evaluation of the international finance corporation’s global trade finance program, 2006–12

7/28/2019 Evaluation of the International Finance Corporations Global Trade Finance Program, 200612

1/157

Evaluation of the International Finance

Corporations Global Trade FinanceProgram, 200612

Overview


2/157

Evaluation of the International FinanceCorporations Global Trade Finance Program,200612


3/157


4/157

i

2013 Independent Evaluation Group1818 H Street NW, Washington DC 20433Telephone: 202-473-1000; Internet: http://ieg.worldbankgroup.orgSome rights reserved

1 2 3 4 16 15 14 13

This work is a product of the staff of the Independent Evaluation Group (IEG) of the World BankGroup. Note that IEG and the World Bank Group do not necessarily own each component of thecontent included in the work. IEG and the World Bank therefore do not warrant that the use of thecontent contained in the work will not infringe on the rights of third parties. The risk of claimsresulting from such infringement rests solely with you.

The findings, interpretations, and conclusions expressed in this work do not necessarily reflect theviews of IEG, the World Bank Group, its Boards of Executive Directors, or the governments theyrepresent. IEG and the World Bank Group do not guarantee the accuracy of the data included in thiswork. The boundaries, colors, denominations, and other information shown on any map in this workdo not imply any judgment on the part of IEG or the World Bank Group concerning the legal statusof any territory or the endorsement or acceptance of such boundaries.

Nothing herein shall constitute or be considered to be a limitation on or waiver of the privileges andimmunities of IEG and the World Bank Group, all of which are specifically reserved.

Rights and Permissions

This work is available under the Creative Commons Attribution 3.0 Unported license (CC BY 3.0)http://creativecommons.org/licenses/by/3.0. Under the Creative Commons Attribution license, youare free to copy, distribute, transmit, and adapt this work, including for commercial purposes, underthe following conditions:

AttributionPlease cite the work as follows: IEG (Independent Evaluation Group). 2013.Evaluation of

the International Finance Corporations Global Trade Finance Program, 2006-12. Washington, DC: WorldBank. Creative Commons Attribution CC BY 3.0

TranslationsIf you create a translation of this work, please add the following disclaimer along withthe attribution: This translation was not created by the Independent Evaluation Group or the World BankGroup and should not be considered an official IEG/World Bank Group translation. IEG and the World BankGroup shall not be liable for any content or error in this translation.

All queries on rights and licenses should be addressed to the Office of the Publisher, The World Bank,1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected].

Cover: Photo by Asita R. De Silva

ISBN: 978-0-8213-9980-4eISBN: 978-0-8213-9981-1DOI: 10.1596/978-0-8213-9980-4


5/157


6/157

i

Contents

ABBREVIATIONS .................................................................................................................................. V

ACKNOWLEDGMENTS ....................................................................................................................... VII

OVERVIEW ............................................................................................................................................ IX

MANAGEMENT RESPONSE ............................................................................................................... 27

MANAGEMENT ACTION RECORD ................................................................................................ XXXII

CHAIRPERSONS SUMMARY: COMMITTEE ON DEVELOPMENT EFFECTIVENESS .............. XXXIX

STATEMENT BY THE EXTERNAL EXPERT PANEL ......................................................................... XLI

1. BACKGROUND AND CONTEXT ....................................................................................................... 1

The World Bank Groups Strategy to Support Trade and Financial Intermediation .................................................. 1The Role of Trade Finance ....................................................................................................................................... 4Characteristics of the Trade Finance Industry since 2006 ........................................................................................ 6Summary ................................................................................................................................................................... 7

2. IFCS GLOBAL TRADE FINANCE PROGRAM: OBJECTIVES AND DESIGN ................................. 9

Program Objectives, Design, and Evolution .............................................................................................................. 9

Other Trade Finance Initiatives ............................................................................................................................... 14

Summary ................................................................................................................................................................. 16

3. RELEVANCE OF THE GLOBAL TRADE FINANCE PROGRAM .................................................... 17

Factors Affecting the Supply of Trade Finance ....................................................................................................... 17Additionality of the GTFP ........................................................................................................................................ 23Summary ................................................................................................................................................................. 31

4. EFFECTIVENESS OF THE GTFP IN SUPPORTING ACCESS TO TRADE FINANCE INUNDERSERVED MARKETS ................................................................................................................ 33

Reaching IDA, Low-Income, and Fragile Countries ................................................................................................ 33

Helping Banks Build Partner Networks ................................................................................................................... 36Reaching Small and Medium-Size Enterprises ....................................................................................................... 38Supporting Critical Sectors of the Economy ......................................................................................................... 41Leveraging Commercial Bank Financing ................................................................................................................ 44Enabling Longer-Term Trade Finance .................................................................................................................... 44Helping Improve Liquidity in Times of Crisis ........................................................................................................... 45Opening Doors for IFC in Difficult Markets .............................................................................................................. 46Supporting South-South Trade and Exports from Developing Countries ................................................................ 47Building Trade Finance Capacity in Issuing Banks ................................................................................................. 49


7/157

CONTENTS

ii

Summary ................................................................................................................................................................. 51

5. EFFICIENCY OF THE GLOBAL TRADE FINANCE PROGRAM ..................................................... 52

Summary ................................................................................................................................................................. 55

6. IFC WORK QUALITY ........................................................................................................................ 56

GTFP Operations .................................................................................................................................................... 56GTFP Marketing and Client Relationships .............................................................................................................. 58

Appraisal and Supervision of Issuing Banks ........................................................................................................... 59Creation of a Common Trade Platform among Multilateral Development Banks .................................................... 60Reporting, Monitoring, and Evaluation of the GTFP ............................................................................................... 61Summary ................................................................................................................................................................. 64

7. MAIN FINDINGS AND RECOMMENDATIONS ................................................................................ 66

Main Findings .......................................................................................................................................................... 66

Relevance/Additionality ....................................................................................................................................................... 66Effectiveness ....................................................................................................................................................................... 67

Efficiency ............................................................................................................................................................................. 69Work Quality ........................................................................................................................................................................ 69

Recommendations .................................................................................................................................................. 71Additional Issues for Consideration ......................................................................................................................... 73

Boxes

Box 2.1. Operation of a Typical GTFP Letter of Credit Transaction .......................................................10Box 2.2. IFCs Trade and Supply Chain Products ..................................................................................14

Tables

Table 2.1.Increases in the GTFP Program Limit since FY05 ................................................................12Table 2.2. Annual GTFP Commitments as a Proportion of Total IFC Commitments (percent) ..............15Table 3.1.Factors That May Limit the Supply of Trade Finance ...........................................................18Table 3.2. Changes in the Use of GTFP, 200612 ................................................................................23Table 3.3. GTFP Use by Country and Issuing Bank Risk Ratings by Region, 200612 ........................24Table 3.4. GTFP Guarantees by Country and Issuing Bank Risk (percent of total GTFP volume) ........25Table 3.5. Pricing of GTFP Guarantees, FY0612 (volume-weighted annual average, percent) ..........30

Table 4.1. GTFP Reach in Low-Income and IDA Countries ..................................................................34Table 4.2. Top Ten GTFP Countries by Volume, 200612 ....................................................................35

Table 4.3. Concentration of GTFP Compared to IFC Long-Term Investments (percent) .......................36Table 4.4.Change in the Average Size of GTFP Guarantees, FY0612 ($ millions) ............................39Table 4.6. GTFP Use by Sector, FY0612 (percent of total GTFP volume) ..........................................42Table 4.7. GTFP Use by Sector and Region, FY0612 (percent of total) ..............................................43Table 4.8. Average Tenors of GTFP Guarantees (months) ...................................................................45Table 4.9 GTFP South-South Transactions (percent of total) ................................................................47


8/157

CONTENTS

ii i

Table 4.10. Main Trade Finance Instruments Supported in Each Region (percent of total) .................. 48Table 4.11. Past IEG Reviews of Trade Finance Advisory Projects ...................................................... 50Table 5.1.GTFP Gross Income Projections ($ millions) ....................................................................... 52Table 6.1.Confirming Bank Feedback on GTFP Operations ................................................................ 57Table 6.2. Issuing Bank Feedback on IFCs Appraisal Quality .............................................................. 59

Table 6.3.Comparison of the Key Features of MBD Trade Finance Programs .................................... 61

