Continue to strengthen the focus in areas where additionality is high and seek to increase the share of the program in high-risk markets and where the supply of trade finance and alternate risk-mitigation instruments are less available while managing risks in a manner consistent with IFC's risk assessment and management standards.
Key steps to consider include (i) adding more high-risk issuing banks, (ii) adding more banks in high-risk countries, (iii) introducing internal country risk-based volume targets to supplement absolute volume targets, (iv) introducing internal targets for return on economic capital to support optimal pricing of GTFP guarantees, and (v) establishing a comprehensive additionality assessment process for the program.
1. The GTFP has demonstrated high additionality in riskier markets where there are trade needs but lines of credit from international confirming banks and alternate risk mitigation instruments are less available. In recent years, while the GTFP has expanded in higher-risk markets, in terms of dollar volume it has grown faster in low- and medium-risk countries. IFC has not yet fully developed a comprehensive process to assess GTFP additionality. Guarantee pricing is an important tool to help ensure additionality.
Original Response: Agreed: IFC agrees that it should continue to ensure that GTFP focuses on areas where its additionality is significant. IFC further recognizes that, consistent with the importance of maintaining a global emerging market presence, it has significant additionality in International Development Association (IDA) countries, in fragile and conflict-affected situations (FCS), and middle-income countries (MICs). In MICs, IFC focuses on frontier regions and lower-tier and regional banks that have limited or no access to international Confirming Bank networks and/or do not have sufficient trade lines or other trade finance products to meet the requirements of importers, including those that cater to the needs of SMEs and other key stakeholders. It is important to note that GTFP has always intended to be a global program, responding to market demand across emerging markets with a wide range of income and risk profiles.
IFC appreciates the following key steps IEG has recommended for IFC's consideration:
(i) add more high-risk issuing banks: IFC agrees with the intent of this recommendation and will continue to seek innovative ways to identify viable banks in lower tiers and smaller markets. Riskier banks can face a number of challenges, including financial viability, trade finance capacity, and reputation, among others. As such, IFC will balance its efforts to reach more challenging banks while not compromising its credit standards in the pursuit of higher-risk counterparties. Both development impact and financial sustainability will remain key considerations. IFC will look to establish more formal coordination between its investment and advisory services to identify banks that need improved risk profiles prior to participating in GTFP and to help them make adjustments.
(ii) add more banks in high risk countries: IFC agrees that the GTFP should seek to grow its bank membership in IDA countries, as well as in countries where trade finance is nascent, or where companies are forced to resort to cash collateral to finance their trade and banks do not have access to viable alternatives to offload risk. The program will increase its emphasis on considering banks from more fragile areas.
As noted in IEG's recommendation, GTFP is a demand-driven program and has significant responsibility for the tangible and proven "seal of approval" membership to this program provides for all existing members, care must be taken to balance growth in severely challenging markets taking into account both market need and investment and reputational risk.
(iii) introduce internal country risk-based volume targets to supplement absolute volume targets: IFC agrees in principle that targets for less developed markets are useful. Thus, per IEG's recommendation, IFC plans to continue incorporating GTFP's contributions to the risk and income-based targets that IFC establishes, particularly with IDA country targets. In addition to its global commitment volume and project number targets, IFC has targets for poor countries, high-risk countries, and high-risk regions in non-IDA countries (frontier regions). Achievements of targets in IDA and FCS feed into IFC's staff performance and rewards programs.
(iv) introduce internal targets for return on economic capital to support optimal pricing of GTFP guarantees: IFC uses risk-adjusted performance measures when considering new investments, and also for assessment of historic profitability. IFC currently applies risk-adjusted return on economic capital as a factor in loan pricing. Risk-adjusted return on capital (RAROC) is one of the metrics used by IFC in considering historic portfolio performance. IFC has taken steps to integrate GT
IFC Action 1: Identify banks for GTFP AS to work with, either prior to GTFP membership (improving their capacity) or rising from identified bank needs within the membership.
Indicator: # of banks identified
Target: at least 5 banks identified
Timeline: 2Q15
(ii) IFC Action 2:
Complete pilot country assessment which catalogs existing GTFP banks along with non-members, seeking to identify additional potential candidates
Indicator:
Pilot Study Completion
Target: 1 pilot study completed
Timeline: 2Q15
(ii) IFC Action 3: Increase FCAS banks in GTFP network
Indicator: number of FCAS banks added (ether current FCAS or prior year)
Target: 1 per year
Timeline: 4Q14,15,16
(iii) IFC Action 4: Emphasize IDA country investments
Indicator:
IDA country FY14 volume targets
Target: US$ 3.1 billion Commitment Volume
Timeline: 4Q14
(iv) IFC Action 5 : Complete historic profitability/RAROC analysis for GTFP
Indicator: Completed historic analysis
Target: completion of market practice, historic profitability and return analysis drivers identified.
