WORLD TRADE
ORGANIZATIONWT/WGTDF/W/6
3 July 2002
(02-3725)
Working Group on Trade, Debt and Finance Original:  English
COMMUNICATION FROM THE ASIAN DEVELOPMENT BANK
The following communication, dated 1 July 2002, has been received from the Asian
Development Bank in advance of their presentation to the Working Group on 11 July.
_______________
1. It is a great pleasure and privilege for me to address this second Meeting of the Working
Group on Trade, Debt and Finance. Today, I would like to talk about the important need for costeffective and reliable trade finance
1 in our developing member countries (DMCs), the difficulty of
getting such trade finance during periods of economic or political instability, how we can help “level
the playing field” in this area, ADB’s initiatives effecting trade and trade finance and share with you a
few case studies which taught us some valuable lessons about how.
I. THE NEED FOR COST EFFECTIVE AND RELIABLE TRADE FINANCE IN DMCS
2. Before we go too far into the topic of trade finance, I would like to explore with you the
“Cash Flow Challenge” faced by many DMC importers and exporters and highlight one of the
difficulties these exporters face in finding new creditworthy overseas buyers.
A. CASH FLOW CHALLENGE
3. During the pre-shipment stage - usually supp liers demand cash up-front, while buyers in our
DMCs want and/or need time to pay.
4. And again, during the post-shipment stage - DM C suppliers want cash up-front and Overseas
buyers demand time to pay on open account.
5. For a DMC manufacturer in the middle, without access to cost effective and reliable trade
finance, scarce working capital is tied up and diverted from paying wages and other direct production
costs.  There is not enough time to convert production inputs into exports and FX earnings.  The
manufacturer is forced to insist on the export contracts requiring cash terms, and deferred terms onopen account near impossible. This makes the manufacturer much less competitive when compared to
a similar manufacturer in another country, which has access to appropriate trade finance.  This creates
an uneven “playing field” because of factors beyond the control of the manufacturer-exporter.
                                                     
1 Trade Finance facilities provided by banks to importers and exporters can include the provision of
working capital loans or overdraft; issuing performance, bid and advance payment bonds; opening letters ofcredit (L/Cs); accepting and confirming L/Cs; and discounting L/Cs. Such facilities are usually denominated in
hard currencies, with the possible exception of the working capital loan or overdraft.WT/WGTDF/W/6
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B. FINDING NEW CREDITWORTHY BUYERS
6. Many DMC exporters only sell to foreign buyers on open account, if they have known the
buyer for “generations”  - or for cash or against letters of credit (L/Cs) for new buyers. This results in
the exporter being restricted to established or mature markets, taking commercial and political risk on
the buyer, or on its bank if an L/C is issued  – something the exporter is ill-equipped to do.
II. THE DIFFICULTY OF GETTING TRADE FINANCE DURING PERIODS OF
ECONOMIC OR POLITICAL INSTABILITY
A. FROM LOCAL BANKS
7. During periods of economic or political instability cost effectiveness and reliable trade
finance is not offered or is difficult to get from many local banks because of the lack of competition
from international or other local banks, non-performing loans “clogging” up their balance sheets,
government and other securities offer much better risk free returns, inability to secure the finance
(forcing the customer to pledge cash) and export contracts seen to have little or no security value.
B. FROM INTERNATIONAL BANKS
8. International banks extend credit to local banks in many forms, including L/C confirmations,
bill of exchange endorsements or avail interbank loans, swaps, hedges and other treasury activities.
This enables local banks to offer trade finance denominated in hard currencies.
9. However, during recent periods of economic or political instability in certain DMCs, we have
seen international banks force up confirmation fees or loan margins, reduce or cancel “bank limits”
or reduce or cancel “country limits”.
10. To exemplify this, during the past five years in Pakistan, confirmation fees jumped from 2%
to 6%, or more, and then fell back, being an additional cost ultimately to the account of the Pakistanimporter and added to the cost of production.  In Indonesia, the total value of trade finance bank limits
fell from $6 billion, from 400 international banks to some $1.6 billion, from 50 banks of which 10 are
currently active.