Figures

Figure 1.1. The World Bank Groups Strategy to Support Trade, 201121 ............................................. 3Figure 3.1. IFC Additionality in Providing Risk Mitigation under the GTFP ............................................ 22Figure 3.2. Average GTFP Country and Issuing Bank Risk Levels, FY06-12 (volume weighted) ......... 26Figure 3.3. GTFP Guarantee Volume by Country and Issuing Bank Credit Risk Ratings, 200612 ..... 28Figure 6.1. Relative Size of the GTFP Commitments Using a Risk-Weighted Approach ...................... 62

Appendixes

APPENDIX A NOTE ON THE GLOBAL TRADE LIQUIDITY PROGRAM ........................................... 74

APPENDIX B PEOPLE INTERVIEWED ............................................................................................... 81

APPENDIX C SURVEY INSTRUMENTS .............................................................................................. 95

BIBLIOGRAPHY ................................................................................................................................. 104

Evaluation Managers

Caroline Heider Director-General, Evaluation Marvin Taylor-Dormond Director, Private Sector Evaluation Stoyan Tenev Manager, Private Sector EvaluationAs ita R. De Si lva Task Team Leader


9/157


10/157

v

Abbreviations

DOTS Development Outcome Tracking SystemEBRD European Bank for Reconstruction and Development

GTFP Global Trade Finance ProgramGTLP Global Trade Liquidity ProgramICC International Chamber of CommerceIDA International Development AssociationIEG Independent Evaluation GroupIFC International Finance CorporationLIC Low-income countryMDB Multilateral development bankMIC Middle-income countryMSME Micro, small, and medium-size enterprisesSME Small and medium-size enterpriseSWIFT Society for Worldwide Interbank Financial Telecommunications

XPSR Expanded Project Supervision Report


11/157


12/157

vi i

Acknowledgments

This evaluation was prepared by a team led by Asita R. De Silva (Task Team

Leader/Principal Author) comprising Emelda Cudilla, Heather Dittbrenner, DerekEnnis, Jack Glen, Houqi Hong, Marylou Kam-Cheong, Maria Kopyta, Victor Malca,Nestor Ntungwanayo, Maria Gabriela Padrino, Michael Pomerleano, Ida Scarpino,Thierry Senechal, Donald Smith, Melvin Vaz, Joseph Wambia, and Izlem Yenice.Peer reviewers for the report were Marc Babin (former Director of the InternationalFinance Corporations Corporate Portfolio Management Department) and BernardHoekman (Director of the World Banks International Trade Department). Theevaluation was prepared under the direction of Stoyan Tenev, Manager,Independent Evaluation Group Private Sector Evaluation, and Marvin Taylor-Dormond, Director, Independent Evaluation Group Private Sector Evaluation, andunder the general direction of Caroline Heider, Director-General, IndependentEvaluation Group.


13/157


14/157

ix

Overview

The International Finance Corporation (IFC) introduced the Global Trade Finance Program(GTFP) in 2005 to support the extension of trade finance to underserved clients globally. Theprogram has since expanded rapidly, and its authorized exposure ceiling was increased in threestages from $500 million in 2005 to $5 billion in 2012. In FY12, the GTFP accounted for 39percent of total IFC commitments, 53 percent of its commitments in Sub Saharan Africa, and 48percent of its commitments in Latin America and the Caribbean.

The GTFP has been a relevant response to demand for trade finance risk mitigation in emergingmarkets, although faster recent expansion in lower-risk markets raises the need for closemonitoring of its additionality in these areas. The GTFP significantly improved IFCsengagement in trade finance from its past efforts by introducing an open, global network ofbanks and a quick and flexible response platform to support the supply of trade finance. TheGTFP has high additionality among high-risk countries and banks, where the supply of trade

finance and availability of alternate risk-mitigation instruments are lower.

In its early years, the GTFP was concentrated in higher-risk, lower-income countries, particularlyin the Africa Region. During the global financial crisis, the programs risk-mitigation instrumentbecame relevant in much broader markets. In the years since the 2009 crisis, although the GTFPhas continued to expand in high-risk markets, in terms of dollar volume it has grown faster inlow- and medium-risk countries.

The GTFP has been effective in helping expand the supply of trade finance by mitigating risksthat would otherwise inhibit the activity of commercial banks. The program has been weightedtoward low-income countries (LICs) relative to their share in global trade. The GTFP played auseful role in helping connect local emerging market banks with global banks. It has also helpedglobal banks extend their capacity to do business in developing countries, which can be limitedby regulatory constraints on capital, among other factors.

Indicators such as small and medium enterprise and sector reach are not fully informative ofprogram effectiveness in themselves, as the instrument has little influence over the local banksrisk appetite among its clients. Despite its initial goal to support longer-term trade financetransactions, GTFP guarantees have tenors only slightly longer than the broader market. TheGTFP has helped IFC engage in difficult countries and has led to long-term investments with 40new clients.

The GTFP has been profitable, although not to the extent originally expected. The program

appears to be low risk and has not paid any claims to date. The opportunity costs of the programfor IFC are relatively low. Even though the GTFP accounted for 39 percent of IFCcommitments in FY12, it accounted for 2.4 percent of its capital use, 1.2 percent of its staffcosts, and 0.6 percent of its net profit.

IFC work quality, particularly with respect to the GTFP processing time, marketing and clientrelationships, and the depth and quality of IFCs due diligence, has been good and has beenappreciated by clients. At present, the system to handle cases of covenant breach among


15/157

OVERVIEW

x

participating banks lacks clarity. Although substantial progress has been made in developingsystems to assess the development effectiveness of the program, more can be done to addressthe apparent data reporting and collection burden on client banks as well as the difficulty inattributing many of the outcome indicators to the program.

The Independent Evaluation Group (IEG) recommends that IFC (i) continue to strengthen theGTFPs focus in areas where additionality is high and increase the share of the program in high-risk markets and where the supply of trade finance and alternate risk-mitigation instruments areless available; (ii) adopt additional methods of reporting volume that can reflect the distinctnature of trade finance guarantees; (iii) refine the means by which GTFP profitability ismonitored and reported; (iv) review the costs and benefits of the current monitoring andevaluation framework; (v) ensure that a transparent process is in place to govern cases ofcovenant breach; and (vi) enhance the program's ability to meet the demand for coverage oflonger-term trade finance tenors.

Background and Context

The Bank Group seeks to help enhance tradefinance in emerging markets as part of itsstrategy to support global trade. It has broadstrategies to support trade and financial sectordevelopment. In 2005, the Bank Groupidentified investments in trade finance as ameans to support trade in developingcountries. In 2011, supporting trade financewas identified as a component of the BankGroups formal strategy to support trade over

the next decade.

Intermediation by the banking sector canprovide risk mitigation and improve theliquidity and cash flow of trading parties.Although much of global trade is conducteddirectly between firms, some 2040 percent oftrade transactions is estimated to involveintermediation by the banking sector. Themost common trade finance instrument usedby banks to intermediate trade transactions isthe letter of credit. A bank issuing a letter of

credit replaces the credit risk of the buyer in atransaction. A confirmed letter of credittransaction involves a local issuing bankand an international confirming bank thatguarantee the trade transaction payment.

Several key characteristics distinguish themarket for trade finance from other financial

markets. Trade finance is characterized byshort-term maturities, with the tenor of atrade finance transaction averaging fivemonths. The industry is dominated by some30 international confirming banks thataccount for more than 80 percent of globaltrade finance. The industry is also relativelylow risk, with surveys indicating that theaverage default rate on import letters of creditin recent years was 0.08 percent (ICC 2011).

Globally, trade finance has been recovering

since the financial crisis, although somechanges are apparent in the industry.Following the onset of the financial crisis in2008 both international trade and tradefinance volumes dropped. Both recoveredafter the crisis, although trade is growing at aslower rate than in the past, partly because ofthe rebalancing of the world economy towarddomestic demand in emerging markets as wellas slower growth in developed countries (IMF2011). The industry has also shown greater

selectivity in risk taking and flight to qualitycustomers (ICC 2011). The Europeansovereign debt crisis has also caused somelarge European banks to reduce their presencein trade finance. Meanwhile, some U.S.- andAsian-based banks have increased their tradefinance activity, although the extent to which


16/157

OVERVIEW

xi

they can fill the gaps left by the Europeanbanks remains to be seen.

