In a deal showing how the public and private sectors can work together in the financial arena, Standard Chartered and the ADB have put together an innovative political risk guarantee package for trade finance with Pakistan.
Under the agreement, the ADB will guarantee the political risks associated with trade financing for companies that export to Pakistan. Standard Chartered is the facility agent for the package, which is worth $150 million over the next six years.
The ADB will guarantee the payment to international banks by Pakistani banks that confirm letters of credit (LCs), if the Pakistani banks cannot make the payments due to certain political conditions. These include foreign exchange inconvertibility or transfer blockage.
The benefits of the scheme are that it will be cheaper for Pakistani companies to import raw materials and will thus help them achieve more export competitiveness. It will also mean that international banks will have less Pakistani risk on their books and so in effect will be able to increase their country lines to the nation.
"An innovative aspect of this facility is that we are stripping out country risk from the LC and transferring this risk to ADB. Thus, ADB assumes the political risk while the banks carry the commercial risk. This makes best use of ADB’s and the banks’ respective strengths," says Werner Liepach, Senior Financial/Capital Markets Specialist and Mission Leader for this project at the ADB. "Some of the international banks participating in the facility would not be here if they weren’t covered by ADB’s guarantee. Other banks are welcome to join us."
Speaking about the benefits of the scheme for Pakistan, Martin Endelman, ADB’s Export Credit Specialist adds, "Without this facility, offshore suppliers that sell much needed imports to Pakistan may during periods of perceived political uncertainty encounter difficulties in obtaining confirmation of certain LCs issued by Pakistani Banks, or will do so at a high cost, thus penalizing Pakistan companies versus their international competitors due to political factors beyond their control."
The seven other banks that are participating in the scheme are Credit Agricole Indosuez, Deutsche Bank, ING Bank, Societe Generale, Sumitomo Bank, HSBC and Wells Fargo.