Blog by Abby Bickford, Marketing Director, Surecomp
Following the GTR Africa conference, held in Cape Town on March 10-11, we spoke to two of our Africa-focused clients, Absa Bank and ODDO BHF, to hear their views on the latest trends and developments impacting trade and the finance that supports it across the continent.
Surecomp: The past two years have seen a confluence of factors pressuring trade globally, from the Covid-19 pandemic to commodity price volatility and geopolitical uncertainty. How has this impacted your business in Africa?
Florian Witt, Head of International and Corporate Banking at ODDO BHF: We do business in 40 countries across Africa, and despite the challenging environment for trade globally, we have experienced solid growth in our business. At the beginning of the Covid crisis, we took the view that it represented uncertainty rather than risk, and because the tenors on trade finance in Africa tend to be even shorter than in other areas of the world, we very quickly proved that our model worked. Overall, 2021 was a very good year for us, and we are now doing approximately 15% of the African flows with the German market.
Riaan Louw, Head of Unfunded Wholesale Trade Finance at Absa Bank: Prior to Covid, we had seen a gradual move away from the traditional letter of credit (LC) and documentary collections business to open accounts, but this has reversed somewhat as corporates have realised that trade finance solutions enable them to mitigate risk and enhance liquidity. With an LC, you can open up the possibility of discounting for beneficiaries, which means they can offer attractive trade terms, as well as refinancing for applicants. The focus has shifted from pure risk mitigation at a credit and underlying goods level, to unlocking liquidity and working capital for clients.
Surecomp: The global trade finance gap has reached a record high of US$1.7tn, with SME exporters in emerging markets the hardest hit. What are the main challenges to democratising access to trade finance in Africa, and how are you working to overcome them?
Katlego Moroka, Pan Africa Trade Finance Product Manager – Institutional Trade at Absa Bank: As financial institutions, we are bound by the economics of business. The major barriers are the cost to serve – cumbersome KYC processes and trade-based money-laundering regulations such as Basel, as well as high capital requirements often making extending trade finance to the SMEs cost-prohibitive. We aim to be innovative and to do as much as we can within those parameters. This is where our partnerships with development finance institutions (DFIs) come in. Through extensive discussions with them, we have been able to leverage their support in the form of guarantees and funded structures to better enable credit appetite for those SMEs.
DFIs such as the IFC and the CDC Group play an important counter-cyclical role of enhancing credit appetite under challenging conditions, either standing behind Absa through the provision of guarantees or funded structures. We have been able to leverage irrevocable reimbursement undertakings to support corporates right across the scale. The discussions are ongoing, and we are pushing each other through partnerships to ensure that we provide the best solutions across the region as more needs to be done.
Witt: Africa has experienced well-documented challenges as a result of bank de-risking over recent years. As a non-African bank that is carrying out transactions in many countries on the continent, I have seen first-hand how European and US providers of trade finance have left the market, and I attribute this in part to very narrow risk management capacities. Our approach, which has served us well, is that relationships are key. Knowing your client is vital – this is the first principle of trade finance.
Surecomp: What opportunities do you expect to see from the African Continental Free Trade Area (AfCFTA) agreement?
Louw: The free trade agreement is aimed at unlocking the ability for Africa to do business with itself in a more free-flowing manner. It is still conceptual to a large extent, because there is so much from a regulatory agreement point of view that needs to be resolved, and we expect it to raise the requirement for banks to facilitate the business that will be unlocked as part of this agreement.
It is estimated that around US$1bn of investment will be needed in infrastructure to enable the AfCFTA to reach its potential, from roads to railways, ports and customs infrastructure. As a result, over and above the need for financing we expect to see increased demand for guarantees, as products such as these are going to be key in enabling the AfCFTA and breaking down non-tariff barriers.
Surecomp: The acceleration of digitisation brought about by Covid-19 social distancing measures have changed the way we do business around the world. What are clients asking you for in this regard?
Louw: Fortunately, we had already created and commercialised a platform called Trade Management Online allowing our clients to interact with us electronically before the pandemic, and we really saw the value of it once Covid hit, as did our clients. What clients are asking for is convenience, but it must also be simple for them to use and it must be better than the manual process. The other thing that clients are asking for, which is nothing new, is the personal touch and service. This presents something of a conundrum, because clients want technology but they still want to be able to speak to a human. Our approach therefore has been to use technology to augment the way that we interact with the client, freeing up our relationship managers to spend less time resolving queries and more time as trusted advisors delivering bespoke solutions to our clients.
Surecomp: What are the barriers to trade digitisation in Africa?
Moroka: We are seeing a trend in key markets on the continent to localise data, with new legislation such as the Protection of Personal Information Act (POPIA) in South Africa. These regulations aim to strengthen controls on client information and therefore banks have to assess the impact on data and system architecture along with technologies currently being driven such as cloud computing. While protection of client information is of paramount importance, this trend poses a challenge for the banks that operate across multiple jurisdictions with regards to flow of information within centralised functions and systems.
Louw: Another issue is that Africa is still at the proof-of-concept stage in terms of a lot of trade digitisation, while in other jurisdictions like Europe and Asia, consortiums have already been created and the solutions have been proven. In the African context, we don’t yet have regulation backing full and scalable trade digitisation. We are however very actively looking at how to link up role-players in the value chain.
Surecomp: What are your digitisation priorities?
Louw: I think the question banks have to answer is, are we going to remain banks or are we going to become technology service providers? Digitisation represents massive pressure in terms of funding, development capacity and time to deliver, whereas if you work with the right partners, you can be a lot more agile in the way you deliver solutions to clients, it can be a lot more scalable and you can continue to focus on what you can do well as a bank and let the tech experts partner for what they do well.
One aspect that we are grappling with is that there are so many options out there from a technological perspective and the question then becomes, what is the strategic solution to seamlessly integrate all of these systems and players? Once solutions that cross corridors and countries emerge – and they become scalable and broadly accepted – commercial adoption becomes easier. For now, one approach is to work with an intermediary that can sit between the bank and all the service providers in order to enable a one-to-many relationship, because it is simply not viable for banks to have one-to-one relationships with every solution provider in the market. Our relationship with Surecomp is part of this strategy; they partner with a number of the solution providers that are starting to emerge as leaders in trade digitisation.
Witt: Relationship management is at the heart of everything we do, and digitisation is no different. We want to leverage the technical capacities and capabilities of solution providers, and we want to do this with like-minded partners. We currently work with Surecomp also for this reason – Surecomp is a good, robust provider of a technical solution that is important to our business, and they place the same importance on relationships as we do.
Surecomp would like to thank Florian Witt, Riaan Louw and Katlego Moroka for their participation in this interview.