This evaluation covers the GTFP since itsinception in 2004.In recent years, IFC hassubstantially increased its engagement in tradefinance. IFC, mainly through the GTFPitsflagship trade finance productas well asthrough the Global Trade Liquidity Program(GTLP) and other trade and supply chainproducts. This evaluation focuses on theGTFP, which IFC established in FY05 andwhich started operations in FY06. It providesan overall assessment of the programsdevelopment effectiveness against the criteriaof relevance, efficacy, and efficiency.

Program Objectives, Design, and Evolut ionThe GTFP aims to help increase theavailability of trade finance in underservedmarkets. In November 2004, the Board ofDirectors approved IFCs proposed $500million GTFP. The goal of the program was tosupport the extension of trade finance tounderserved clients globally. The new modelsought to address a range of weaknesses inIFCs past trade finance efforts. To encouragethe flow of trade finance, IFC would guarantee

the payment obligation of a local bank in adeveloping country to an internationalconfirming bank. The program was intended toallow IFC to respond quickly to supportliquidity when and where it was needed, assistlocal banks develop relationships withinternational counterparts, and enhance tradefinance capabilities among local banks.

Since its initial approval, the program hasexpanded significantly. In December 2006, IFC

reported that demand for GTFP guaranteeshad surpassed expectations, particularly inAfrica, and requested an increase in theprograms ceiling to $1 billion. In September2008, shortly before the full effects of theemerging global financial crisis were felt, IFCrequested a further increase in the ceiling to$1.5 billion. IFC indicated that the program

had seen rapid growth, and Africa continued tobe its main focus. In December 2008, IFCwent back to the Board to request that theprogram ceiling be doubled to $3 billion sothat it could respond to the unfolding global

economic crisis. Finally, in September 2012,the program ceiling was increased to $5 billionbecause of continuing strong demand.

IFC has introduced several other trade andsupply chain products in the last few years.InMay 2009, IFC established the GTLP to helpaddress liquidity constraints and temporarilysupport trade finance flows to developingcountries in response to the global financialcrisis. The $1 billion program was acollaborative effort among bilateral and

multilateral development finance institutionsand governments to disburse funds to globaland regional banks with extensive tradenetworks. The program was modified inJanuary 2010 into an unfunded guaranteefacility. In FY11, two additional trade andsupply chain programs were initiated: theGlobal Trade Supplier Finance program andthe Global Warehouse Finance Program.These two programs aim to support access toworking capital for suppliers in developing

countries and for farmers and small andmedium-size enterprises (SMEs) in theagriculture sector.

The GTFP has become a large part of IFCsannual commitments, although IFCs methodof reporting may overstate its relative size.Since its establishment in 2005, the GTFP hasgrown from 5 percent of IFCs total annualcommitments in 2006 to 39 percent in 2012.The GTFP grew by an annual average of 75percent a year compared with 10 percent ayear for long-term finance commitments. In2012, the GTFP accounted for 48 percent ofIFC commitments in the Latin America andthe Caribbean Region and 53 percent ofcommitments in Sub-Saharan Africa. IFCsmethod of reporting its short-term tradefinance volume, however, may overstate itsrelative size in IFCs business.


17/157

OVERVIEW

xi i

Program Relevance

Factors Affecting the Supply of TradeFinance

The relevance of the GTFP lies in its ability to

enhance the supply of trade finance, withoutpreempting existing market solutions thatmight be available at reasonable cost.IFCsmandate is to support private sectordevelopment in member countries withoutundertaking activities for which sufficientprivate capital would be available onreasonable terms. Supporting private sectordevelopment without competing with privateplayers or undermining market solutionsitsadditionalityprovides the underlying

rationale for IFCs engagement in any activity.The additionality of IFC engagement in tradefinance lies in the extent to which it helpsenable viable trade transactions that wouldotherwise not occur because of the inadequatesupply of trade finance on reasonable terms.It is this definition of additionality that isapplied in this report.

There are several scenarios in whichinternational confirming banks may notsupply adequate trade finance to meet demand

from issuing banks in emerging markets.Factors that may inhibit the supply of tradefinance from an international confirming bankto a local issuing bank include (i) theperceived high credit risk of the local issuingbank; (ii) internal constraints to theconfirming bank, such as capacity toundertake due diligence, prudential controls,or access to information; (iii) externalprudential regulations, such as those requiredby Basel III agreements that can affect capital

requirements and costs; (iv) risks in thebanking sector of the emerging market, suchas poor regulation that could affect the issuingbanks ability to honor its obligations; and (v)political and macroeconomic risks in thecountry that could also affect the banksability to honor its debts.

Various other risk-mitigation options to helpthe flow of trade finance may or may not existin different markets. In general, risk-mitigation instruments that can encourage thesupply of trade finance from international

banks to local banks when a clean credit limitis reached include cash deposits from the localbank to the international bank, interbank risksharing, private credit insurance, insurancefrom an export credit agency, or a guaranteefrom a multilateral trade finance program,such as IFCs GTFP. Each instrument may ormay not be available in specific markets andhas its strengths, limitations, and applicabilityin different circumstances.Additionality of the GTFP

The GTFP was a relevant response to demandfor trade finance risk mitigation and wasconcentrated in high-risk, low-incomecountries in its early years.When the GTFPbecame effective in FY06, IFCs AAA creditrating and the programs flexibility, quickresponse mechanism, and foundation on IFCsglobal network of partner banks placed it in aposition to meet demand for trade finance riskmitigation in high-risk markets. In FY0608,

45 percent of GTFP volume was in high-riskcountries (using IFCs country risk rating); 52percent in LICs; and 47 percent in the AfricaRegion. GTFP guarantees were also used incountries that were experiencing temporarypolitical and economic crises that affectedexternal risk perceptions. This was the case inLebanon in 200607; Kenya following theelections in 2007; Pakistan following politicaluncertainty and macroeconomic instabilityafter 2007; and Nigeria during banking sectorcrises in 2006 and 2008.

During the global economic crisis, theprogram offered a viable risk-mitigationinstrument with relevance in significantlybroader markets.The global financial crisisaffected the risk appetite of internationalconfirming banks as well as the availability ofother risk-mitigation instruments in emerging


18/157

OVERVIEW

xiii

markets. There ensued a strong, broader-based demand for the GTFP for coverageeven among more credit-worthy banks incountries with limited political risk. Theincreased demand was driven less by crises or

underlying weaknesses in specific emergingmarkets than by increased caution and morestringent prudential norms amonginternational confirming banks.

In the years since the 2009 crisis receded, theGTFP has maintained a significant presencein lower-risk markets, raising a need for closermonitoring of its additionality in thesemarkets.With the broader demand after theonset of the crisis, the GTFP was no longerconcentrated in the highest risk markets. In

200912, the share of total guarantee amountin high-risk countries was 27 percent; in LICs,16 percent; and in Africa, 22 percent. Theproportion of the GTFP guarantee amountissued to support low risk banks in low riskcountries rose from 10 percent in 200608 to21 percent in 200912. Nonetheless, theGTFP remains overweight in LICs:Although LICs accounted for seven percentof developing country trade, they accountedfor 21 percent of GTFP volume in FY0612.

Case studies point to high GTFP additionalityin high-risk, crisis-affected countries.IEGcase studies in Cte dIvoire, Liberia, and theDemocratic Republic of Congo andinterviews with international confirmingbanks indicated that the GTFP has relativelyhigh additionality in these countries. Each wasa conflict-affected country with weak bankingsystems that affected perceptions of risk. BothGTFP and non-GTFP issuing banks indicatedthat they had to put up cash collateral formost trade transactions, which reduced fundsavailable for additional lending. The smallvolumes and perceptions of high country andbanking sector risk discouraged large lines ofcredit from international banks and made fewrisk-mitigation instruments available otherthan cash collateral. International confirmingbanks indicated that the costs of undertaking

and maintaining due diligence with localbanks in these markets is often not justified.Although the GTFP did not change thesecosts, participation in the program increasedtheir comfort and enabled higher volumes.

The GTFP has also had shown highadditionality in countries that have weakbanking systems or long-standing countryrisks. In the East Asia and Pacific Region,Vietnam has dominated the share of GTFP,representing about 60 percent of volume inthe region. Its banking sector has beenconsistently perceived as high risk because ofrapid credit growth and weaknesses inbanking supervision. In Pakistan, which is thelargest GTFP user country in the Middle East

and North Africa Region, the banking sectorhas also been perceived as high-risk becauseof poor credit quality, concerns over politicalinterference in loan recovery, and political andmacroeconomic instability.