Timeline: 1Q15
(v) IFC Action 6: Complete comprehensive additionality study
Indicator: additionality study
Target: Completed additionality study
Timeline: 2Q15
In the absence of the FY17 Management update on this recommendation, IEG keeps the Implementation Progress as Substantial and Implementation Status as Active (Rated).
In its FY16 Update of this recommendation, IEG acknowledged that substantial progress has been made on action items 1, 2 and 4. However, there was lack of evidence from IFC on action items 3, 5 and 6 to assess the progress towards: (i) adding more issuing banks in FCS (ii) GTFP pricing and (iii) establishing a comprehensive additionality assessment.
IEG would need the following information to upgrade the rating on Implementation Progress and Implementation Status:
- Action 3: IEG did acknowledge in its FY16 update that substantial progress has been made in terms of adding a total of 14 issuing banks in the GTFP network in FCS countries during FY14 and FY15. However, IEG in its FY15 update requested for the following information for each of the 14 issuing banks as evidence, which was not provided by IFC: (a) name of the issuing bank (b) country name and (c) date when the bank joined the GTFP network
- Action 5: IEG also acknowledged in its FY15 update about the progress made in terms of: (a) conducting historical Risk Adjusted Return on Capital (RAROC) from FY07 until FY14 (b) identifying the drivers of revenues such as, number of banks, number of active banks, line limits, commitment volume, guarantee tenor, and cancellations and (c) indicating that market conditions in the country seem to have the greatest impact on price (refer to June 2014 presentation GTFP Profitability 2.0: Considering Potential Drivers). However, as IEG indicated in its FY15 update, there is lack of evidence on whether GTFP is factoring RAROC while pricing guarantees in real-time, which is the key towards achieving this action item. Furthermore, IEG in its FY15 update requested for the following information, which was not provided Provide concrete evidence by taking a real-time GTFP transaction (blocking out the Country Name and Client Name for confidentiality purposes) and clearly explain how GTFP is determining the price of a transaction and
- Action 6: IEG indicated in its FY15 update that the Management update for this action item was a repeat of the same information that was provided to IEG in the FY14 Management update Pilot additionality study was completed and has been published in the most recent Board Paper dated September 13, 2002. IEG notes that there a need for IFC to revisit and update the additionality study. This is because the additionality study was conducted at the time of the GTFP evaluation in 2012 and that there has been no update since then.
In the absence of FY16 Management update on this recommendation, IEG keeps the Implementation Progress as Substantial and Implementation Status as Active (Rated). In its FY15 Update of this recommendation last year, IEG acknowledged that substantial progress has been made on action items 1, 2 and 4. However, there was lack of evidence in the FY15 Management Update on action items 3, 5 and 6 to assess the progress towards adding more issuing banks in FCS, guarantee pricing and establishing a comprehensive additionality assessment. IEG would need the following information to upgrade the rating on Implementation Progress and Implementation Status:
- Action 3: IEG did acknowledge in its FY15 update that substantial progress has been made in terms of adding a total of 14 banks in FCS countries in GTFP network during FY14 and FY15. However, IEG in its FY15 update requested for the following information for each of the 14 issuing banks as evidence, which was not provided: (i) Name of the Bank (ii) Country Name and (iii) date when the Bank joined the GTFP network.
- Action 5: IEG also acknowledged in its FY15 update about the progress made in terms of: (i) conducting historical Risk Adjusted Return on Capital (RAROC) from FY07 until FY14 (ii) identifying the drivers of revenues such as number of Banks, number of active Banks, line limits, commitment volume, guarantee tenor, and cancellations and (iii) indicating that market conditions in the country seem to have the greatest impact on price. Furthermore, progress was made in conducting analysis on pricing such as portfolio allocation vs average price and GTFP exposure by pricing buckets -- Top 20 Vs Bottom 20 markets (in US$) (refer to June 2014 presentation "GTFP Profitability 2.0 - Considering Potential Drivers". However, as IEG indicated in its FY15 update, there is lack of evidence on whether GTFP is factoring RAROC while pricing guarantees in real-time, which is the key towards achieving this action item. Furthermore, IEG in its FY15 update requested for the following information that was not provided --- Provide concrete evidence by taking a real-time GTFP transaction (blocking out the Country Name and Client Name for confidentiality purposes) and clearly explain how GTFP is determining the price of a transaction.
