Schemes
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (23)
1. Receivable Purchase/Discounting Programme
This programme involves a family of facilities, namely:
Forfaiting Facility
Invoice/Receivable Discounting Facility
Factoring and Receivables Management Facility
Joint Bill Discounting/Financing and Refinancing Facility:
2. Structured Pre- and Post Export Financing Facility;
3. Reimbursement Guarantee Facility;
4. Export Credit Guarantee;
5. Correspondent Banking/Africa Letter of Credit Confirmation
Facility (Africorrbanking)
Trade Expansion & Diversification Scheme
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (24)
6. .Syndications Programme
This is a risk-bearing programme the Bank uses to leverage trade
and project financing into Africa. Through this programme, the
Bank arranges or joins a syndicate or club of reputable
international and/or African banks in providing financing to
African entities in trade and/or project-related activities.
7. Financial Future-Flow Pre-Financing Programme
Financial future-flow transactions refer to future-flow debt
offerings that rely upon receivables not generated from export of
physical goods for repayment. Such receivables include credit
card or cheques, migrant remittances, royalties arising from
Bilateral Air Services Agreements (BASA), over flight fees,
etcetera.
Trade Expansion & Diversification Scheme
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (25)
8. Country Risk Guarantee Facility
This programme is aimed at making the sovereign risk of African
countries more acceptable by transferring this risk to
Afreximbank credit risk. Under this programme, Afreximbank
guarantees international and African banks with credit exposures
to Africa against certain country risk events.
9. Local Currency Programme
This programme serves important trade facilitation function as it
helps the Bank to provide matching currency to its clients' needs,
for example, providing working capital financing for the purchase
of local inputs for export manufacturing. Further, in a number of
sub-regions operating or planning to introduce currency areas,
the local currency programme helps promote intra-regional
trade.
Trade Expansion & Diversification Scheme
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
New Programmes & Facilities
In order to accelerate the realization of its medium term Trade Developmental goals, the Bank has introduced new programmes to augment existing ones. These include:
(26)
1. Construction/Tourism-Linked Relay Facility (CONTOUR)
This is a risk sharing facility introduced by the Bank with a view to supporting the Bank’s goal of promoting tourism in furtherance of the continent’s export diversification objective. Under the facility, the Bank shares the risk of developing hotels and tourism facilities by transferring contraction risk to parties better able to manage the risks. The facility has been fully elaborated and introduced with clear procedures, guidelines and accompanying marketing documents.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (27)
2. African Content Support Programme (ACSP)
This programme is designed to increase the capture of value accruing
to African countries from their extractive sectors;
It seeks to increase value addition in the extractive industries by
increasing the participation of African entities in these sectors;
Through this programme, the Bank will provide financing and advisory
services to entrepreneurs who provide or seek to provide support
services in the extractive industries in such a way that value –added in
Africa is increased. The ACSP includes the following facilities:
i. Mining Services/Oil Services
Facility;
ii. Facility for the Discount and/or
Purchase of Receivables; and
iii.Asset-Based Lending.
New Programmes & Facilities
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (28)
3. Intra-African Trade Facilitation Programme (INTRAFAP)
Through this programme the Bank seeks to promote trade, economic
cooperation and regional integration in the African continent. It is
also designed to provide a platform for mobilizing financial, technical
and other resources for the development, promotion and financing of
intra-African trade. This programme is being implemented using 3
facilities and 2 services, namely:
i. intra-African Letter of Credit Support Facility (ILCSF);
ii. intra-African Trade Services Support (ITSS);
iii. intra-African Export Financing Facility (IAEFF);
iv. Advisory Services and Market Research; and
v. Policy Advocacy.
New Programmes & Facilities….
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (29)
4. Health and Medical Tourism Programme (HMTP)
This programme is similar to Contour, in the sense that it seeks to
promote diversification of Africa’s exports by supporting the
development of world-class health facilities in Africa to meet the
growing health care needs of Africans.
Under this programme, the Bank provides appropriate financing for
the construction of first class hospitals or the purchase of modern
medical facilities across the continent.
The Bank, under this programme, will also facilitate the use of
expertise of African medical professionals domiciled abroad through
exchange programmes and/or sabbaticals.
New Programmes & Facilities……..
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (30)
5. Africa Cocoa Initiative (AFRICOIN)
This initiative was designed as part of the Bank’s EDP to
hasten the pace of industrialisation of the continent by
promoting value addition in Africa’s cocoa sector.
Through this programme the Bank provide:
a)term funding to support acquisition or expansion of
existing capacity in order to increase the processing of
cocoa beans into raw materials (liquor, cocoa butter, and
powder) to feed chocolate manufacturing plants in
Europe, North America, and Asia; and
b)Cocoa bonds to support the planting of new trees and to
promote consumption of cocoa products in Africa and
Asia.
New Programmes & Facilities…….
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (31)
6. African Diaspora Programme
This programme was introduced for the purpose of:
a) assisting African governments with significant remittance
receipts to access reasonably-priced external trade and project
finance from the international credit markets, using
remittances by African in the Diaspora as collateral and main
source of repayment.
b) Given the rapid growth in demand for and trade in African
ethnic foods and vegetables in Europe and the USA as the
population of Africans in the Diaspora continue to soar, the
Bank intends to facilitate the import of such goods by
supporting players in the supply chain.
New Programmes & Facilities………
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (32)
7. Africa Central Bank Deposit/Investment Programmes
(ACBDP)The Bank intends to use this programme to mobilize part of the growing foreign exchange reserves of African central banks to fund viable trade and project ventures in Africa as part of on-going efforts at making Africa’s growing external reserves more supportive of the continent’s trade and economic development process while diversifying the funding sources of the Bank.
8. Non-Equity Modes (NEMs) of International ProductionThis programme is designed to complement existing programmes under the Bank’s EDP to support long-term industrial development by building capacity, including through technology dissemination and domestic enterprise development, and by helping host countries to gain access to global value chains.
NEMs will be implemented through 3 Facilities, namely Franchise Financing Facility (FFF); Export Agriculture Financing Facility (EAFF) and Contract Manufacturing Support Facility (CMSF)
New Programmes & Facilities……..
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
ESSENTIALS TO STRUCTURED TRADE
Enforceable commercial contracts;
Acceptable performance risk;
Acceptable off takers/payment risks;
Avoid set offs in contracts;
Do your due diligence very well;
Understand the business well; and
Avoid currency and price risks.
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Conclusion
Access to financing has always been a challenge, however the introduction of structured finance has enable the continent continue its path towards development showing remarkable growth.
It is perhaps, more remarkable considering the
multiplicity of challenges that emerged in the global
output growth, notably the global financial and economic
crises that broke in 2008/9 and the sovereign debt crisis
of the Eurozone that began in 2009.
The once “hopeless continent” (by the Economist, 2010,
May 11 Edition)” achieved an enviable pace of economic
expansion of about 4.8% per annum during 2001-10,
making it, presently the second fastest growing region
behind Developing Asia
The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa
Thank you for listeningPlease visit Afreximbank
website : www.afreximbank.com