ITFA’S AFRICA REGIONAL COMMITTEE TACKLES THE TRADE FINANCE GAP by Shannon Manders, ITFA Consultant



Africa’s trade finance gap, the unmet demand for bank-intermediated trade finance on the continent, is estimated to be in the region of US$120bn. Evaluating solutions for reducing this gap forms an integral part of ITFA’s Africa Regional Committee (ARC), chaired by ITFA board member Duarte Pedreira of Crown Agents Bank. Here, ARC board members share their thoughts on what’s new in the conversation about how the gap can be bridged.

  1. Tech solutions are helping, but are currently too fragmented

Africa’s trade finance gap stems from several issues affecting SME borrowers in particular, including a lack of verifiable historical financial information, a lack of credit history, changes in global banking regulations, and a reduction in institutions supporting lending.

Although a number of tech companies have stepped in over the last few years to try and tackle some of these problems, their solutions often tend to lack both scale and cohesion.

“It’s like the gold rush – it’s far too fragmented,” says Pedreira. “Everybody is trying to get the same business, but completely ignoring what the priorities should be.”

Pedreira believes that the new tech-led know your customer (KYC) repositories in particular, several of which have emerged across the globe over the past few years, have a significant role to play in addressing Africa’s trade finance gap – but only if they can find a way to work together.

In Africa, corporate information platform Asoko Insight, launched in 2014, leverages technology and in-country sources to help banks and investors access high-quality corporate data. Its purpose-built solutions provide instant, accurate and up-to-date information on the continent’s leading growth markets, businesses, and the people who run them.

More recently, the African Export-Import Bank (Afreximbank) last year launched its new customer due diligence (CDD) platform, called Mansa, which seeks to provide a single source of primary data required for banks to conduct CDD and KYC checks on counterparties in Africa. With the utility, the bank says it hopes to “end the subjective evaluation of customers and eliminate the perceived, and often unfair, risk in trading with African counterparties”.

Combining solutions such as these, together with registries at governmental level to create a truly central repository, could be key to ensuring enough information about borrowers is available, says Pedreira.

Whether or not that information can be trusted is another issue, and to that end Pedreira also advocates the creation of a specialised ratings system aimed specifically at SMEs, which generally lack audited financial statements and formal accounts.

“What we need is some sort of ratings agency that understands the need to go and look into what I call companies’ ‘black books’. Using technology, this could enhance due diligence on a low cost basis and eventually create credit ratings associated with these SMEs,” he says.

“To me, with this type of initiative – creating a central repository for corporate due diligence and KYC, as well as a rating systems for SMEs based on a deep understanding of the local sets of accounts – you’re working towards solving the trade finance gap.”

  1. New guidance for correspondent banking services is a positive step

In March, BAFT released the Respondent’s Playbook for Obtaining and Maintaining a Correspondent Banking Relationship, a guidance document for users of correspondent banking services which aims to address the significant decline of correspondent banking relationships worldwide since 2011. The Playbook outlines the decision-making process of correspondents establishing new and reviewing existing relationships and the measures that respondents may take to increase the likelihood of a favourable outcome.

“The playbook is a realistic window into actively managing de-risking,” explains Tod Burwell, president and CEO of BAFT. “It discusses the three major drivers in a correspondent’s decision process when considering a new or reviewing an existing relationship, and empowers a respondent to improve its circumstances by adopting certain best practices.”

According to Minos Gerakaris of Rand Merchant Bank, an ARC board member, the initiative is “very positive”.

“It’s the first step forward in decoding the requirements,” he says. “When banks exit correspondent banking relationships, they typically give the excuse of KYC hurdles, or that the relationship is not profitable enough – because the cost of compliance is higher than it is to run them. But that doesn’t explain to the respondent banks the underlying reason for this decision.”

However, if a bank that is being de-risked could aggregate information that it can then go back and respond to, it may start to find, in time, more willing correspondents to take it on.

As such, Gerakaris explains that BAFT’s guidance document could eventually lead to more access to dollar funding for tier 2 and 3 banks, which could then be lent to their customers – primarily SMEs – thereby reversing the trend of de-risking, and ultimately narrowing the trade finance gap

  1. Supply chain finance and factoring solutions could be part of the answer, but face numerous challenges

Over the past few years there has been a global push towards non-traditional trade finance solutions such as supply chain finance and factoring. But despite such facilities having been embraced in emerging markets around the world, take up in Africa has been slow.

Simon Cook of Sullivan & Worcester and ARC board member explains that receivables financing for one could be an important step to closing the trade finance gap at the SME level.

“This is a very straightforward form of financing. If we can come up with a way that allows SME borrowers to access this product, it can make a huge difference,” he says.

Cook explains that SME borrowers often have the sorts of low-level invoices that fit well with receivables financing – but not necessarily with structured finance, which is costly and can take too long. “Invoice financing is quicker and cleaner. For that reason, it should be a lot easier for SMEs to access that financing, understand it and be comfortable with it.”

The challenge, however, is trying to find a way to make it economically viable for the banks and funds who are providing the financing.

