Work needed for Africa to grow exports
• Collaboration offers a strong prospect of bridging trade finance gap, writes Lynette Dicey
It is estimated that one in every six African exporters fails to meet their export sales targets due to a lack of funding for the input, production and export stages of their operating life cycle.
The result culminates in a loss of about $50,000 per trade or per transaction, per small and medium-sized enterprise (SME) per year, according to the African Development Bank. This inadequate financial support ultimately culminates in a trade finance gap of more than $8bn that the continent currently faces, the bulk of which affects SMEs the most.
Inwang Akpan, head of Trade, Transaction Banking at Standard Bank, explains that African countries, typically rich in natural resources, are heavily reliant on exports to generate alternate foreign direct investment and capital flows. As a continent classified as a net importer, however, the challenge is that the demand for foreign capital is much larger than industry exports, at least for most countries. There is a growing acknowledgement that exporters need to be supported via grant schemes or tax incentives in special economic zones if countries want to grow their exports.
In Africa, export finance is typically provided through export credit agencies, development finance institutions, multilateral development banks and even government bodies. Where possible, commercial banks and private investors have supplemented access to export financing through traditional trade finance facilities. At times, the latter category of trade financiers will face a risk appetite calibration informed by regulatory prescription and may struggle to serve the magnitude of the export funding requirement in a market, says Akpan.
“When commercial banks partner with developmental financing bodies, additional liquidity is injected into a value chain and the cost of capital provided to exporters can be optimised, and the value of purchases made in international markets is enhanced through more competitive landing costs,” he says. “Export finance promotes exports by making financing mechanisms and instruments available that mitigate risk and accelerate liquidity into an exporter’s working capital cycle.”
Despite accounting for 17% of the world’s population, Africa accounts for only 3% of global trade and 2% of manufacturing output. It has the lowest proportion of intraregional trade than any other part of the world and is overly dependent on the export of raw materials, almost ensuring that the majority of its citizens live in poverty. Various studies and economic models have revealed that if Africa were to increase its share of world trade by just 1%, that increase would generate about $70bn of additional income.
The establishment of the African Continental Free Trade Area (AfCFTA) plans to accelerate intra-African trade and boost Africa’s trading position in the global market by creating the world’s largest free trade area. The creation of a tariff-free continent is intended to grow what has traditionally been low levels of intra-African trade and, in the process, grow local businesses, drive GDP growth and reduce poverty levels. Once fully implemented it will eliminate tariffs on 90% of goods and reduce barriers to trade in services, potentially increasing Africa’s income by $450bn by 2035. AfCFTA is predicted to grow intra-African trade by 3.9% per annum.
“Once trade barriers have been removed, capital will be required to support increased intra-African trade,” says Akpan. “Africa needs significant investment into infrastructure including roads, railways and bridges to physically provide easier accessibility. The continent also needs to invest in technology and digitalisation. Not only will digitalisation benefit smaller businesses, but digital supply chain finance solutions will make it easier and more affordable for small and emerging businesses to access trade finance solutions.”
More developmental financial institutions working on the continent have developed and introduced supplementary trade and export finance programmes, on both a funded and unfunded basis. The programmes allow for a collaboration with commercial banks to support a wider range of clients, aggregators and even government agencies to realise their growth potential, mitigate their risk and enhance their operating efficiency.
These facilities, says Akpan, are used to provide financing to SMEs and local corporates and promote both intra-African and international trade.
“They also aim to encourage and expand trade finance activities of international finance institutions, or banks, who work primarily with smaller domestic banks in Africa to cater to the needs of SMEs and local corporates. Other target segments include soft commodity aggregators that support networks of small farmers and commodity traders.”
Akpan says commercial banks such as Standard Bank continue to grapple with liquidity constraints that many African markets continue to face.
Partnerships and collaboration between commercial banks and developmental financial institutions offers a strong prospect of bridging the trade finance gap and supporting SMEs and local corporates alike.