In a roundtable discussion hosted at GTR Africa in early 2022, GTR brought together Africa trade finance leaders to discuss the progress of, and nuances around, industry trends such as trade digitalisation and sustainability efforts on the continent.
Roundtable participants
GTR: Over the last couple of years, the conversation around sustainability in our industry has gathered pace, with governments, export credit agencies and banks around the world vowing to support decarbonisation and push renewable energy sources. How much momentum do these efforts have in Africa?
Wilson: I think the issue that Africa faces is that the dominant voices around trade and sustainability come from developed markets, which generally means that the solutions, standardisations and frameworks that they look to position are most appropriate for those markets.
In my mind, there are two major concerns: one being that there’s a degree of misapprehension of the African marketplace among those dominant voices. Secondly, there’s a problem from a product perspective in that there’s a strong tendency for global environmental, social and governance (ESG) experts in the wider field of debt to try and transfer the existing ways of thinking and technology directly onto the African trade finance market. It’s not a perfect fit.
The key performance indicators for large global transactions are not going to be applicable to many African SME trade facilities. I think that’s been overlooked by the global community and has caused some ruction.
Thankfully, we have now seen the likes of Baft and the International Trade and Forfaiting Association establish ESG-focused committees that are actively seeking input from emerging market trade financiers, including those in Africa.
Memeh: I see ESG and sustainability practices as an opportunity for Africa.
The issue of the ‘G’ for governance is a historical one on the continent, and the global push will ensure progress continues to be made.
There’s an economic advantage for Africa if these efforts are successful. The continent is home to some of the least industrialised countries. If you’re looking to build manufacturing and industrial capacity, you can’t afford to invest in systems and infrastructure that will be obsolete in 10 years’ time.
But I agree with George – we need African voices to be heard at the highest level when it comes to creating standards and frameworks.
Wilson: My big thrust is that African trade finance is sustainable by definition, simply because of its benefits for developing economies and the ‘trade not aid’ perspective, and governance is embedded into trade finance in a way that it’s not with vertical debt. And that is because trade finance on the continent – pretty much all the way through to SMEs – is mediated by African banks. These are banks that are heavily regulated, they’re audited, and they independently inspect every single trade asset, including all of the dimensions of that asset in terms of transmission, where the goods are coming from, the buyers, the sellers, etc.
That’s something which seems to have been missed. It is very frustrating that there are deep pools of dollar liquidity looking for a sustainable home that could be deployed immediately if the international community would recognise the fact that trade finance is sustainable in Africa. That’s a route to actually filling in the trade finance gap rather than just endlessly talking about it.
Mwaba: The reality on the ground is that a lot of the African banks and corporates are not ready for this transition.
As Afreximbank, we are expected to be ESG-compliant because we access the international bond and loan syndication market to raise our liquidity. The bank has a huge oil and gas portfolio, and we wonder whether these requirements are going to impede our ability to raise funding in the international market in the future.
We also lend to African financial institutions (FIs) and are expected to try to apply ESG requirements to those African FIs. The truth is they’re not ready. When we ask the question, they then go away to try and come up with an ESG strategy in order for them to access funding. It’s challenging from an implementation point of view as we need to give African FIs time to prepare to become compliant.
To answer the question about there being enough traction in Africa, I think the effort is there. But there are so many African economies whose economic wellbeing depends on production from fossil fuels. What’s going to replace that in the short term?
International banks are already pulling out of funding those types of projects, and people are looking to institutions like Afreximbank to step in and support reserve-based lending facilities on the continent. We’ve seen billions of dollars’ worth of demand.
The western world has had many years to prepare for where they are today. There’s now an expectation for Africa to fall in line immediately, when the reality is that we also need time to find our way on this journey. And we should be given that space given how little we contribute to carbon emissions as a continent compared to the western world.
Pedreira: It needs to be a model that works with Africa, rather than being imposed on Africa. I agree with the fact that we need to focus a lot more on the governance side, and we have seen some excellent progress being made in countries like Rwanda.
