The IFC’s approach to international trade finance

13 June 2011 | Inside the institutions

Trade finance refers to financing arrangements that support international trade transactions. Financial institutions – normally banks – provide guarantees or loans to assist exporters who require prepayment in order to ship their products, or to reduce the risk for purchasers who need to pay for goods before actually receiving them. This allows traders and producers who suffer from credit constraints to have more access to credit and thus enjoy greater integration in international trade markets. Trade finance is also one of the central parts of a new ten-year strategy paper on international trade currently being developed by the World Bank for the period between 2011 and 2021 (see Update 72).

The International Finance Corporation (IFC), the Bank’s private sector arm, currently operates two main trade finance programmes: the Global Trade Finance Program and the Global Trade Liquidity Program. The Finance Program offers major international and regional banks partial or full insurance guarantees that cover various forms of trade finance instruments, such as letters of credit, promissory notes and advance payment guarantees. This enables them to offer risk guarantees to local financial institutions in emerging markets so they can expand the trade finance services they offer to local exporters and importers. The Finance Program also encompasses a technical assistance element, which offers on-site advisory services and trade finance training courses to build the capacity of participating banks. The Finance Program had its ceiling increased in December 2008 from $1 billion to $3 billion following the global financial meltdown.

In 2009, as a response to the financial crisis, the IFC created the Liquidity Program, which raises funds from public sources such as international finance and development institutions, governments and banks. The IFC channels the funds through commercial banks, which then provide it as trade finance to clients in developing markets (see Update 66). The IFC has committed $1 billion to the Liquidity Program. The aim is to raise a total of $4 billion, with contributions from G20 governments, in order to support up to $45 billion of trade over three years.

In 2010 the IFC launched two new programmes. Global Trade Supplier Finance is a new joint investment and advisory programme to provide short-term financing directly to exporters in emerging markets who sell their products to large international companies. The Global Warehouse Finance Program, on the other hand, supports the agriculture sector by providing banks with liquidity or risk coverage backed by warehouse receipts, which allows farmers and small businesses to have access to finance as soon as they deposit their commodities in warehouses.

As of January 2011, the IFC has supported almost $22 billion of trade transactions through the Finance Program and the Liquidity Program, according to the Bank’s website. In the 2010 financial year, the Finance Program issued $3.46 billion in guarantees, marking a 44 per cent increase over the previous year. Over one third of trade supported by it was in Latin America, 22 per cent in Sub-Saharan Africa and 16 per cent in the Middle East and North Africa. Over half of goods supported by the Finance Program in that year were agricultural products or oil, gas and chemicals.

The IFC states that, as of December 2010, the Liquidity Program had supported trade worth over $11.2 billion since its creation in 2009 through around 8,000 transactions. Of these, 81 per cent were for small and medium enterprises. Companies are defined as such if they fulfill two out of three criteria: less than 300 employees, assets under $15 million or sales under $15 million. However, this definition has been questioned before (see Update 73). Of the total, 28 per cent were for members of the Bank’s low-income country arm, the International Development Association (IDA). According to the IFC, 41 per cent of trade supported by the Liquidity Program was in Latin America and the Caribbean, followed by 26 per cent in East Asia and the Pacific, 16 per cent in Sub-Saharan Africa and 12 per cent in South Asia. The Middle East and North Africa region represented only 4 per cent of trade supported by the Liquidity Program, while Europe and Central Asia accounted for only 1 per cent.

An April report by the Bank’s arms-length evaluation body, the Independent Evaluation Group (IEG), highlighted that the development impacts of trade finance projects have not yet been assessed (see Update 76). There are also concerns about the potential for trade finance projects to violate the Bank’s social and environmental policies as trade finance investments to financial intermediaries, such as banks, are still subject to less stringent guidelines for compliance with the IFC’s performance standards (see Update 76, 74).