Participating banks indicated that theygenerally did not use the GTFP fortransactions that they would have conductedanyway.Akey underlying criterion for IFCadditionality is whether the trade transaction

would not have happened without the GTFP.In an IEG survey of GTFP participatingbanks, 56 percent of responding issuing banksand 71 percent of responding confirmingbanks indicated that they had not used theprogram for transactions that they would havedone anyway. IEG interviews suggest thatGTFP was a convenient and quick responseoption when credit lines were full andalternative risk-mitigation instruments werenot available. However, given that theavailability of alternate risk-mitigationinstruments can vary on a day to day basis aswell as variable use of GTFP depending onthe availability of headroom on credit lines, itis difficult to establish with certainty if anyparticular trade transaction would or wouldnot have happened without GTFP.


19/157

OVERVIEW

xi v

Under some circumstances, the likelihood of aGTFP-supported transaction taking placewithout the GTFP is higher. In IEGs survey,44 percent of the issuing banks thatresponded (that accounted for 17 percent of

GTFP commitments since 2006) indicatedthat they have used the program fortransactions that they would have executedanyway. In IEG interviews, local issuingbanks indicated that for their well-establishedcustomers, they would seek alternate meansand somehow make the transaction happen,even at higher cost. Large importers, such astraders in oil and other commodities, werealso more likely to find an alternate source oftrade finance or provide cash to make atransaction happen. Some confirming banks

that follow their corporate customers alsoindicated that they would somehow find a wayto make the transaction happen for thesecustomers, even at higher cost, including bygoing through another confirming bank withrelationships in that country.

Pricing is an important tool to help IFCensure that alternate market solutions are notimpeded. Given the difficulties in ex antemeasures of additionality on a case by case

basis, along with the possibility of crowdingout an existing private sector solution, IFCspricing is an important tool to help ensure itsadditionality. At present, IFC aims to priceguarantees at market levels. However, theprocess is not fully transparent and pricingeach transaction involves some subjectivity.

IFC currently has regional volume targets butdoes not have return to capital-basedtargets.This may create some tension between thedual objectives of meeting volume targets andensuring pricing levels that do not riskcrowding out any viable existing instruments.The goal should be to price guarantees at alevel that will not undermine the use of otherrisk-mitigation instruments, but still becommercially viable. Although an emphasison encouraging the highest possible pricingthat a market can absorb may have a trade-off

in terms of volume, it can also help ensure theadditionality of the GTFP and itsconcentration in the most relevant markets.

Program Effectiveness in Supporting Accessto Trade Finance in Underserved Markets

IEG assessed the GTFPs effectiveness againstachievement of key objectives.Theoverarching objective of the GTFP is to helpincrease access to trade finance amongunderserved markets. Key targets andintermediate goals identified by the programinclude (i) reaching low-income, InternationalDevelopment Association (IDA), and fragilecountries; (ii) helping banks build partnernetworks; (iii) reaching SMEs; (iv) supporting

critical sectors of the economy; (v) leveragingcommercial bank financing; (vi) enablinglonger-term trade finance tenors; (vii) helpingimprove liquidity in times of crisis; (viii)opening doors for IFC in difficult markets; (ix)supporting South-South trade; and (x) buildingtrade finance capacity in issuing banks.

Case studies illustrate the benefits of enablingtrade transactions. This evaluation did notendeavor to demonstrate the links betweentrade and development, which are well

established in the literature. In cases where theGTFP provided risk mitigation when viablerisk-mitigation alternatives were not available,it helped enable trade transactions that wereotherwise unlikely to have occurred. When aseller required a confirmed letter of credit andif the local banks available to the buyer didnot have access to trade finance frominternational banks and no risk-mitigationoptions were available at reasonable cost(including cash in advance), then the importer

would not have been able to complete thetransaction.

Reaching Low-Income and FragileCountries

Since its inception, the GTFP has issued nearly$4 billion in guarantees for issuing banks in


20/157

OVERVIEW

xv

LICs. This represents 21 percent of the totalprogram volume, compared with the 7 percentshare of LICs in developing country tradeduring the period, indicating an overweightposition in LICs. However, guarantee volume

for LICs decreased from more than $1 billionin FY09 to $500 million in FY12 as large userssuch as Nigeria, Pakistan, and Vietnam movedfrom LIC to MIC status.

More than half the program is in IDAcountries. By International Bank forReconstruction and Development/IDAborrowing status, the share of guaranteevolume in IDA/blend countries rose from 45percent in FY07 to 51 percent in FY12. Thedollar amount of guarantees issued in

IDA/blend countries rose from $410 millionin FY07 to $2.9 billion in FY12. The volumein fragile and conflict-affected states droppedfrom 22 percent of the program in FY0608to 4 percent in FY0912 (or from an averageof $181 million in FY0608 to $109 million inFY0912). This is similar to the 4 percentproportion of IFC long-term investments infragile and conflict-affected states.

The programs concentration in a small

number of countries has been declining,although a few large countries still account fora large share of GTFP volume.The top 10GTFP countries (by location of issuing banks)accounted for 76 percent of the programsvolume in FY0912, compared with 95percent in FY0608. The number of countriesin which the program was active increasedsubstantially, from 37 in FY08 to 84 in FY12.Nevertheless, the program remainsconcentrated, and 10 countries accounted for73 percent of its volume since 2006. There arestrong concentrations in each region. FourcountriesNigeria, Ghana, Kenya, andAngolaaccounted for 90 percent of GTFPvolume in Africa; two countriesPakistanand Lebanonaccounted for 89 percent ofvolume in the Middle East and North AfricaRegion; and Vietnam and China accounted

for 98 percent of volume in the East Asia andPacific Region.

Helping Banks Build Partner Networks

The GTFP has played a useful role inconnecting local issuing banks with globalconfirming banks. A core GTFP objective hasbeen to help trade finance banks establishdirect relationships with each other that canthen lead to enhanced flows of trade finance.In IEGs survey, 66 percent of issuing banksand 60 percent of confirming banks indicatedthat the GTFP influenced their decision toadd new banks to their trade networks.1Feedback from GTFP and non-GTFP banksin IEG case study interviews indicated

demand among lower-tier, less-well-established banks to become part of theGTFP network as a door opener and seal ofapproval that can help build relationships.

In some banks, capacity extension rather thanintroduction to new partners has been a keydriver of GTFP use.The GTFP is also usedby some international confirming banks thatalready have emerging market networks toextend their capacity that is constrained by

prudential or regulatory constraints on theiruse of capital. In these cases, the GTFP helpsthe banks issue more trade finance withintheir existing networks than they wouldotherwise be able to do. This was the case,for example, among some of the largerconfirming banks that had global presencesand did not need the GTFP to help themestablish new relationships. In IEGs survey,25 percent of confirming banks (thataccounted for 26 percent of GTFP volume)indicated that the GTFP did not help increase

their network of trade finance counterpartbanks in emerging markets, and 39 percent(that accounted for 34 percent of volume)

1As part of the research for this evaluation, IEGconducted a survey of participating GTFP banks inSeptember 2012.


21/157

OVERVIEW

xv i

stated that they had not established newrelationships as a result of the program.

GTFP volume is concentrated among a fewconfirming banks.The number of accreditedinternational confirming banks in the GTFPincreased from 64 in FY06 to 234 in FY12.However, 10 international banks haveaccounted for 63 percent of GTFP volumesince 2006, and in 2012, three banksaccounted for 44 percent of the volume. Theconcentration partly reflects the nature of theindustry, which is dominated by 2030international banks. However, it also suggeststhat demand could be variable, depending onthe trade finance strategies, risk perceptions,and current business models of these banks.

The concentration is most pronounced in theEast Asia and Pacific Region, where fourconfirming banks accounted for 83 percent ofthe programs volume since 2006. A singlebanks business in Vietnam has accounted for38 percent of GTFP volume in the East Asiaand Pacific Region since 2006.

Reaching Small and Medium-SizeEnterprises

Eighty percent of GTFP guarantees (bynumber) were worth less than $1 million,although the bulk of the programs volumesupported large transactions.IFC uses theproxy measure of transactions less than $1million to indicate whether the GTFP isreaching SMEs or not. Nearly 80 percent ofthe number of guarantees issued since FY06was less than $1 million. The average size of aGTFP guarantee increased from $0.8 millionin FY06 to $1.9 million in 2012. Averageguarantee size has varied significantly across

markets, with smaller transactions moreprevalent in high-risk, low-income countriesand with higher-risk banks.

