ITFC SUPPORTS BURKINA FASO’S COTTON SECTOR WITH €85 MILLION SYNDICATED MURABAHA FINANCING

ITFC provided €85 million Murabaha financing to the Government of Burkina Faso, with Sofitex as the executing agent. Sofitex is Burkina Faso’s state-owned leading cotton company with long-standing experience in cotton, a critical export crop and foreign currency source for Burkina Faso.

Cotton Export Vital for Burkina Faso’s Economy

Burkina Faso is a land-locked country located in West Africa with almost 90% of its population engaged in farming. Sorghum, millet, corn and rice are grown as subsistence crops with cash crops including cotton, groundnuts, and sesame playing a key role in employment and income generation for the rural population. Cotton is one of the few crops cultivated as a cash crop, exclusively for export purposes. Known as “white gold”, the major cash crop for local farmers and an important export and revenue-generating product for the country.

Cotton accounts for about 3% of the country’s GDP and around 18% of exports. It is also a vital source of foreign exchange. Burkina Faso’s share of world cotton exports has tripled over the past ten years – a remarkable achievement despite a slump in world prices and ongoing political risk and stability challenges. ITFC’s support for this vital sector is in line with its strategy of prioritizing its financing to the key sectors driving economic growth and income generation for the people in Member Countries.

Rationale & Challenges

Securing funding for the purchase of the necessary Seed Cotton (to be processed into Cotton Fiber before export by Sofitex) from local farmers and opening new markets to Burkina’s Cotton Fiber remained a national priority for the country, notwithstanding the price decline in international markets as well as on-going political challenges. ITFC remained steadfast in its partnership with Sofitex and the Government of Burkina Faso despite these challenges.

ITFC’s trade financing solution consolidated the financing package and offered a sizable facility to cover the funding requirement for the agricultural cycle, leveraging on its ability to mobilize significant resources from the market at a competitive cost. The ITFC team successfully syndicated the deal, with the operation being over-subscribed, despite the political challenges that Burkina Faso has been through over the past few years.

In addition, ITFC leveraged on its global network of clients and partners to  link buyers from other member countries to cotton exporters like Sofitex, a concept called “Reverse Linkage.”. In this respect, the ITFC team introduced a Turkish Cotton trading and textile production company to Sofitex and Burkina’s authorities. The aim was to create value for both clients by linking buyers and sellers of cotton in Member Countries while contributing to South-South cooperation and intra-OIC trade. The introduction led to the Turkish Cotton trader concluding a contract with Sofitex and becoming a standing buyer of Burkina cotton.

Financing Structure

ITFC and the Islamic Development Bank (IDB) have had a longstanding relationship with Sofitex, dating back to 2006 when the first IDB structured trade finance (STF) operation was approved for the cotton exporter. Sofitex has benefited from more than €346 million of financing under several operations from ITFC and IDB. This long-standing partnership demonstrates ITFC’s strong commitment to Burkina Faso’s cotton sector and its support to the Country’s economic and social development agenda.

In its latest financing package, ITFC approved a syndicated pre-export Murabaha financing facility in favor of the government of Burkina Faso, with Sofitex as the executing agent. The Facility will help Sofitex secure the purchase of seed cotton from local famers for processing into cotton fiber before it is exported and sold to a diversified pool of international traders and off-takers. 

The structure of the operation combines the sovereign backing from the government of Burkina Faso with an enhanced security package with the transaction generating its own cash flows to repay the financing (i.e. a self-liquidating structure). This includes assignment of proceeds from the export sales to off-takers and domiciliation of the funds into ITFC’s collection account, which is then used to repay the financing.   

Financing with Impact

As mentioned, the ITFC financing aims at securing the purchase (directly from local farmers) of Seed Cotton, which is processed into Cotton Fiber before export. The facility shall indeed allow the purchase of around 250,000 tons of Seed Cotton, from more than 4,000 groups of farmers and cooperatives, for the production of 71,000 tons of Cotton Fiber.

The developmental impact of the operation is substantial. With Burkina Faso being a land-locked country, trade is critical for economic development. Cotton, the “white gold” is an essential commodity and a major cash crop for local farmers, affecting positively their income and improving their living conditions.  Cotton culture acts also as a guarantee for rural food security as farmers use some of the available agricultural inputs (fertilizers, insecticides, etc) not only to enhance cotton growing but also for growing food crops. Moreover, cotton represents an important export and revenue-generating vehicle for West African countries. Thus, cotton production and financing represent important instruments for poverty alleviation.

The long-standing partnership between ITFC and Burkina demonstrated ITFC’s strong commitment to the country’s cotton sector and its backing of the Government’s economic and social development agenda.

Summary Deal Information

ITFC Syndicated Pre-Export Murabaha Financing Facility for the Purchase of Seed Cotton from Local Farmers

MLA

International Islamic Trade Finance Corporation (ITFC)

Beneficiary

Government of Burkina Faso, Sofitex as Executing Agent

Amount

€85 million

Tenor

Up to 12 months

Date of Signing

3 December 2015

 

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