To the point about emissions, there’s certainly an argument that Africa can and should be compensated through the purchase of carbon credits to offset global residual emissions. This could not only preserve the continent’s carbon sinks, but also offer it a way of recovering economically from the impact of the pandemic and the Ukraine war.
du Plessis: We have to be realistic about the challenges, but I agree with Memeh, it’s an opportunity. Everyone agrees that ESG is the right thing to do, and I don’t think that what is required at the moment is overly sophisticated in terms of deal structure.
Eventually we’ll see supply chain finance – driven by large corporates – really accelerate the sustainability agenda in Africa, all the way down to the smaller suppliers.
GTR: Trade digitalisation has been brought into sharp focus by the pandemic. What have been some of the standout successes in terms of regulatory initiatives or trade finance instruments in the region? What is the extent to which digitalisation can work for SME trade?
du Plessis: It’s an interesting conversation to have in Africa, where we have quite a concentrated banking market and many of our banking institutions have very long histories.
Trade finance as a product, with all of its required documentation, is quite expensive to deliver into the market. So, there’s an internal and an external conversation to be had around digitalisation. Internally, banks need to ensure they have a profitable trade finance product, and externally, there are a number of fintech and software companies developing new solutions and systems that relate to how banks engage with the wider trade ecosystem.
What we’re interested in is having our clients direct the conversation as much as possible. A lot of our thinking is in terms of how we can coordinate all of this technology internally and externally in a way that best suits their needs.
Mwaba: From a bank perspective, we have seen an uptick in digitalisation, whether that’s using artificial intelligence for document checking or electronic marketplaces to originate deals or for price discovery, all of which create internal efficiencies.
From a development finance institution perspective, there’s a broader conversation around the need to both drive and track trade amongst SMEs and MSMEs. That’s a perennial, as yet unsolved, problem.
One of Afreximbank’s initiatives has been the roll out of the Pan-African Payment and Settlement System (PAPSS), which facilitates payments for goods and services in local currencies, without having to use the US dollar or any other third currency. A Kenyan buyer can pay in Kenyan shillings to import goods from South Africa, and the South African seller receives rand. The system processes settlements across all participating central banks at the same time.
In addition, our Mansa customer due diligence platform has been launched.
We’re also launching a supply chain finance programme across the continent. Afreximbank has recognised the need to support supply chain finance, and to do so by means of a digital platform which will drive penetration and acceleration.
One of the reasons that intra-African trade is so low is because of a lack of information. To remedy that, Afreximbank has started integrating all its digital platforms towards creating a single window, the Africa Trade Gateway, which will be a digital ecosystem that includes a payment and settlement system, customer due diligence data, trade information and trade regulation portals.
All of these technologies, once put together, will be a game changer.
Hammond: The progress that we’ve seen in terms of digitalisation in the last few years alone has been amazing.
When we’re talking about finance for SMEs, it’s worth bearing in mind their practical constraints, such as internet access.
And then there are the legal and regulatory issues around the use of data on platforms – especially across borders. Rules around things like data protection and the use of electronic signatures are complex and often in flux.
GTR: As leaders of African trade, what are your individual areas of focus and expectations for the year ahead?
Wilson: With the ongoing crisis in Ukraine, inflation and interest rates are going to remain very important considerations. There was an expectation that this would work in Africa’s favour, but that remains to be seen.
We need to resolve the sustainability challenge, and as I said before, I do believe there is a shortcut to doing so in Africa.
Rather than everyone arguing about how we define and certify sustainable trade, we need to get the message across that ‘trade, not aid’ creates a significant developmental impact for things that aren’t easy to measure. Carbon emissions are scientifically relatively easy to measure; the other UN Sustainable Development Goals are much harder to quantify.
If we had a sufficient groundswell of opinion for people to understand the benefits of trade finance on the continent, delivering up to a third of GDP growth in fragile developing economies, it seems intuitively obvious to me that we’d be able to move things along.
Pedreira: There’s far too much uncertainty at the moment. It’s not only the war in the Ukraine, but it’s the knock-on effect that it is having globally.
Putting that aside, my biggest focal point for the year is unquestionably the African Continental Free Trade Area (AfCFTA), which is bringing together the African continent in a way that hasn’t been seen in the past. I’m optimistic and ambitious about the deal and what it’s setting out to do. I think we should use it to solve some of the biggest issues that have affected the continent for a long time.