11. Bank limits  were reduced or cancelled because the creditworthiness of local banks weakened
due to increased non-performing loans, poor internal accounting and governance and uncertaintyabout central bank supervision.  Better returns were achieved on “guaranteed” banks (those supported
in some way by the host government) or other more creditworthy banks in other countries.
12. Country limits, on the other hand, were reduced or cancelled because of real or perceived
concerns about currency inconvertibility or transfer blockage, confiscation or expropriation of funds
to be remitted, enforcement of “contract” and political violence (such as war, that might cause closure
of the banking system).  Currently, there are a number of international banks that have country limits
on certain DMCs, which are substantially smaller than the sum of all the bank limits they have in theDMC.
13. Usually the increase in confirmation fees or the reduction or cancellation of limits was for a
good reason, but sometimes only because of a perception in “head office” which was thousands of
kilometres away.  The end result, however, forced up the cost of trade finance, or in the worst case,
made it difficult or impossible to get thus making exports from the DMC less competitive, causingreduced exports, loss of FX earnings, increased unemployment and poverty.WT/WGTDF/W/6
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III. HOW CAN WE HELP LEVEL THE PLAYING FIELD?
14. Host governments  can play perhaps the most important role in levelling the playing field.
They can improve creditworthiness of the bank and non-bank financial sector through better
supervision, improved corporate governance an d pushing forward with the clean up of non-
performing loans or NPLs. Host governments can improve the legal system and the ability of banks toenforce security.  They can encourage competition from international and local banks in trade finance,
and promote the establishment of local credit rating agencies to rate banks and their customers.
Whenever possible, they can encourage the private se ctor to provide export credit insurance (ECI), to
help exporters safely sell to new buyers in new countries and increase the quality of trade receivables
held by exporters.
15. Local banks  should acknowledge that well structured trade finance is less risky and good
business. They need to maintain or improve their credit rating, which will lower the cost of L/Cconfirmations and interbank debt. Local banks need to nurture correspondent banking relationships,
since during times of instability these will be strained.  They need to take advantage of ECI offered by
leading international credit insurers – official or private.
16. International banks  should change country limits and bank limits based on reliable
information, not as a “knee jerk” reaction.  Some international banks with limited experience inemerging markets can take advantage of risk mitigation products such as PRI and trade credit cover
from private and public sector PRI providers a nd ECAs. And if need be, they can use credit
enhancement programs offered by multilaterals, such as EBRD under its Trade Promotion Facility,
IFC and ADB (as detailed in the case study).
17. Multilaterals and bilaterals  can play a pivotal role in rebuilding confidence between host
governments, local banks and international banks by providing well targeted credit enhancements, but
only if the “market” can not. We are good at keeping host governments focused on what they need to
do through policy support and capacity building.  But perhaps most importantly we need to recognize
that trade finance plays a critical role in supporting DMCs to increase exports and ultimately earn
more foreign exchange, which is needed to service and repay foreign debt and create employment andreduce poverty.
IV. ADB’S INITIATIVES AFFECTING TRADE AND TRADE FINANCE
A. M
OBILIZING CREDIT THROUGH CO-FINANCING
18. Our Co-financing Strategy urges us to forge partnerships with international & local banks;
other financial institutions in international capital markets, public and private sector political risk
insurers and export credit agencies (ECAs) to mobilize cost effective short, medium and long term
credit for ADB “projects”.
19. This initiative calls for us to focus on our comparative advantage of taking long-term political
and select commercial risks, while letting co-financiers focus on their comparative advantages -
taking short and medium-term commercial funding, FX , interest rate and documentation risks.  It also
calls for us to concentrate on those risks that the market cannot effectively take, thus filling the “gap.”
B. ENCOURAGING THE PRIVATE SECTOR
20. ADB’s Private Sector Development Strategy was approved after the Asian financial crisis and
shows how we can better promote private sector led growth in the Asia Pacific Region.  It focuses on
how ADB can assist DMCs to create enabling c onditions for private sector investment, good publicWT/WGTDF/W/6
Page 4
and corporate sector governance, sound macro-economic policy, legal & judicial reforms, investment
and trade liberalization, and financial sector and capital market reforms.
21. It sets a framework for ADB to catalyse private sector investment and commercial risk taking
activities, with specific development impact and demonstrational effect, through equity investments,
direct loans, partial credit guarantees and political risk guarantees.