Although recent studies indicate that theproxy measure for loans reflects the SMEstatus of borrowers, more research is neededto clearly establish this for trade finance.A

recent study conducted by IFC concluded thatthe $1 million loan size proxy captured themicro, small, and medium-size enterprisestatus of the beneficiary firm (IFC 2012b). Ina sample of 3,000 loans of less than $1

million, 80 percent of beneficiaries werefound to be SMEs and 18 percent weremicroenterprises. However, whether this isalso valid for trade finance transactions hasnot yet been verified. There are cleardifferences in properties between direct loansto firms and trade finance transactions.Additional study is needed to determinewhether the $1 million trade transaction size isalso a good proxy for the SME status of theemerging market party of a trade transaction.

An SME reach indicator is not in itselfinformative of GTFP effectiveness. IFCendeavors to add SME-oriented issuingbanks to the GTFP in order to enhance thereach of the program among SMEs. However,regardless of the definition of SMEs, there issome question as to whether the indicator initself is informative of the programseffectiveness. Under the GTFP, IFC does nottake the payment risk of the local firmapplying for a trade finance instrument. The

GTFP therefore does not directly influencethe risk appetite of the local issuing bank orits selection of clients, which can be largefirms or SMEs. An issuing bank can alsorequire cash up front from local firms,regardless of whether they have GTFPcoverage or not. Moreover, the profile of thelocal issuing bank is the key determinant ofthe additionality and achievement of theprogram. In theory, the program could haveall its transactions less than $1 million but notreach underserved markets if the transactionsare through well-established banks that couldhave obtained trade finance anyway. Use of anSME reach indicator is therefore not fullyinformative in itself and needs to at least besupplemented by indicators of the profiles ofthe issuing banks.


22/157

OVERVIEW

xvii

Refusing large transactions is unlikely toenhance the achievements of the program.The primary means by which IFC can affectthe proportion of the program that isallocated to transactions of less than $1

million is by refusing to cover largetransactions. This, however, has itslimitations. If IFC had refused all transactionsover $1 million since 2006, then the totalGTFP volume over the programs life wouldhave been $4 billion instead of $19 billion.Moreover, given that SMEs can often benefitfurther up or down the supply chain, assuppliers or distributors, it is not clear thatrestricting the program only to direct SMEimporters would be in the interests of SMEs.

Supporting Critical Sectors of theEconomy

The type of product covered by IFCguarantees is not in itself fully informative ofthe programs effectiveness.IFC reports keyachievements of the GTFP in supportingcritical economic sectors such as agricultureand energy efficiency. Some 20 percent of theGTFP supported trade transactions involvingagricultural products. However, as with SME

reach, this is also not a fully informativeindicator of effectiveness.

The GTFP does not control the type ofproduct for which trade finance is requested.The GTFP is fundamentally demand drivenand does not create trade transactions itfacilitates those for which there is alreadydemand. IFC can influence the sector share ofthe program by communicating preferredsectors to support or by refusing to coversome sectors or products. However, it is

questionable if this is warranted. In the caseof imports into developing countries, it is notclear whether some critical sectors do or donot have less access to trade finance, as this ismore a function of the creditworthiness of theimporter and the issuing bank rather than theproduct being imported. Some productsperceived as not developmental may also have

substantial indirect effects, further raising thequestion of the use of the product share as anindicator of program achievement.

Excluding eligibility of public sectorcorporations represents a potential gap inreach. IFCs mandate is to supportdevelopment of the private sector in membercountries. For this reason, trade transactionsthat involve a public corporation (as importeror exporter) have been ineligible for coverageunder the GTFP. However, excluding thesetransactions may represent a gap in coverage.IEG interviews and survey responses indicateda demand from both confirming and issuingbanks for GTFP coverage of transactions thatinvolve public sector corporations on the

grounds that they indirectly affect privatefirms. It was emphasized that importers thatare public sector corporations are oftenintermediaries only, with the goods being soldto the private sector for input into processingindustries or for retail distribution. At the sametime, however, there could be reputational risksassociated with some public sector entities.Given the potential benefits as well as risks,further review and consideration of expandingeligibility to include public sector corporations

is warranted.

Leveraging Commercial Bank Financing

The extent to which the GTFP has been ableto directly leverage commercial bank fundingof trade finance has been less than expected.The GTFP has helped introduce banks thathave gone on to establish relationships witheach other and in this way has indirectlyinfluenced confirming bank financing of tradein emerging markets. However, an initial goal

was to use the GTFP to directly leverageconfirming banks own capital. A statedGTFP goal to this end was to limit IFCguarantee coverage to 75 percent of theunderlying trade transactions at a portfoliolevel. This limit has not been realized, andguarantee coverage has averaged 80 percent oftrade transactions. This can be partly


23/157

OVERVIEW

xviii

attributed to factors such as the globalfinancial crisis, more stringent prudentialregulations, and the European banking crisisthat affected the risk appetite of confirmingbanks in emerging markets.

Enabling Longer-Term Trade FinanceTenors

GTFP guarantees have had tenors onlyslightly longer than the market average.Anoriginal program goal was to support long-term trade transactions, for which the supplyof trade finance was not readily available inthe market. In middle-income countries,although there was better access to tradefinance than in LICs, there was a gap in trade

credit for longer-term transactions,particularly capital good import transactions.However, the average GTFP tenor has beenonly slightly longer than the average marketterm. The average tenor of all trade financeproducts in the market in 200510 was 4.9months, compared with the GTFP average of5 months. In middle-income countries theaverage GTFP guarantee tenor was also 5months. Feedback from IEG interviews andsurveys indicates a continued demand for

GTFP coverage of longer-term transactions.

Helping Improve Liquidity in Times ofCrisis

The GTFP has also reached countries goingthrough and recovering from economic andpolitical crises.The program has been usefulin times of crisis, when international banksincreased risk aversion to particular countries.For example, in Lebanon in 200607 politicalinstability and violence led to decreased risk

appetite among commercial banks, despite thecountrys well-established banking sector. InPakistan, political uncertainty along withmacroeconomic and financial instability led toa rise in GTFP use from $9 million in FY07to $260 million in FY09. In Nigeria, crises inthe banking sector in 2006-08 triggered thecancelation or reduction of credit lines and

GTFP use increased by 60 percent betweenFY07 and FY10. Past IEG evaluations foundthe program to be a flexible and responsivetool for IFC during the crisis (IEG 2011b,IEG 2012). Sixty-four percent of issuing

banks surveyed indicated that the GTFPhelped maintain their trade finance businessduring the global financial crisis.

Opening Doors for IFC in DifficultMarkets

The GTFP has led to long-term investmentswith more than 40 new clients.The low-risknature of trade finance allows IFC to engageissuing banks with risk characteristics thatwould be unacceptable for its longer-term

investment activities. This has allowed it todevelop relationships with these banks,become more familiar and comfortable withthem, and subsequently make more traditionallong-term investments with them. IEGidentified 60 projects that were committedsubsequent to the GTFP project among 41new GTFP clients. However, using the GTFPto help IFC enter difficult markets is asecondary benefit and does not itself providea rationale for the program. If, for example,

the GTFP is not additional in a new marketand is crowding out viable existing means oftrade finance risk mitigation, then its use as anentry point for IFC would not be justified.

Supporting South-South Trade

One-third of GTFP volume has supportedSouth-South trade.A goal of the program wasto support transactions in which both theexporter and importer are in developingcountries. Given the nature of the instrument,

the bulk of GTFP guarantees (78 percent)supported imports into developing countries(from both developed and developingcountries). Since 2006, 34 percent of theprogram volume supported South-Southtrade, compared with the 23 percent sharethat South-South exports comprise in globaltrade. In the Africa and East Asia and Pacific


24/157

OVERVIEW

xi x

Regions, more than 40 percent of transactionssupported South-South trade. IFC identifiedthis as a priority and increased the number ofconfirming banks in developing countries(excluding branches) from 14 in 2007 to 72 in

2012. According to IEG client interviews,there is demand for more confirming banksfrom developing countries to be added andIFC has indicated a continued focus on thisgoing forward.

Building Trade Finance Capacity inIssuing Banks

Participation in IFCs Trade Finance AdvisoryProgram has helped some participating banksexpand their trade finance capacity.In IEGssurvey of participating GTFP banks, 57percent of issuing banks indicated that IFCstrade finance capacity-building program hadhelped them increase the number of tradefinance transactions that they undertook. PriorIEG project-level reviews of several earlyAdvisory Services projects found that theywere mostly successful, although there was aninadequate framework to measure their long-term contributions. The capacity-buildingprogram is not fully coordinated with other

IFC advisory services in access to finance thatmay cause opportunities to leverage synergiesbetween the programs to be missed.