One of these issues is the trade finance gap. This is also something that digitalisation can go a long way in addressing, by enabling better access to good data related to the multitude of SMEs that banks to date simply do not want to engage with because they know nothing about these smaller players.
If there’s a future where we can plug in open banking as part of the AfCFTA so that banks can assess things like cash flow and creditworthiness, and digital solutions can be built around that, it will help us close the gap once and for all. We’ll eventually be able to understand SMEs. The question is, how far do we want to take the good momentum around the AfCFTA?
du Plessis: Looking ahead, Africa is going to be dealing with geopolitical risks, inflation and high commodity prices – all of which is going to translate into higher interest rates.
The continent also has highly indebted governments – and potentially corporates, given the fact that it’s been a tough few years. So, I think one has to be careful from a credit risk point of view. But from a financier’s perspective, it might be good for trade finance business. There will be a greater need for trade finance instruments, such as guarantees and letters of credit, which can be used to support balance sheets and boost cross-border activities.
Another important factor for the next couple of years is the reshaping of supply chains, as driven by the fallout from the pandemic. Companies are looking to localise supply chains. Although it might not be good for cross-border trade activity, these onshoring and reshoring measures drive local trade opportunities. They could also bring supply chain finance opportunities, especially for banks that are not too keen on cross-border supply chain finance but can do local currency and finance local supply chains, which should then release some liquidity into those companies.
In terms of the ESG agenda, the onus is on us to figure out how we unlock those pools of capital for the benefit of African borrowers.
Memeh: The cost of funds is going to be a critical issue. Margins are going down in an increasingly competitive environment, whereas stricter capital requirements, interest rates and forex liquidity challenges are increasing the transaction costs and overall constraints of participating in trade finance in Africa.
At Standard Chartered, we have very advanced digital trade capabilities but when it comes to trade digitalisation in Africa, I am of the view that more needs to be done by African regulators and policymakers to encourage adoption through appropriate regulation and greater efforts at standardisation.
I think there’s an opportunity for more conversations to be had around that in an African context.
Hammond: Since 2020, disruption has been an ongoing trend, but one that also brings opportunity – it’s just about finding those pockets of opportunity. I think that collaboration is the key to finding solutions and thinking about things in terms of the bigger picture.
We need to be more open to opportunities to work with the wider ecosystem to solve problems on a long-term basis, rather than only dealing with short-term emergencies. Within my business we’re keeping an eye on the longer term and trying to be receptive to what clients and other contacts are doing to see where those opportunities lie.
Then, from a purely legal perspective, I think everybody needs to be very careful with their contracts in this kind of environment. In such volatile times it can be quite easy to inadvertently breach something. You’ve got to be really cautious, not to ‘over lawyer’ it, but be clear on what you want and how you can avoid breaching.
Mwaba: I think the challenge is, will there be enough capacity to finance trade in Africa given the increase in commodity prices? We’re already seeing clients needing to double lines. With petroleum imports, for example, when we put lines in place, the price of crude was US$50 a barrel, and now look at where it is and where it’s projected to go.
How much more can African banks do collectively to continue supporting trade, especially given that international banks are not as present as they should be? Will we be able to issue and confirm all of the trade instruments that are required on the continent given that Africa remains a net importer? I think we will face problems in finding enough financing to actually fund the trade that’s required on the continent.
On a more positive note, in terms of the AfCFTA, intra-African trade presents a fantastic opportunity. Do we really need to import everything from outside Africa when there are pockets of great expertise in some of our neighbouring countries? Could we look to our neighbours to satisfy our food needs, for example? When it comes to exporting, if we can aggregate our expertise in certain centres before then exporting collectively, not as individual countries but as Africa, we can extract more value. We will have better negotiating power because we’re doing bigger volumes and meeting higher quality standards. This, I think, might be the biggest opportunity of all.
Tags: Afreximbank, Crown Agents Bank, Digital trade, Duarte Pedreira, ESG, George Wilson, Gwen Mwaba, Hogan Lovells, Investec Bank, Laurie Hammond, Louis du Plessis, Onyebuchi Memeh, Rand Merchant Bank, Standard Chartered, sustainability
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