ABSA’s Doreen Fick examines the current state of the African trade and receivables market, highlighting key tools and initiatives.
There is no doubt that Africa has some of the fastest growing economies in the world and is also described as the future economic growth engine of the world. The International Monetary Fund (IMF) expects Africa will achieve growth of 3.5% in 2019. It has listed Ethiopia, Rwanda, Ghana, Côte d’Ivoire, Senegal, Benin, Kenya, Uganda, and Burkina Faso as some of the countries with top performing economies. On the downside, the continent’s two largest economies – Nigeria and South Africa have been experiencing tough economic times with Nigeria expected to bounce back during 2019.
A significant percentage of this growth can be attributed to local and international trade. Trade Finance Global indicates that trade finance accounts for 3% of global trade worth $9 trillion annually. The International Chamber of Commerce (ICC) predicts that growth prospects from Africa will mainly come from the following sectors: Agricultural; Chemical, Fuel and Mining; and Machinery and transport equipment.
Traditional Trade Finance
Traditional Trade Finance products such as Documentary Collections, Letters of Credit and Guarantees are well acknowledged for the additional assurances they provide to trade transactions. The ICC shows that commercial Letters of Credits still account for 73% of trade finance transactions processed by banks in Africa. In our experience the Asian continent, one of Africa’s biggest trading partners, has a preference for Letters of Credits and Global Corporates and International Banks who perceive Africa as high risk will often request South African banks to provide additional confirmation to Letters of Credits issued by other African countries.
Documentary Collections where banks are only acting as a post box are still very relevant in Africa. SWIFT figures for 2018 indicate that over 89 000 Export collections and 36 500 Import Collections were produced throughout Africa with Tunisia, Morocco, and South Africa issuing the highest volumes.
Bank Guarantees and Standby Letters of Credit
Bank Guarantees and Standby Letters of Credit prominently feature in a continent where the risks are well documented and guarantees have become a prerequisite before projects or services are awarded. As per SWIFT data, South Africa, Kenya, and Nigeria have issued the most guarantees in 2018 with Algeria, Morocco, and Mauritius receiving the highest numbers of Inward Guarantees. On-Demand Performance Guarantees are favourites in the Mining and Construction Industry throughout Africa. One construction project can require a Tender-, Advance Payment, Performance and Retention Guarantees whilst Rehabilitation Guarantees in favour of the Department of Mineral Resources are the norm to ensure the land is restored to its original state in the Mining Sector. International Buyers and Sellers regularly request Standby Letters of Credits as backup in their trade transactions. These guarantees, if properly managed, can contribute a significant portion to any bank’s top line revenue figures. Write offs can however be significant should these occur.
Open Account Finance
Open Account Finance products such as Supplier Finance, Receivable Finance, and Trade Loans are also gaining more traction in Africa. These products unlock and assist with much needed working capital for Buyers and Sellers and will help to address the significant Trade Finance gap on the continent. One of the areas of growth noted is Trade Loans which has seen a significant increase in Africa. This flexible, short-term borrowing facility can be linked to a specific trade transaction which helps to reduce the credit risk of the client.
Trade Loans can be used to assist with pre- and post-financing of regular or once-off trade transactions throughout the African continent and can be offered regardless of whether the transaction was executed on Open Account Finance or Letter of Credit terms. Supplier Finance and Receivables Finance programmes have longer implementation periods due to complex Regulatory, Compliance, and Know Your Client (KYC) requirements. Once off the ground though, the programs are quick to operate, gives comfort to the bank and provide instant financing to cash strapped companies.
Africa’s Tech Revolution
Africa has made great strides thanks to technological innovation and is set to continue embracing the opportunity technology brings at a significant rate. In 2018, investments in technology start-ups across the continent grew by 108% to $1.163 billion according to Partech Africa, a French venture capital firm. Emerging technologies such as Artificial Intelligence and Blockchain are growing in credibility and Biometrics and Identity Management are becoming more prevalent with the increased focus on data protection. Trade will specifically benefit from sophisticated systems that are able to assist with Financial Crime and Anti-Money Laundering compliance requirements. Features of these systems will include transaction monitoring and recording, dual vessel tracking and identification of dual goods and products, in addition to normal sanctions screening checks. The ICC shows that Banks in Africa, more than Global Banks, feel that the enablement of digital channels will have the potential to significantly increase sales of the trade finance products.
To conclude, Africa has good growth prospects of which trade finance will be a significant part in it. To ensure success, many banks operating in Africa, including Absa, are becoming regional banks to cater for the needs of global corporates who want to operate within the African continent on a standardised approach. To achieve this, banks should build standard target operating models across regional offices, establish correspondent banking relationships in countries where they might not have a physical presence, invest heavily in technology to adhere to all the regulatory and compliance requirements and use economies of scale to remain profitable and deliver good returns