Program Efficiency

The GTFP is profitable, although not to theextent originally projected by IFC. The GTFPIIV Board papers projected a cumulativegross income of $179.5 million for 200712.Actual gross income was $59.3 million overthis period, and on a net income basis, the

program had a loss of $4.7 million over theperiod. Gross return on risk-adjusted capitalhas been positive since 2008 and was 17percent in 2012, compared with 23 percentfor IFC overall. Net return on risk-adjustedcapital turned positive in 2011 and increasedfrom 3.9 percent in 2011 to 8.0 percent in2012, compared with 21 percent for IFC

overall. Multiple factors account for the gapbetween projected and actual profitably. Inparticular, projected direct expenses werelower than actual. In addition, the originalprojections assumed an average transaction

price of 2.4 percent, when the average annualprice in 200612 was 1.5 percent, resulting inlower revenues than originally projected.

The current system inhibits a comprehensiveview of GTFP profitability at a program level.During the preparation of this evaluation, IFCworked with IEG to prepare a profit and lossstatement for the GTFP business line, whichhad not been previously done. Because of thenature of the program and the ownership ofthe portfolio by each region rather than the

central department, the routine departmentalincome statements do not present a completepicture of program profitability, as they donot incorporate the direct expensesrepresented by the central department.

The program appears to be low risk and hasnot paid any claims. Although the program hasbooked nearly $19 billion in guarantees since2006, there have been no claims paid to date.This partly reflects the relatively low-risk nature

of the industry and products involved. The lackof claims may also reflect a two-stage bufferimplicit in each transaction. For example, evenif an importer defaults on a GTFP-guaranteedtrade transaction to the issuing bank, an issuingbank may not necessarily default on thatamount to the confirming bank. This may beso, for example, in the interests of protectingits broader relationship with the confirmingbank.

The GTFP consumes a limited amount of

IFC capital and staff time and its opportunitycosts are relatively low. Based on an economiccapital framework that incorporates therelatively low-risk nature of trade financetransactions, IFC maintained a risk weight forthe GTFP of 11 percent of the totaloutstanding exposure. In comparison, theweight for senior loans and subordinated debt


25/157

OVERVIEW

xx

is 2035 percent and for equity it is 6070percent. Applying this weighting, in 2012 theeconomic capital allocation for GTFP was$278 million, representing 2 percent of IFCstotal capital use. This proportion will further

drop following a 2012 reduction of the riskweight for short-term finance from 11 percentto 5 percent. The average staff cost and actualhours spent on the GTFP were both about 1percent of IFCs total staff costs over FY0612. In this respect, the opportunity costs ofthe program are low and limited to what otheractivities IFC could do with this level ofcapital and staff resources.

The GTFP is not a significant contributor toIFCs bottom line. In FY12, GTFP guarantee

commitments were $6 billion, compared toIFC commitments of $15.5 billion (excludingmobilizations). GTFP net income was $10.1million, compared to $1.7 billion (before grantsto IDA) for IFC. Thus, even though the GTFPrepresented 39 percent of IFC commitmentsduring the year, it accounted for just 0.6percent of its net income. Even with its lowlosses and its new lower capital allocation, theGTFP contribution to net income is small andbelow the level suggested by its capital

allocation, reflecting either low returns or ahigh capital allocation, or both. IFC reportsGTFP commitments in the same manner aslong-term investments, even though theaverage GTFP transaction is five months. Themanner of reporting therefore may overstatethe relative weight of GTFP commitments inrelation to other IFC activities.

IFC Work Quality

GTFP Operations

Client feedback has been positive on thequality of IFCs processing and turnaroundtime. GTFP operations aim to ensure high-quality service and a quick response time, whileprotecting against reputational risk. IEGssurvey of confirming banks indicated thatIFCs operations are viewed positively. More

than 90 percent of respondents indicated thatGTFP handled transactions quickly andaccurately and responded to requests withflexibility. Nearly all respondents (97 percent)indicated that transactions were turned around

within the agreed time limits. IEG interviewswith both confirming and issuing banks alsorevealed broad satisfaction with GTFPoperational processing. Client banks expressedappreciation that a public multilateral couldrespond so quickly and praised the GTFPscommercial rather than bureaucraticmindset.

Some areas that can be improved include aninadequate billing system.Although thethree-stage approval process provides some

security, the GTFP platform relies on somemanual entry, so the possibility of humanerror remains, particularly in the event ofrapidly increasing volumes. Client banks alsoemphasized weaknesses in the billing system.

GTFP Marketing and Client Relationships

The GTFPs marketing and clientrelationships are strong.There was consistentfeedback from IEG interviews and surveys

that IFC staff were experienced, responsive,and knowledgeable on emerging marketcountries, institutions, and markets. Someconfirming banks emphasized IFCsconstructive role as a knowledge provider.Some of the larger confirming banksappreciated IFCs responsiveness andflexibility in appraising and adding issuingbanks at their request. Issuing banks in thecase study countries also expressedappreciation for the information sharing andknowledge capacity of GTFP staff.

Appraisal and Supervision of IssuingBanks

GTFP client feedback also indicates that IFCsdue diligence is thorough and of high quality.Confirming banks interviewed by IEGexpressed confidence in IFCs appraisal and


26/157

OVERVIEW

xx i

supervision process and indicated that IFCslisting of an issuing bank sent a strong signalon the creditworthiness of the bank. Issuingbanks surveyed by IEG also expressed positiveviews on the reasonableness, timeliness, and

flexibility of IFCs appraisal process. Someissuing banks interviewed by IEGparticularlyin countries with relatively strong bankingregulation and supervision, such as Lebanonand Sri Lankaindicated that the process canat times be overly cumbersome.

There is inadequate transparency in handlingcases of breach of contract.One part of thequarterly supervision process is a review of theextent to which clients have breached any ofthe financial covenants agreed to as part of the

legal agreement. In the case of the GTFP, IEGidentified numerous cases where GTFPguarantees were issued at a time when theissuing bank was in breach of at least onecovenant. In other cases, lines had been frozenor suspended in the event of covenantbreaches. A clear and transparent process togovern use of the program in the event of abreach of covenant in order to ensure thatIFCs development contribution throughcovenant enforcement is maintained as well as

to protect IFC against potential losses was notpresent. A comprehensive review of thebreaches and full assessment of the currentprocess to ensure adequate transparency iswarranted.

Creation of a Common Trade FinancePlatform among Multilateral DevelopmentBanks

IFC has helped make considerable progresstoward establishing a single standard for

multilateral development bank (MDB)support for trade finance.One of the originalobjectives of the GTFP was to helpstandardize the approach to trade financeamong MDBs to provide advantages tocommercial banks in terms of time and costsavings, easier communication, and multiplesolutions. Good progress toward this

objective was made. The GTFP itself wasbased on the European Bank forReconstruction and Developments model,and IFC subsequently helped other MDBs,including the Asian Development Bank and

the African Development Bank, establishtrade finance programs based on the samemodel. Some differences among the programsremain, however, including the eligibility ofpublic sector corporations and use of silentguarantees in which the issuing bank is notaware that a guarantee has been issued againstits payment risk.

Although there is some competition amongthe MDBs, this does not appear to beunhealthy, and the large potential market

offers room for multiple actors.IFC has thelargest trade finance program among theMDBs, with total volume twice the value ofthe Asian Development Bank and theEuropean Bank for Reconstruction andDevelopment and eight times larger than theInter-American Development Bank. It is theonly MDB with a global presence. There isconsiderable overlap in issuing banks amongthe MDBs. During IEG interviews, therewere some anecdotal reports of GTFP banks

checking prices among MDBs and trying toplay one against the other. However, thisdid not appear to adversely affect the activitiesof the MDBs. In general, as long as eachMDB adheres to the principle of ensuringadditionality, then competition between theMDBs is not necessarily unhealthy. There arefewer opportunities for direct cooperation intrade finance than initially expected.

