The Trade and Development Bank (TDB) is the regional development finance institution for Eastern and Southern Africa. It acts as a specialized African wholesale bank, offering short, medium- and long-term financing products including debt, equity, and guarantees, across a wide set of sectors, supporting public and private sector clients to advance their development projects and realize transactions that contribute to the SDG agenda.
As liquidity in trade proves vital in times of crisis, we connected with Michael Awori, Chief Operating Officer at TDB, to learn more about the bank’s blended trade finance initiatives and innovations to support the flow of trade and capital and goods in the region to ensure development projects get the support needed to generate impact.
Could you shed some light on how TDB’s blended trade finance initiatives may help mitigate the impact of COVID-19?
Liquidity is key. What we are doing is designing and implementing solutions to ensure liquidity continues to flow for short-term trade, long-term trade finance and corporate finance to keep development on track. Recently, we closed a primary forfeiting transaction in the healthcare sector. For this trade project, we worked with the sponsor of a hospital project, the contractor and a local bank. In this case, TDB delivered liquidity to allow the project to continue, enabling the local bank to provide unfunded exposure and deploy its liquidity into other ventures. Likewise, we have recently signed a revolving pre-export structured trade commodity finance facility for a fair-trade company, enabling it to unlock the working capital needed to stay competitive at a time when liquidity is in short supply.
TDB also provides direct liquidity to several institutions supporting vital sectors so goods can flow, and supply chains can be maintained. The other underlying challenge we are responding to is that of trade finance still being very paper heavy. The fact that many airports are closed across our region means paper cannot move. When this happens, trade comes to a grinding halt. TDB has accelerated its technological innovations through a partnership with dltledgers, a platform that uses blockchain technology to enable trading companies to connect their supply chain network to their financing banks, thereby digitizing trade finance processes and documentation. Investing in blockchain has enabled us to continue to effectively finance vital trades, such as imports of agricultural commodities, working closely with suppliers and institutions within our member states, despite the significant challenges caused by the pandemic.
What are the biggest barriers to financing the SDGs in Africa?
One of the biggest barriers is the gap between perceived risk and real risk. Across Africa and our footprint, certainly there are regions with poor enabling environments, where we see weak institutions, poor infrastructure, high costs of doing business, stretched timelines for pipeline origination, and big data and information gaps. Those factors do affect risk. But these realities and conditions exist in many markets beyond the continent. Africa is not unique in these circumstances. Unfortunately, the perceived level of some of these risk factors is higher in Africa than elsewhere. What we need to recognize is that the real risk is not. Those bold enough to step forward and ignore the noise are discovering it is possible to find attractive deals, price them and execute those deals successfully.
Where do you see the greatest opportunity in overcoming this perceived risk challenge? What can be done to mobilize domestic institutional capital toward developing projects in the region?
We must start at home. We need to put more of Africa’s long-term institutional capital to work on the continent rather than investing it in low-yielding securities elsewhere. TDB is certainly focused on this. We have over 14 African institutional investors–including pension funds–among our shareholders, who, apart from the exceptional and consistent financial returns we deliver, have invested in TDB because of the SDG-aligned returns we offer. In addition to this, we can improve the conditions attached to this capital. Blending often comes with strings that impact the absorption of institutional capital, whether it is the type of project, or the type of sponsor, or the source of equipment. While governance matters are important, we should place greater emphasis on outcomes and monitoring and evaluation, with less emphasis on restrictions at inception. This could lead overall to higher delivery and absorption of institutional capital towards the SDGs.
Also, capital going towards Technical Assistance (TA), or softer support to get projects to bankability, could support higher take-up and an increased number of projects being successful. Capital that is more patient and willing to take on a longer tenor will play a key role. Here, African institutional capital can also provide a local currency component to de-risk transactions to get more SDG projects to financial close.
How is TDB using trade finance and blended finance to close the SDG funding gap?