- Action 6: IEG indicated in its FY15 Update that the Management update for this action item was a repeat of the same information that was provided to IEG in the FY14 Management update -- "pilot additionality study was completed and has been published in the most recent Board Paper, dated September 13, 2012..".
Action 1: GTFP has made substantial progress in identifying and providing trade finance advisory services to the following five Banks which are in the pipeline to become members of its network: Myanmar Oriental Bank (MOB), Central Bank of South Sudan and three subsidiaries of Orabank in Chad, Guinea and Togo. GTFP has also provided training to FDH Bank in Malawi on Trade products and internal controls. Based on the above information, management claims that at least six FCS countries have been identified and trained till date. Although training the representatives of Central Bank of South Sudan on banking supervision could possibly lead to improvement in the supervision of the commercial banks, GTFP has not identified and trained any issuing banks in South Sudan. Therefore, excluding the Central Bank of South Sudan would result in a total of five issuing banks in FCS countries that have been identified and trained on trade finance advisory services, achieving the target of at least 5 banks identified for training. Based on the above information, IEG acknowledges that substantial progress has been made in terms of identifying and training high-risk issuing banks and the achievement of this action item in terms of meeting its target of at least 5 high-risk issuing banks has been achieved.
Action 2: Based on the information in the managementâs update, GTFP has completed a pilot study for Myanmar and has identified critical sectors of growth, key stakeholders, and established a framework for country engagement. Therefore, this action item has been fully achieved.
Action 3: Based on the information in the managementâs update, GTFP has made substantial progress by adding a total of 14 banks in FCS countries during FY14 and FY15. IEG would like to know the following details of each of these 14 issuing banks as evidence: name of the bank country name and date when the bank joined the GTFP network.
Action 4: Based on the information in FY15 IFC Annual Portfolio Review (page 30), volume of GTFP transactions in IDA in FY14 and FY15 was US$ 4.5 billion and US$ 4.4 respectively, exceeding the target of US$ 3.1 billion.
Action 5: The presentation âGTFP Profitability 2.0 â Considering Potential Driversâ on June 2014 includes historical RAROC estimates starting from FY07 until FY14 (pg. 2). The presentation also includes the following drivers of revenues (pg. 13): number of banks, number of active banks, line limits, commitment volume, guarantee tenor, and cancellations. In terms of drivers of price, it states that market conditions in the country seem to have greatest impact on price (pg. 34). Also, it includes analysis on pricing such as, portfolio allocation vs average price and GTFP exposure by pricing buckets â Top 20 vs bottom 20 markets (in US$). However, there is lack of evidence on whether GTFP is factoring RAROC while pricing guarantees in real-time, which is the key towards achieving this action item. Management needs to provide IEG with more concrete evidence by taking a real-time GTFP transaction (blocking out the country name and client name for confidentiality purposes) and clearly explain how GTFP is determining the price of a transaction.
Action 6: Management update for Action item 6 is a repeat of the same information that was provided to IEG in the previous MAR update â âpilot additionality study was completed and has been published in the most recent Board Paper, dated September 13, 2012..â.
Although based on managementâs update there is sufficient information to conclude that substantial progress has been made on action items 1, 2 and 4, there is lack of information in the recent managementâs update on action items 3, 5 and 6 to assess the progress towards adding more issuing banks in FCS, guarantee pricing and establishing a comprehensive additionality assessment.
Action 1. In additional to the identification of MOB Bank in Myanmar and the Bank of South Sudan, training programs were provided to three separate Orabank subsidiaries in Chad, Guinea, and Togo, which are in the pipeline to become GTFP members. In South Sudan, IFC completed a three-year training program for representatives from the Central Bank of South Sudan, covering both on-site and off-site supervision of commercial banks with an emphasis on trade finance transactions. Trainees that successfully completed the six-module course are now certified as banking supervision specialists. GTFP AS also provided a full trade advisory program for FDH Bank in Malawi on trade products and internal controls. GTFP AS had identified additional FCS work for FY16. A comprehensive banking sector-wide project engaging with specific commercial banks, among other trade finance stakeholders, is planned for delivery in early FY16 in Comoros and Madagascar. Thus, programs for banks in at least six FCS countries have been identified and executed, and plans for programs in at least two additional FCS countries are planned for FY16.
