ITFC has successfully tailor-made Shariah-compliant solution in order to meet the specific needs of the client and to effectively compete in an aggressive market environment. In this way, ITFC managed to harness a diversified portfolio with the groundnut, as an important strategic commodity. Taking business a step further, ITFC designed the first structured trade finance deal provided by the IDB Group to the Agricultural Sector in the Gambia. This deal helped in advancing the Gambian agricultural sector role through a sustained commitment to improve access to value-added and competitive financing.
Under this financing, the ITFC as an arranger and a financier extended a Murabaha Financing with the amount of US$14 million in favor of the Gambia Groundnut Corporation (GGC) in order to finance the groundnut commodity.
Groundnut is the main cash crop of The Gambia and its production and related marketing activities engage a large percentage of the country’s population. For long, the industry had been relying on borrowing crop finance funds from local commercial banks at high rates. Moreover, those banks lacked the capacity to meet its financing requirements. Not surprisingly, this made the operations less viable. The net effect had been a downward trend in groundnut production. Late payment to farmers also aggravated their financial uncertainty as the producers were unable to properly plan the use of their annual earnings. This uncertainty often forced them to resort to taking small loans to meet their daily financial needs.
With the availability of financing from ITFC, the Gambian groundnut industry now has access to adequate financing for the purchase of the country's entire commercial crop. The low cost means improved viability for GGC as financing and operating costs are reduced. During the last season all groundnut purchases were fully paid for and on time without recourse to any form of credit buying. This has also strengthened marketing arrangements for groundnuts. Since farmers are now able to sell their produce and receive cash on delivery, they feel more confident in participating in groundnut production. The result has been increased earnings for them, which in turn lead to poverty reduction.
Increased purchases also meant increased export of products, which brought in foreign exchange to the country. Consequently, it helped improve the country’s GDP significantly.
The Government of The Gambia, on behalf of the Gambia Groundnut Corporation (The Agent) made a written request for the financing of expected bumper harvest of 2010/2011 groundnut season. An estimated 115,000 metric tons was earmarked to be financed at US$14 million. GGC was reluctant to approach local banks for such an amount due to the high interest rate associated and the inability for the Government to provide the funds on time.
ITFC, braved the risk involved and after making its due diligence, decided to provide the required finance on a six monthly revolving basis. Mechanisms of creating an escrow account were put in place, list of off takers was made available and facility manager was identified.
GGC identified potential buyers/off takers and reached an agreement inter-alia the volumes and quantity for Cranswick Pet Product of UK, HPS/Birdfeed and Leisure of France through Ecotrade for oil. May Bank, London was nominated escrow account holder for the repayment.
After obtaining the purchase approval from ITFC, Facility Manager made sure that the products are insured by “All Risk Coverage” insurance while in the depots or storage facilities with ITFC being assigned as Loss Payee. Facility Manager presented the invoices and warehouse receipts certifying quantity and quality upon which ITFC will release payment to suppliers. Repayments made come from off takers and as agreed and signed in a tripartite contact, all proceeds from sales go through the nominated bank which took the responsibility of allocating amounts due to ITFC on time.
What makes this deal standout?
- This is the first Islamic Structured Export Financing deal in The Gambia.
- It is fully supported by the Government of the Gambia with readiness to provide a Sovereign Guarantee in the event that the structure put in place fails to meet the repayment of the financing facility upon its due date.
- The operation was designed to benefit thousands of local farmers of 70% of the rural population whose entire life depends on this crop.
- ITFC was able to use foreign currency to finance local purchases that require local currency thereby earning the country extra foreign currency through this operation.
- ITFC facilitated the increased production of the product since farmers are assured of receiving payments for their products upfront instead of waiting for longer period as it used to be in the past
- Use of a professional local agent, Facility Manager to play successfully the role of monitoring and control in the likes of ACE, SGS collateral managers.