Equity Bank Kenya is in advanced stages of securing a Sh7.7 billion ($60 million) trade finance guarantee facility from the African Development Bank (AfDB) to support its facilitation of small companies engaged in import and export through letters of credit.
The continental lender said approval for the proposed facility is expected before the end of the month, a move that will help derisk Equity Bank’s international trade facilitation, particularly to smaller businesses.
A letter of credit is a bank’s promise to pay a seller of goods once certain conditions, such as shipping, are met.
It reduces risks in international trade by substituting the bank’s creditworthiness for the buyer’s.
If the buyer fails to pay, the issuing bank guarantees the seller will receive the funds. Letters of credit are issued from one bank to another. From this guarantee, Equity will transfer the entire risk of default by the buyer to AfDB.
Once approved, the facility will enable Equity Bank to expand trade financing for small and medium enterprises (SMEs) and lower costs, making it easier for Kenyan companies to participate in global trade.
“The proposed facility will contribute to mobilising significant financial resources for SMEs and local corporates in agriculture, manufacturing as well as the industrial sector,” the AfDB said in a recent disclosure.
“It will help address critical market demand for trade finance in Kenya by supporting trade in various vital economic sectors.”
Under the facility, AfDB will provide a 100 percent non-payment risk guarantee for letters of credit issued by Equity Bank, making it cheaper and easier for the bank to lend to importers and exporters.
Importers often rely on letters of credit to buy goods and services from abroad, but costs can vary depending on the buyer’s credit risk or how the foreign bank views the issuing bank’s credibility. The AfDB facility will strengthen Equity Bank’s risk profile, lowering the cost of issuing letters of credit and expanding access to trade finance for Kenyan businesses.
AfDB says the facility will be instrumental to Kenya’s economy, boosting export revenues and contributing to employment growth.
While formal approval is pending, AfDB noted the facility aligns with its current 10-year strategy and is likely to be approved. The guarantee forms part of a broader financing framework supporting Equity Bank’s Africa Recovery and Resilience Plan over the next three years.
The total funding under this framework has not been disclosed.
AfDB has recently stepped up private sector financing. Last week, the bank extended Sh19.5 billion to KCB Bank to support women-led SMEs and green projects.
