Africa is growing its reputation as a hotbed for technological innovation, while shifting supply chains and economic diversification efforts are opening exciting new opportunities for trade. However, access to trade finance facilities remains a long-standing challenge, particularly for the continent’s vast number of SMEs. Digitizing processes and documents could prove a much-needed catalyst for bringing African trade into a new era.
On the face of it, the continent is brimming with potential. In terms of economic growth, the African Development Bank predicts the continent will outperform the rest of the world this year and next, with real domestic GDP averaging 4% over that period – ahead of the projected global average of 2.7% and 3.2% respectively.
Significant opportunities are emerging around exports of raw commodities. Though such flows have long been a cornerstone of many African economies, demand for alternative energy supplies in Europe has given a boost to gas producers such as Egypt and Angola, while efforts to accelerate the energy transition are driving purchases of critical minerals such as copper, cobalt, lithium and nickel.
Another opportunity lies in domestic processing of raw materials. That creates initial possibilities for intra-African trade – no individual country can reliably produce all materials necessary for electric vehicle battery production, for example – followed by the chance to export refined or value-added goods to markets elsewhere. A December report by the Peterson Institute for International Economics suggests this development would greatly serve the needs of Western importing countries looking to diversify supply chains and ensure long-term energy and industrial security.
In recent years, foreign investment in Africa has been dominated by China, notably through the infrastructure-focused Belt & Road Initiative. A by-product of the ties formed was a large increase in commodities exports from Africa to China, as well as high volumes of imports of Chinese goods. But with that investment starting to fall – China announced early last year it would cut headline investment in Africa by around a third – supply chains are starting to shift.
Standard Bank’s Africa Trade Barometer for 2022 says small businesses in Africa are actively diversifying away from Chinese buyers, while there is also a “general drop-off in buying directly from traders and wholesalers located in China.” The trend has spurred other markets into action, particularly in the Middle East, as fresh opportunities emerge to become a trade hub for commodities and goods moving in and out of Africa.
But smaller African businesses hoping to seize opportunities to forge new trade partnerships face a familiar problem. Standard Bank’s barometer notes that usage of specialized trade finance among businesses still remains low, at just 11%, with usage of letters of credit declining “significantly” for both imports and exports.
It quotes an unnamed industry insider who says the cost of providing credit to SMEs often outweighs the reward. “I think there’s a perception that risks are high at this point in time,” they say. “The general macroeconomic situation ultimately impacts SMEs, perhaps more so than the larger corporates in the economy.”
Digitizing trade documents and processes carries enormous potential for reducing some of those initial costs. At March’s GTR Africa conference in Cape Town, attended by Surecomp, one speaker noted that onboarding costs for African SMEs often soar because there is often limited or no electronic data for funders to assess creditworthiness and risk.
Without that digital infrastructure in place, financing a SME will require more back-office resources “for much less return, and not as interesting a name,” they said, adding that banks are keen to increase financing to SMEs “but it has to make sense.” If a bank is able to digitize documents, establish electronic identities associated with specific companies and offer digital trade instruments, those processes become “a lot more efficient,” they suggested.
Once that infrastructure has been established, trade documents should provide a rich source of data. At the transaction level, boosting the use of electronic invoices “could be key, because it provides the underlying data to the transaction” and so adds another layer of digital infrastructure that banks can access, one speaker at the event said. The information held by an anchor buyer in a supply chain finance programme could also be used as a source of information by financing providers, another added.
There are strong signs that the appetite for such reforms is already strong, with African technology firms growing fast – particularly in the financial sector. A decade ago the continent had no so-called unicorns, defined as companies with a valuation of at least $1 billion. Today there are at least seven, of which five are active in fintech, payments or e-commerce, including OPay, Wave and Flutterswitch.
Digitizing African trade processes is not a cure-all for the continent, however, and efforts will be needed elsewhere to expand access to finance for SMEs. One speaker at the GTR event noted that some corporates in Africa are looking to strengthen local supply chains and so are bringing a greater number of smaller vendors into supply chain finance programmes. If successful, this would allow SMEs to lean on the credit rating of a much larger company and access finance at preferable rates.
Regulatory reforms could also help. UNIDROIT, the International Institute for the Unification of Private Law, has been developing a model law to help countries introduce a reliable framework around factoring programmes. The draft law is due to be submitted for final approval to UNIDROIT’s governing council this month (May 2023).
At the same time, banks will be eagerly watching the impact of the African Continental Free Trade Area. As one event attendee noted, achieving scale is vital for companies looking to access cheaper finance, and the reduction of barriers to intra-continental trade could provide a springboard for companies to grow rapidly.