Reporting, Monitoring, and Evaluatingthe GTFP

From a corporate perspective, the GTFP isnot as large as it seems. As reported in IFCsannual report, the GTFP accounted for 39percent of IFCs total commitments in 2012.However, the manner in which IFC reports itstrade finance activities may overstate theirrelative magnitude. In reporting overall


27/157

OVERVIEW

xxii

commitments, short-term guaranteecommitments are treated in the samemanner as long-term loans or equitycommitments, even though they have tenorsof around 5 months (compared with

maturities of generally 712 years for long-term loans). Moreover, the program accountsfor 2.4 percent of IFCs capital and 1.2percent of IFCs staff costs. Alternatemethods of reportingsuch as a risk-weighted approachmight better capture therelative size of the program.

IFC began implementing a formal monitoringand evaluation system for the GTFP in FY12.IFC has been working to develop anevaluation framework for GTFP activities at

the transaction and institutional levels. InFY12, IFC began including the GTFP in itsDevelopment Outcome Tracking System(DOTS). In the past year, as a part of theGTFP DOTS pilot, IFC collected some 6,000survey points from over 200 banks andconducted a post-pilot review of datacollection, survey methodology and clientfeedback. The DOTS for GTFP aims tocollect and assess information at five levels:(i) the trade transaction level, (ii) the country

level, (iii) the confirming bank level, (iv) theissuing bank level, and (v) the beneficiarycompany level. Inclusion of trade finance inDOTS represents an important effort onIFCs part to try and measure thedevelopment outcomes of its short-term tradefinance products.

A range of challenges exists with the currentmonitoring and evaluation approach. Thecosts and benefits of applying theDOTS/Expanded Project Supervision Reportframework to the GTFP are not fullyapparent.It adds a substantial data reportingand collection cost to issuing banks andattribution of many outcomes to the programis difficult. Extensive reporting on the part ofissuing banks may be perceived as overlyintrusive, given the relatively limitedcontribution that the program can have on a

banks overall activities. The logicalrelationship between some of the DOTSindicators and guarantees on trade financetransactions is questionable. For example, itwould be difficult to attribute an increase of

the institutions profitability to GTFP becauseof multiple factors that affect a banksprofitability. IFC is currently applying lessonslearned to innovate both content and processto capture the benefits of GTFP DOTS whileimproving operational feasibility.

Preparation of an annual programmatic-levelassessment of the GTFP warrantsconsideration.As of the end of FY12, IFChad completed more than 12,000 transactionsunder the GTFP. The nature of the trade

finance guarantee instrument makesevaluation in the same manner as a long-terminvestment difficult. Instead, a programmatic-level review that tracks relevant indicators andmakes an overall assessment of the programsrelevance/additionality, effectiveness, andefficiency may be more useful.

Relevant indicators of program effectivenessand achievement include country risk and thetier of the issuing banks. Some indicators ofprogram effectiveness that are currently used,such as SME and sector reach, are lessinformative in themselves, as the instrumenthas little control over the relationship betweenthe issuing bank and its clients. Moreinformative indicators of programachievement include (i) participation of lower-tier banks, (ii) the degree of country/politicalrisk, (iii) inclusion of countries in political orfinancial crisis, (iv) inclusion of countries withunderlying weaknesses in their financialsystems, (v) the extent to which confirmingbanks increase/decrease their lines of credit,(vi) the extent to which confirming banksundertake their first transaction with anissuing bank because of the GTFP program,and (vii) the extent of trade finance that wascatalyzed in the longer-term because of arelationship that was established through theGTFP.


28/157

OVERVIEW

xxiii

The Global Trade Liquidi ty Program

Introduced in 2009, the GTLP wasestablished to protect and catalyze the supplyof dollar liquidity to fund trade finance duringa time when dollar financing was freezing;

global trade finance markets were diminishing,and there were increasing concerns on theeffects of the crisis on global trade andemerging market short term finance. IFCshowed flexibility and responsiveness tochanging market conditions by adjusting thedesign of the program.

The GTLP benefited largely low- andmedium-risk countries. Consistent with theGTLPs objective of addressing systemic

issues in trade finance liquidity, the programdid not target IDA or LICs. The majority ofbanks supported by the GTLP were in the BBto BBB credit rating range, because of theneed to quickly inject liquidity into the system.Participants and partners saw the main valueof the program as sending a signal thatdemonstrated the commitment ofdevelopment finance institutions to tradefinance and therefore instilled confidence inthe market. The extent to which the GTLPresulted in an increase in trade finance is hard

to judge, given the fungibility of funding. Thecurrent information system does not permitan accurate, reliable assessment of theprograms profitability.

Findings and Recommendations

The GTFP has been a relevant response todemand for trade finance risk mitigation inemerging markets. In recent years, althoughthe GTFP has continued to expand in high-risk markets, in terms of dollar volume, it has

grown faster in lower-risk markets, raising aneed for closer monitoring of its additionalityin these markets. The program has beenlargely effective in helping expand the supplyof trade finance by mitigating risks that wouldotherwise inhibit the activity of commercialbanks. In terms of efficiency, profitability hasbeen less than expected, but improving in

recent years. IFC work quality, particularlywith respect to GTFP processing time,marketing and client relationships, and thedepth and quality of IFC's due diligence, hasbeen good and appreciated by clients,

although some weaknesses in processing areapparent.

Recommendations

Continue to strengthen the focus in areaswhere additionality is high and seek toincrease the share of the program in high-risk markets and where the supply of tradefinance and alternate risk-mitigationinstruments are less available, whilemanaging risks in a manner consistent

with IFCs risk assessment andmanagement standards. Key steps toconsider include (i) adding more high-riskissuing banks, (ii) adding more banks in high-risk countries, (iii) introducing internalcountry risk-based volume targets tosupplement absolute volume targets, (iv)introducing internal targets for return oneconomic capital to support optimal pricingof GTFP guarantees, and (v) establishing acomprehensive additionality assessment

process for the program.

Adopt additional methods of reportingvolume that can reflect the distinct natureof the trade finance guarantee instrumentand provide a better picture of the relativesize of the GTFP in IFC. GTFP short-termguarantee commitments are treated in thesame manner as long-term IFC investments,even though they have an average tenor of 5months. This may overstate the size of theGTFP relative to other IFC activities.

Although the GTFP accounted for 39 percentof IFC commitments in 2012, it accounted for2.4 percent of IFCs capital, 1.2 percent ofIFCs staff costs, and 0.6 percent of IFCsprofit.

Refine the means by which profitability ofthe GTFP is monitored, analyzed, and


29/157

OVERVIEW

xxiv

reported internally in order to bettercapture a comprehensive picture at theprogram level and to guide futureprogram directions.Because of the nature ofthe program and ownership of the portfolio

by regions rather than the central department,the routine departmental income statementsdo not present a complete picture of theprograms profitability. Closer monitoring ofthe profitability of the program, includingdisaggregation by different markets (such asregion, country risk, and country incomegroup), would help guide future directions ofthe program. A clear understanding of theprofitability of the GTLP is also warranted.

Review the costs and benefits of fully

applying the DOTS and Expanded ProjectSupervision Report frameworks to theGTFP instrument and consider adoptingan annual program-level evaluation thatincludes relevant indicators ofadditionality and effectiveness.There arechallenges with adapting the evaluationapproach used for long-term IFC loans andequity investments: It adds a substantial datareporting and collection cost to issuing banks,and attribution of many outcomes to the

program is difficult. An annual program-levelevaluation with relevant indicators should beconsidered. IFC should also continue todevelop more relevant indicators to measureits additionality and achievements, such as thetier of the issuing banks, the degree of countryand banking sector risk, or the extent towhich confirming banks haveincreased/decreased their lines of credit as aresult of the program.

Ensure that a formal, consistent, andtransparent process is in place thatgoverns the use of the program in theevent of covenant breaches on the part ofissuing banks. IEG identified numerouscases where GTFP guarantees were issued at atime when the issuing bank was in breach ofat least one covenant. In other cases, lineswere frozen or suspended in the event of

covenant breaches. A clear and transparentprocess to govern use of the program in theevent of a breach of covenant was not inplace. Establishing a transparent formalprocess would help ensure that IFCs

development contribution through covenantenforcement is maintained, protect IFCagainst potential losses, as well as allow forflexibility, as needed.

Take steps to enhance the ability of theGTFP to support trade transactions thatrequire longer-term tenors to help meetdemand in this segment of the tradefinance market. An original GTFP goal wasto support longer-term trade transactions forwhich trade finance was not readily available

in the market. In practice, the average tenor ofGTFP guarantees has only been slightlylonger than the market average. An area ofclear demand from IEGs surveys andinterviews with clients was for the GTFP tocover longer-term trade finance tenors.