Action 2. IFC committed to complete one pilot country assessment, cataloging existing and potential banks. GTFP has fully completed its pilot study for Myanmar - thoroughly assessing the country's critical sectors to growth, including the financial sector, identifying key stakeholders and establishing a framework for country engagement/elevation for both the financial sector and beyond. A confidential copy is available upon request.
Action 3. Target has been achieved for FY15. The IEG target is to add one bank per year in an FCS country. The team has far exceeded its MAR targets, adding 14 total banks in FCS countries in FY14 and FY15.
Action 4. Fully achieved in 2014 and well above the target. FY14 IDA commitment volume totaled USD 3.6 billion from GTFP (as reported in the FY14 Annual report).
Action 5. As indicated in 2014, the team has conducted confidential investigational interviews with global bank leaders regarding the components of their profitability, which drives RAROC calculations and the levels of organizational structure responsible for each component. The team has had extensive conversations with IFC's [CIR] Risk department regarding capital allocation methodologies and assumptions regarding capital allocation for trade finance. The team has researched the history of RAROC calculations and capital allocation at IFC via review of board papers regarding capital treatment and RAROC for trade finance at IFC. The team has completed a historic profitability assessment of GTFP, including detailed findings of drivers and cost allocation methodologies to IFC's Senior Management, including our CEO in October 2013. The team has since modelled GTFP's key profitability drivers in detail, gaining an understanding of the key levers which may or may not be feasible in each region/market, depending on market conditions and showing the theoretical impact of changes in those drivers. The team currently projects FY15 for GTFP down to the RAROC level, updating the model monthly as actuals come in and market conditions change. The team also performs a separate quarterly analysis of GTFP's profitability for IFC's Financial Institution Group's quarterly management team meeting. GTFP operations are already orienting towards targeting RAROC at this point, and models and discussions support this. Sample presentations were provided last summer. Available again upon request.
Action 6. Our pilot additionality study was completed and has been published in the Annex of GTFP's most recent Board Paper, dated September 13, 2012. (Annex 3, page 95, IFC/R2012-0302). It categorizes and buckets countries by risk, as well as categorizes individual banks by corresp
1. Based on the managementâs update, IFC has made progress and has started providing advisory services to two banks. As of the first quarter of FY15, progress has been made in identifying two banks, against a target of 5 which is due by the second quarter of FY15. The achievement of this action item is currently under progress and will be revisited by IEG in the next round of the managementâs update.
2. As per the managementâs update, a country assessment for identifying potential issuing banks in Myanmar is currently under progress. This action item will be revisited by IEG and the status of the country assessment will be monitored in the next round of the managementâs update.
3. Based on the managementâs update, a total of six issuing banks in fragile and conflict affected states have been added to GTFP in FY14, significantly exceeding its target of 1 per year. IEG will continue to track this action item in the next rounds of the managementâs update to see if the progress is sustained in FY15 and FY16.
4. As per the managementâs update, the total commitment of IFC in IDA countries is close to USD 6.9 billion based on the information in IFCs 2014 Annual Report (refer to âIDA: Commitments (millions)â line item on page 61). Of which, GTFP accounts for USD 3.6 billion, based on the information from the managementâs update (not available in IFCs 2014 Annual Report). IEG will continue to track the progress of this action item in the next round of the managementâs update.
5. Although, as per the managementâs update progress has been made in projecting GTFP down to RAROC level, no evidence or information has been presented to IEG on historic profitability/RAROC analysis for GTFP. Also, IEG performed a search for RAROC in the Global Trade Finance Program (GTFP) Operating Manual (http://spapps.worldbank.org/quickstrike/ifcpolnproc/ppsite/Lists/PNPDoc…), but could not find any documentation on RAROC calculations.
6. Although, there is evidence from action items 1, 2 and 3 above that IFC is making progress in identifying issuing banks in high risk markets, there is currently a lack of evidence on progress made towards establishing a comprehensive additionality assessment.
1. Progress made and on track to be completed by the timeline (2Q15)
2. Work fairly advanced and on track to be completed by 2QFY15
3. Target has been achieved for 4QFY14. A bank has been added in Myanmar this year.
4. Fully achieved and well above the target. FY14 IDA commitment volume totaled USD 3.4 billion
5. Progress made and on track to be completed
6. On track to be completed as planned (2Q15)
Note: Scott Stevenson and Susan Starnes cleared, reviewed and approved the updates and ratings for all GTFP recomendations (243-248), authorized coordinator to click in the system on their behalf.