The Trade Finance Programme (TFP) of the Asian Development Bank (ADB) aims to mitigate the commercial risks involved in international trade transactions. Trade involves a seller bearing the initial cost of the transaction, and there is a risk associated with the buyer’s default of payment, which can result in the loss of upfront cost and goods. The TFP provides a Credit Guarantee instrument to bridge trade gaps and assure payments for advising banks, ultimately supporting sustainable jobs and economic growth.
The commercial risk in trade arises from the buyer’s failure to fulfill payment obligations or other prerequisites specified in the contract. This risk becomes higher when exporting to developing countries, where there may be a lack of creditworthiness awareness or reliable banking infrastructure. Under the TFP, the ADB provides Credit Guarantee facilities to partner issuing banks in 16 developing countries, aiming to expand foreign trade opportunities.
The Credit Guarantee arrangement involves multiple parties, including exporters, importers, issuing banks, and confirming banks. The ADB acts as the guarantor, ensuring that the confirming bank receives 100% of the purchase price if the issuing bank defaults. Importantly, the Credit Guarantee does not replace existing financial products issued by banks but provides an additional risk mitigation tool. This scheme reduces commercial risk for both the exporter and confirming bank, particularly when trading with buyers in developing countries associated with ADB’s partner banks.
