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A new trade finance initiative specifically designed to improve funding access for small and medium enterprises (SMEs) in Africa has been unveiled. This initiative aims to reduce the trade finance gap, which is a significant obstacle to economic growth and development across the continent.

This initiative marks the beginning of a series of innovative solutions. It leverages the combined expertise of Investec and Frontclear in trade finance and capital markets to meet the urgent need for financial support accessible to SMEs.

This effort aims to enhance the growth of SME trade portfolios, thereby contributing to socio-economic advancement throughout African nations.

In the first transaction of its kind, Investec extends a facility to Frontclear. This liquidity is then used by Frontclear to engage in a repurchase agreement (repo) with an African bank’s government bond portfolio, supported by a global Development Finance Institution (DFI) guarantee. This innovative approach, restricted to underpinning SME trade finance with provisions for rigorous reporting, has made this financial solution feasible.

By using local African banks’ government bond holdings as collateral, the Investec and Frontclear initiative effectively tackles liquidity and capital challenges on the continent. It enables these banks to adhere to regulatory requirements while still providing trade finance to their SME clients through a repo arrangement.

The scheme offers a practical and sustainable solution originating from Africa, aiming to address one of the most pressing development challenges – making viable trade finance solutions available to SMEs through the local banking infrastructure.

Addressing the trade finance gap for sustainable development

George Wilson, Head of Institutional Trade Finance at Investec, said, “Trade finance is an important and sustainable form of socio-economic development in developing African societies. Trade can contribute as much as 50% of a country’s GDP with medium, small, and micro enterprises (MSMEs) employing up to 85% of the workforce – making them strong originators of self-sustaining development. Yet despite this, MSMEs are often denied trade credit by their local banks.”

Wilson highlights the challenges posed by global banking regulations and growing ESG compliance demands, which inadvertently exclude African SME trade portfolios from being recognised as ‘sustainable finance‘. This exclusion widens the trade finance gap, undermining the objectives of the UN’s Sustainable Development Goals (SDGs).

Wilson added, “Recognising that only lower-tier African banks can provide trade finance to deep-level SME transactions in the real economy was key in the design of a workable solution that tackled these challenges.” 

The initiative also aims to bring developmental finance to a segment of African SME borrowers who would otherwise remain out of reach for international impact investors, multilateral organisations, and DFIs.

Embracing local realities and digital progress

Wilson further explains that the solution is tailored to the African SME and banking context, incorporating existing trade and supply chain finance mechanisms while allowing for future digital advancements. 

He said, “This is a workable solution for the African SME and banking context as it embraces all the existing working analogue administration of trade, as well as supply chain finance and can incorporate any digital trade progress, as and when it happens in Africa. It is not reliant on deep-tier digitisation and poses no additional risk to all of the entities throughout the chain.”

Hugh Friel, Senior Vice President – Africa Structuring at Frontclear, expresses pride in partnering with Investec Bank to offer innovative financial products that enhance trade finance access for the SME sector in Africa and beyond. 

Frield said, “Frontclear is proud to partner with Investec Bank to deliver innovative financial products that can improve access to trade finance funding to the SME sector in Africa, and beyond. By combining our respective legal, product and market expertise in trade finance and capital markets, we’re able to directly benefit SME traders in Africa, by providing viable liquidity solutions to the local banks that are best placed to service the SME sector. We are excited by the impact these efforts will have in reducing the trade finance funding gap on the African continent.”

Wilson concludes by highlighting the product’s grounding in a profound comprehension of the African context, presenting a practical solution to global regulatory challenges and creating a path towards international developmental contributions.

Wilson said, “Importantly, it has been informed by detailed on-the-ground appreciation of the African realities with an acknowledgement that only the local African banks can have any practical impact on SME trade and the trade gap and posits a workable solution to the exigencies of global regulation and a practical path to international developmental additionality. This product structure is the first of its kind to ultimately reach SME traders in Africa by providing liquidity to them and consequently promoting sustainable trade finance on the continent.” 

Wilson characterises the initiative as a distinctive innovation aimed at driving development through sustainable trade finance, reflecting Investec’s commitment to contributing positively to society and Frontclear’s efforts to extend its blended finance approach into African trade finance for greater developmental impact.