C. SHARING OUR “HALO ”
22. To facilitate or help us with these initiatives, for difficult or challenging projects, ADB is
willing to share its “halo” with commercial ba nks, through our CFS or “lender of record” co-
financing, and with private sector political risk insurance (PRI) providers, through our PRG Co-
guarantee Program.  These programs enable co-financiers to benefit from ADB’s Charter privileges &
immunities, which include; no restriction on conversion & remittance of principal & interest,
immunity from confiscation or expropriation and exemption from withholding taxes. They also allowco-financiers to share our “Preferred Creditor Status” – which helps to reduce the chance of debt
rescheduling and reduce the need for some banks to make cross-border debt provisioning
D. T
ECHNICAL & O THER ASSISTANCE
23. ADB helps DMCs with policy support through policy and sector studies, strategy
formulation, policy based lending and dissemination activities; capacity – institution building; andtrade facilitation. But support of trade finance is new, probably because before the Asian financial
crisis it was not seen as a priority need by our DMCs, thus we are still doing pilot transactions.
V. CASE STUDIES AND LESSONS LEARNT
A. $150 M
ILLION POLITICAL RISK GUARANTEE FACILITY FOR INTERNATIONAL BANKS
CONFIRMING PAKISTAN IMPORT L/C S2
Lessons learnt in Pakistan
• Targeted use of ADB credit enhancement, only political risks needed to be covered by ADB, and
ultimately GOP.  Commercial risks left with confirming banks and issuing banks.
• Open access, any international bank should be able to participate.
• Guarantee fees needed to be based on historic average for political risk “premium” associated
with Pakistan L/Cs.  Should not distort the market during periods of political stability.
• Usage of the facility may not occur when expected.  9/11 and Afghanistan War actually reduced
need for the facility.
                                                     
2 L/C PRG Facility purpose is to effectively transfer key Pakistan country risk into ADB risk, thus
helping international banks confirming eligible import L/Cs.  To keep Pakistan country limits open; accept
longer terms; and stabilize or reduce confirmation fees. Th is ensures continued access to finance and effectively
reduce the cost of imports for export production.
For each eligible L/C, ADB guarantees the confirming bank that if it suffers a loss as a result of the
issuing bank's failure to make payments due under the eligible L/C, and the cause of such Loss is the occurrenceof a Guaranteed Risk, then ADB will pay to the confirming bank the guaranteed amount. Guaranteed Riskscould be Debt Moratorium; Change and Enforcement of Law; Expropriation; and Political Violence. Risks notcovered include any underlying disputes or defaults betw een the supplier and the applicant, or the applicant and
the issuing bank, with respect to the eligible L/C or otherwise, or devaluation of local currency.WT/WGTDF/W/6
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B. $1 B ILLION FACILITY FOR THAILAND EXPORT IMPORT BANK3
Lessons learnt in Thailand
• Enabled Exim to successfully tap the internat ional syndicated loan market for a 5-year $950
million term loan.
• Marked the first term financing arranged for Thailand since the onset of Asian financial crisis
1997.
• Designed to help export related enterprises access much needed pre shipment and post ship trade
finance.
• But this depended on local banks being willing and able to intermediate risk, which initially they
did not do.
• Draw down of the loan was modest in part due to  liquidity in the banking system improving faster
then expected.
__________
                                                     
3 Thailand: Export -Financing Facility Project (Loan 1612) –Approved on  26 March 199 8, $50 million
The primary objective of the Project is to provide credit to the private enterprise export sector to fill a portion ofthe resource gap for export lending, and assist the government and the banking system to allocate appropriateresources to this sector.
The Project will assist export-related enterprises in the private sector in Thailand by providing: pre-
shipment financing against purchase orders, contracts, letters of credit and such other customary documentation
applicable to the trade; post-shipment financing against export bills; imported raw material financing againsttrust receipts, for that portion of the raw materials to  be utilized in exports; term loans not exceeding $10
million, with an amortization schedule of up to five years, including a grace period not exceeding 18 months, forplant and equipment for new export-oriented ventures and balancing, modernization and replacementrequirements of existing export-oriented enterprises; and such other export-related facilities as may be agreed
upon from time to time by the Bank.