Other Issues for ConsiderationEnhance the information-sharingplatforms of the program. Some of the

important benefits of the GTFP areintangible, such as informal advice andknowledge sharing between IFC trade andmarketing officers and participating issuingand confirming banks. However, the currentinformation sharing platforms are limited. Anonline mechanism that allows for easycommunication between parties and quicktransfer of information would add value tothe GTFP network.

Invest in further automation of the

operational system.Though the currentGTFP operation is strong and widelyperceived as efficient and responsive, thereare some weaknesses that could undermineoperations with further expansion of theprogram. Further automation andstreamlining of key functions would enhancethe already strong operational function.


30/157

OVERVIEW

xxv

Consider expanding coverage to includetrade transactions that involve publicsector companies. IEG interviews andsurvey responses indicated a consistentdemand from both confirming and issuing

banks to allow GTFP coverage of transactionsthat involve public sector corporations. Insome countries, public sector companiesremain large importers, which then sell goodsto smaller private companies for distributionor processing. At the same time increasedreputational risks may be associated withexpanding coverage to public sectorcompanies. Further review and consideration

of expanding eligibility to public sectorcorporations is warranted.

Fully coordinate trade finance trainingwith other IFC Access to FinanceAdvisory Services. IFC Advisory Services fortrade finance are planned and administeredindependently from other IFC training forcommercial banks. Further coordinationmight be able to better leverage differentprograms to enhance broader aspects of bankcapacity that in the end contribute to a banksability to provide trade finance services to itsclients.


31/157


32/157

27

Management Response

I. Introduction

We welcome the Independent Evaluation Groups (IEG) Evaluation of the InternationalFinance Corporations Global Trade Finance Program, 200612, which assessed the context,relevance, effectiveness, and efficiency of IFCs Global Trade Finance Program (GTFP)and Global Trade Liquidity Program (GTLP). We appreciate IEGs constructiveengagement and collaborative approach with the International Finance Corporations(IFC) team.

We appreciate that the report acknowledges the broad success of GTFP. From itsinception in 2005 through December 31, 2012, the GTFP has covered over 25,000 trade

transactions and has supported over $27 billion in emerging market trade. GTFPcommitments in International Development Association (IDA) countries topped $11billion, while $5.4 billion went to Sub-Saharan Africa, $5.8 billion was in agriculture,and $4.7 billion was in small and medium enterprises (SMEs), which represented morethan 80 percent of the transactions covered. The GTFPs asset risk profile has enabled itto open doors for new relationships for IFC, adding over 155 financial institutions toIFCs client base. Over 40 of those banks have benefitted from additional IFC products.Additionally, the GTFP has provided IFC a gateway to engage in otherwise challengingmarkets; it has supported trade in 27 of the 35 current fragile and conflict-affectedsituations, committing investment volume in 19 of these areas in FY12. Among the

noteworthy transactions supported by the GTFP are cancer-screening equipment forwomen in Gaza, anti-retrovirals for HIV patients in the Democratic Republic of theCongo, energy-efficient machinery for Armenias first and only steel production facility,turbines and other equipment for a hydroelectric dam in Honduras, and the relocationof an entire power plant to Pakistan from Germany.

We agree with the overall findings and recommendations of the report. We welcomeIEGs recognition of GTFPs continued relevance in supporting trade finance inemerging markets. As noted several times in the report, The GTFP significantlyimproved IFCs engagement in trade finance from its past efforts by introducing anopen, global network of banks and a quick and flexible response platform to supportthe supply of trade finance. We particularly appreciate IEGs recognition of theimportance of the GTFP with respect to the World Bank Groups strategy for trade;GTFPs global leadership in emerging market trade finance; the recognition of GTFPsrelevance in multiple scenarios; GTFPs additionality in high-risk, low-incomecountries; its client responsiveness; its efficient use of IFC staff and capital; and its


33/157

MANAGEMENT RESPONSE

28

capacity to support the enabling of trade transactions, South-South trade, the growth ofemerging market Issuing Bank correspondent networks, and trade finance volume.

II. Specific Comments

To complement the reports in-depth and rigorous assessment of the GTFP, we arepleased to provide additional context on a few specific topics:

GTFPs Additionality in Lower-Risk Countries: In addition to IEGs findings ofthe GTFPs strong additionality in higher-risk countries, we would like toemphasize the equally necessary role we play in medium- and low-riskcountries, where we focus support on lower-tier banks, lower-income regions,and less available trade finance products. IFCs intent, upon launch, was toestablish a global program, flexibly leveraging a vast network of bankpartnerships to tap effective trade finance solutions across many trade corridors.

While the program was piloted in targeted markets in Sub-Saharan Africa, as itextended, it enrolled banks that demonstrated both a need for trade finance andspecific clients that would benefit from IFCs engagement. This strategyincorporates not only the countrys risk profile, but also the risk tiers ofindividual banks and their frontier region coverage, among other factors. As theGTFP grew toward a more balanced and global emerging market portfolio, evenwhile responding to recent market challenges starting in FY09, IFC continued toprovide 76 percent of GTFP dollar volume to medium- to high-risk countries. Atsame time, more than 33 percent of trade transactions by transaction count

supported South-South trade and 55 percent occurred in IDA countries. In FY12,61 percent of GTFP's project count was in IDA countries. Current banking systemchallenges are fundamentally changing how risk is assessed and capital islimited among financial institutions. A continued need for trade finance supportacross emerging markets, regardless of income level, is evident.

Existing Market Solutions: While we appreciate the reports articulation of risk-mitigation products that broadly exist, we wanted to draw attention to thelimitations and applicability of bank risk-mitigation options for specific tradetransactions. In cases in which alternatives exist, it has been our experience that

the end beneficiaries often face additional financial challenges. When available,alternatives may be less effective than the GTFP at enabling local banks to dobusiness on an unsecured basis, necessitating cash collateral requirements thatcould not otherwise be used as working capital financing for clients. If the GTFPwere crowding out truly viable market alternatives, one would expect to see fullutilization of IFCs trade finance lines and receive complaints from other market


34/157

MANAGEMENT RESPONSE

29

players. Utilization data on GTFP and bank responses to IEG do not bear out thishypothesis.

Units of Measure: The report assesses program presence based on a percentallocation of dollar volume per country and compares rate of dollar volume

growth between countries. As larger markets tend to have a higher total of tradedollar volume, there are more effective units of measure to gauge programsuccess, particularly given this studys views on the limitations of commitmentvolume stemming from cross-country differences. Given the significant diversityamong markets in terms of macroeconomic characteristics and structurallimitations alone, assessing GTFP growth in individual markets would be moresuitable. While the percent allocation of dollar volume committed in Africa, forexample, has fallen, GTFP commitment volume in Africa has grown sevenfold,an average of 42 percent per year, from $185 million in FY06 to $1.3 billion in

FY12. In addition, since smaller, riskier markets tend to have smaller transactionsizes, the number of trade transactions supported per country would alsoprovide a more balanced comparison of the GTFPs market presence. Thepercentage of transactions supported by the program in IDA countries hasconsistently grown from year to year since 2007.

Impact on SMEs and Critical Sectors: As with other IFC products that workthrough financial intermediaries, the GTFP enables SMEs and participants inother critical sectors to access financing they would not otherwise be able toaccess in a commercially viable manner. In general, SMEs in emerging markets

are more likely to face greater limits and constraints in access to trade finance, soSMEs garner significant benefit from the GTFP. While IFC is not taking theunderlying risk, its guarantee is enabling its partner banks to take that risk.Generally, IFCs SME products are at arms length, as direct IFC investment inSMEs tends to be a less efficient use of IFCs capital and operational resources.Thus, IFCs partner banks determine whether or not to lend to the SMEs, and therisk profile of the SME borrowers. Through the GTFP, this approach has beenapplied to other critical sectors as well, where trade finance remains a challengeto obtain. In addition, the GTFP influences the financing of both critical sectorsand SMEs through careful selection of bank partners, considering their clientbase, as well as proactive discussions with program members regarding IFCssupport of certain sectors so as to encourage member banks and confirmingbanks to finance critical areas. IFC performs extensive analysis to assess, amongother aspects, the viability and potential impact of each trade finance transactionand, in some cases, plays a proactive matchmaker role between counterpartybanks on specific transactions. Furthermore, by guaranteeing SME transactions


35/157


36/157

MANAGEMENT RESPONSE

31

III. Conclusion

evaluation of the international finance corporation’s global trade finance program, 2006–12

Documents