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Trade Finance during the Great Trade Collapse
pressure on trade flows. For example, GTFP extended its guarantee in support of a bank in West Bank and Gaza, facilitating the shipment of critical medical imaging equipment to health centers there. GTFP guarantees have historically been used in the region for unfunded risk mitigation related to letters of credit. In response to the onset of the crisis, the program increased the number of banks covered and enhanced the trade facilities for existing partner banks where it was most needed, notably in Pakistan. Assistance to Pakistan included a landmark trade transaction that brought together support from IFC, the Asian Development Bank, a global confirming bank, and a local Pakistani bank to provide trade finance coverage of up to €110 million in equipment for the textile industry, which accounts for more than 60 percent of the country’s industrial activity. GTFP Solutions Provided and Lessons Learned In the wake of the crisis, IFC’s responsiveness and ability to play its countercyclical role by taking more risk through the existing trade program and launching the complementary trade program proved critical to its success in supporting clients engaged in cross-border trade across all regions. IFC’s ability to engage quickly and assume a leadership role among multilateral institutions was rooted in the experience and in-house expertise gained before the onset of the financial crisis, through three years of operating the GTFP platform. Since GTFP’s inception in 2005, the program has facilitated many first-time partnerships between banks looking for trade solutions on a transactional basis. Such “brokered” relationships have expanded correspondent banking opportunities for client banks, including bank lines of credit and released cash collateral requirements. Improved financing availability has enabled the client base of small local banks, largely SME importers and exporters, to reach new markets under competitive terms. Annually, roughly 80 percent of the guarantees issued have been for amounts less than $1 million, with the median at $155,000, reflecting support for shipment sizes consistent with small businesses. As of late 2008, the crisis of confidence among banking institutions became a defining feature of the disruption to trade financing, which especially affected smaller banks, low-volume markets, and SME clients in the emerging markets. GTFP’s mandate facilitates access to trade financing for underserved market segments. The program’s ability to sustain partnerships among a broad number of banks from developed and developing markets helped to maintain trade across established corridors and to support nontraditional, nascent trade corridors— from exports of cashews from Côte d’Ivoire to Vietnam, to grain from Thailand to Mali, to cement from Turkey to Sierra Leone.