According to Cook, intermediaries are a vital cog in the wheel, and he references the work that Afreximbank has been doing to facilitate the growth of alternative trade finance sources in Africa through various interventions, including the provision of finance to factoring companies.

“Afreximbank has had some success in doing that, where they have effectively done either receivables purchase or invoice discounting, or small loans backed on invoices – all relatively short-term funding,” Cook explains.

Despite the opportunities, Africa accounted for less than 1% of global factoring volumes in 2017, with most of those volumes concentrated in South Africa, Tunisia, Morocco, Egypt, Mauritius and Kenya.

“It seems to be moving in the right direction – just very slowly,” says Cook. “As a banker, you can go to an educational seminar on the topic, but that doesn’t mean your bank is going to start using this product. Domestic or regional banks generally don’t have the template documentation or access to the platforms to make all the efficiencies, so it can be quite a labour-intensive process, at least to begin with.”

Supply chain finance, too, remains relatively unknown across most of Africa – even in the more developed countries, such as South Africa.

The configuration of the continent’s supply chains is often a challenge to take-up of related facilities. “It’s a hard sell to get a large corporate to sign up to a buyer-led reverse factoring-type programme. They are often long cash and typically not necessarily buying from SMEs, but rather from other similarly rated corporates – who are also long cash,” explains Gerakaris. As such, there is no real need, whether that be interest rate arbitrage or shortage of liquidity in the system, to get a supply chain finance programme up and running.

What’s more, in many of the jurisdictions across the continent, there’s typically not much domestic procurement. “It’s certainly changing, and rapidly so, but for many supermarkets in Nigeria, Angola, Ghana – apart from some fresh produce – virtually everything else is sourced as an import, covered by a letter of credit,” says Gerakaris. “Where supply chain finance is going to start to play a role is where there’s an SME local miller, dairy or abattoir in country who starts supplying these supermarkets. You need a more mature agri and manufacturing sector to develop in order to be supplying into these sectors, which then creates the need for a supplier finance solution.”

Besides, those companies that do have the wherewithal to put together a processing plant, and are providing, for example, UHT milk into supermarkets, have typically got long-term project finance to get them going – and are not the SME who benefits most from the discounted invoice for daily working capital.

“Sadly, none of this addresses the trade finance gap directly, because the SME who is falling into this gap isn’t the type of business that’s got the flow of supply to be supplying corporates in the first place. However, corporates deciding to focus on shared value, enterprise development and committing to buying more locally from SMEs will start to change things,” Gerakaris adds.

  1. New digital banks have a role to play, but only once they start lending

It is understood that some 17% of all African trade finance requests are declined. Micro, small and medium-sized enterprises (MSMEs) are the most affected, with African banks rejecting 46% of MSME trade finance requests in 2017.

But many share the view that capturing Africa’s vast unbanked market falls outside of the remit of traditional bank finance.

“The complex models, the Basel requirements, the capital that needs to be held for effectively unsecured lending just isn’t there yet,” says Gerakaris.

The push for digitalisation and the growing adoption of new technologies into trade finance processes has created an opportunity for new fintech players, including digital alternative funders.

“There is going to be a space for digital alternative funders to come in,” he says. “The multifaceted factors that the traditional banks face in terms of compliance, regulation and the risk of fines, as deposit-taking institutions, makes going higher up the risk curve more difficult. Therefore that gap just gets perpetuated.”

Nevertheless, thus far, many digital banks on the continent have yet to begin lending. In South Africa, for example, the three digital banks that are launching in 2019 will focus on transactional business.

“It’s going to take time for these banks to start to enter the lending world, which will attract the heavier capital requirements that the regulators will need for them to start to lend, as well as building up the transactional history of the clients they want to lend to,” Gerakaris explains. “But there is space for new entrants in both banking and alternative funding.”

  1. There is no silver bullet

Ultimately, there is no quick fix to bridging the trade finance gap. For ITFA’s ARC, only once a number of cumulative measures – whether that be the entrance of new fintech players, KYC repositories, or a global search for higher yield – are in place will a solution be possible.

Gerakaris believes that the answer lies in a phased approach.

“For me, it’s going to be led by alternative lenders or micro-lending-type operations which are looking to play in the higher risk, higher return space,” he says. “The key is that those lenders still need to be regulated to stop predatory lending. You don’t want start-ups and SMEs stuck with unsustainable high-interest payday-style loans – it needs to be more formalised.”

And while this approach is only sustainable for a certain period, and up to a certain scale, it does allow the unbanked to get their foot in the door. “Once their business grows sufficiently they would start to deal with tier 2 or 3 commercial banks, and ultimately move up the chain,” says Gerakaris. “It’s going to be a long arduous process, but one we all need to buy into to make it work.”

The ITFA African Regional Committee (ARC) is hosting its first networking drinks on 21 May at the Radisson Blu Upper Hill in Nairobi, Kenya. This event will be held at the end of the first day of the GTR East Africa Trade Finance Conference. The ARC will host its second educational seminar the day after, between 2.00pm and 5.00pm, at the same venue.