The Trade Finance Pulse Check survey, released on 9 October ahead of this year’s WB-IMF Washington meeting, was commissioned by eight multilateral development banks and development agencies including ITC. It provides insight for the first time into the state of financing of international trade across sub-Saharan Africa.
In the report, 70 senior trade finance bankers across the region called on Development Finance Institutions (DFIs) to urgently switch support to short-term trade-related financing to accelerate trade recovery for the private sector and MSMEs in particular.
Ian Sayers, ITCs Senior Adviser for Access to Financing takes a closer look at the report’s findings and explains how they may support ITCs work to improve conditions for the continent’s MSMEs.
MSMEs unable to pivot business to new markets due to the high cost of trade-related financing
First, the report reveals that whilst demand for trade financing across sub-Saharan Africa had flattened by September 2020 compared to growth expectations, it had not collapsed. In some sectors like food commodities, health products, technology, logistics, renewable energy and communications, trades with Asian countries has shown an uptick. Unsurprisingly, in the same period, long-term financing demand has plummeted due to global uncertainties.
However, MSMEs struggle to respond to new orders, pivot to new markets or engage new staff to re-start their businesses. The main reason is the high cost of the short-term advances required. Even businesses with years of good banking relations are faced with rates of more than 20% per annum for financing <180 day advances against export orders. These rates are simply unaffordable. Normal sources, such as “family and friends” financing and remittances, are down by 40% because of the pandemic and MSMEs do not usually qualify for safety-net support that focuses on larger businesses.
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Lenders are also frustrated
Second, in the report bankers confirmed that they too are frustrated. Banks could lend more, given their strong liquidity positions built up after the previous Global Financial Crisis. Banks are constrained by Basel underwriting and macro-prudential rules that require high risk-reserves and stringent reporting for new small client and sector business.
Pulse check interviewees unanimously called for guarantee and risk-sharing programmes from DFIs to address the constraints of country banks in this area.
Mr. Sayers’ comments:
“We need a decisive risk-reduction nudge from DFIs, dedicated to COVID recovery. Such facilities would allow banks to honour reporting rules whilst expanding low-risk trade credit for fulfilling MSME export orders”.
“For the first time, we are hearing banks advocate for 1st-loss guarantees and risk-sharing mechanisms to reduce the cost of trade-related financing and spur growth. ITC is in discussion with several financing providers on implementation mechanisms,” said Ian Sayers.
It’s not only about guaranteeing financing
Banks also say they have no appetite to accept poorly prepared SME lending applications with associated high management overheads and low returns. Mr. Sayers explains: “This is where ITCs Access to financing projects are an essential complement to risk-sharing guarantees from DFIs. ITC reinforces business development services to increase the numbers of enterprises entering our operational and financial management Boot camp process. For those enterprises who are ready, ITC intermediates with financing providers, whilst our local BDS partners coach SMEs through post-financing performance and reporting.”
In this way, the number of SMEs eligible for financing increases, credit risk scores and bank on-boarding costs are reduced. “Trade finance loan defaults are already very low, so if we can find a way to reduce the banks’ pricing of short-term loans, many more African SMEs could expand their businesses and afford sustainability improvements too”, concludes Ian.
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