To some extent, everything we do is blended. On the treasury side, TDB mobilizes funding from various sources (e.g. public sector, institutional investors, private and commercial capital) towards our portfolio, over half of which directly and indirectly contributes to SDGs. Given the recent pullback of global correspondent banks from Africa, and thanks to our investment grade credit ratings, we have cemented our role as the ideal partner to intermediate global and regional capital into the region, and as such, have been playing an increasingly critical role in addressing trade finance gaps as well as forex challenges in the region. Our financing interventions have averted fuel shortages in certain countries. In others, we have helped secure the sourcing and imports of strategic commodities, ultimately facilitating higher levels of inter and intra-African trade and regional integration. Indeed, amid COVID-19, TDB continues to ramp up support to import wheat, grains and fertilizer, enhancing agriculture and ensuring food security, as well as employment. For the long-term part of our business, we fund several manufacturing projects and facilitate infrastructure development. For our energy portfolio, we are placing a greater emphasis on financing renewable energy projects, particularly hydro, wind and solar, which already account for over 70% of our portfolio.
Then there is regional integration, which is embedded in our DNA as the sub-region’s DFI. Our interventions have included funding ports and transportation, including roads, railways and regional airlines. Our work is designed to facilitate greater linkages both regionally and internationally, and a higher level of trade. Sitting here in Nairobi, the Silicon Savannah, we have seen the benefits of mobile money and the financial inclusion benefits that emerge as a result. To expand these benefits regionally, we have supported the telecom sector through funding expanded fibre optic cable capacity, such as the Burundi backbone project, as well as more recently, leading telecoms such as Econet in Zimbabwe and Cable & Wireless in the Seychelles.
How can a regional DFI like TDB grow the field of blended finance and engage other local players such as national DFIs and local commercial banks?
We collaborate significantly with local and regional banks as well as national DFIs in our regular course of business. Beyond standard operations, we have a 3-year pilot program targeting SMEs, providing various instruments from grants, guarantees, Letter of Credit confirmations and TA, via partnerships with local financial institutions, and with engagement from trade finance institutions and multinational development finance institutions (DFIs). For funding and membership, we are mobilizing additional institutional investors, be it pension funds, insurance companies, development funds, as well as other regional DFIs, to join the bank and blend their capital with the capital we raise. We even had a global African think-tank join as shareholder last year.
Regarding DFIs, we are supporting mechanisms to help other counterparties assess the risk of capital of some of these institutions that may not be rated by a global rating agency like Moody’s. We are part of the Association of African DFIs (AADFI) that reviews African DFIs against several different standards and benchmarks, most of which mirror what the ratings agencies measure, but it is an African institution holding accountable African DFIs. Through these measures, we are raising governance and performance standards across the industry, which we believe will ultimately lead to higher volumes of financing flowing into the region.
What is your strategy for mainstreaming gender at TDB and encouraging a trickle-down effect at other DFIs and financial institutions?
We are mainstreaming gender and promoting gender inclusive practices in a few ways: (i) through our SME pilot program, we directly target women-owned business and apply financial and non-financial interventions to support the growth of these businesses, ii) within the financial institutions (FI) space, we assess and track the performance of our clients via different operational and financial metrics, including gender and youth, (iii) with 42% of our workforce being female, high representation of women in the ranks of senior staff and management, and a gender mainstreaming policy, by leading by example and institutionalizing gender mainstreaming internally ourselves, and (iv) through knowledge sharing and capacity building activities, we create spaces to share best practices and scale gender awareness to regional FIs whom we may not touch directly. We have worked with European Investment Bank on the Eastern Africa SME Banking & Microfinance Forum – some people do not know that – for the last couple of years. This is a good example of how TDB is ensuring knowledge and capacity building seeps in the region.
Our inaugural, stand-alone Sustainability Report will be published shortly, and shares our work on gender, among other areas, further institutionalizing our commitment to gender and sustainability.