Roundtable: Rising in the east

When GTR gathered together a group of East African trade financers, companies and insurers, talks centred on financing opportunities for local banks, changing trade flows and the region’s energy needs.

Roundtable participants

• Rupert Cutler, CEO, financial & political risks division, Newman Martin & Buchan (NMB) LLP
• James Kasuyi, trade finance officer, PTA Bank
• George Kiluva, head of trade finance, Commercial Bank of Africa, CBA
• Keith Martin, Initiative for Risk Management in Africa, African Development Bank (AfDB), (chair)
• Dorcas Mugambi, head of trade finance, Co-operative Bank of Kenya
• Duncan Oliphant, co-founder and manager, Titan Collateral Services
• Jef Vincent, chief underwriting officer, African Trade Insurance Agency (ATI)
• Tom Walsh, CEO, Renetech

Martin: How is trade finance in East Africa changing? We have all seen the statistics that East African trade is increasingly moving towards Asia, and a bit less towards Europe than it used to. How do you see these changes challenging the traditional model of trade for East Africa, and what challenges does it pose for us in our various capacities?

Mugambi: I would say in the last five years we have seen a lot of changes in trade finance, especially in the kind of products we are offering as well as direction of business. Recently we have seen a lot of trade shifting to Asia, with more importation of processed goods and machinery coming in from Asia and the Middle East. Europe remains the dominant market for exports – of raw products – coming out of East Africa.

Martin: Do you think that will be changing in the next five to 10 years?

Mugambi: Yes, especially in the trade finance facilitation instruments. Traditionally letters of credit have been very popular; however this trend is changing with the world becoming a global village. Many businesses trading internationally have matured and are establishing stronger relationships across the world. With these strong partnerships coupled with heightened competition, a lot of open account trading and supplier financing is anticipated. Political and country risk has also been substantially mitigated by trade insurance offered by the likes of African Trade Insurance, hence increased business appetite. Also, more customers want to cut costs and are not willing to pay high interest rates; consequently they are seeking more refinancing offshore to benefit from dollar pricing, hence the influx on post-import financing.

Kasuyi: In fact, what is also happening in East Africa is that as the infrastructure is improving for the trade routes, we are seeing larger flows going deeper into East and Central Africa. Obviously, Mombasa and Dar es Salaam are very important ports, not only for those two countries but also for Central Africa: that is how they are able to import and export their goods. So we are seeing that we are managing the tenors on the LCs we are opening a little more. Of course, with important players as collateral managers as well, the supply chain is really improving. We are better able to monitor, manage and mitigate the risks from port to warehouse and to the end customers. Also, with the addition of insurance coverage such as ATI, the whole process is becoming a lot more structured and sophisticated, and we are better able to serve our clients faster so that they can increase their volumes.

Martin: For both of you, have you seen an increasing presence of Asian banks? Since the trade flows are going more and more to and from Asia, have you had better contacts with those banks in the last few years, or is that something that still needs to be developed?

Kasuyi: It is something that needs to be developed. However, yes, in the last few years, we have had more dealings and relationships with Asian banks – especially Japanese and Chinese banks.

Martin: Jef, what kinds of challenges do you think the changes that have happened, and the ones that look like they will happen, pose for ATI?

Vincent: Like Dorcas said, there is a decline of letters of credit and more open account. We probably have a role to play there. I can give you one example. Last year, we started to insure an international steel trader on open account, so they gave 180 days’ credit terms to all their buyers in Kenya, Uganda and Tanzania, and, suddenly, we were flooded by requests from other steel traders who used to work on LC, saying: ‘Oh, but this one can get open account’, so all the buyers are asking for the same terms and conditions. There is something going on, definitely, but the problem, of course, is the assessment of creditworthiness of companies. Most Kenyan, Ugandan and Tanzanian companies are still quite small, so the risk we are asked to take is huge.

Martin: Are you willing to take it or not?

Vincent: It is not only a matter of whether we are willing to take the risk or not, but whether we find reinsurers. When you talk about amounts of US$10mn or US$20mn on an East African local company and you go with that to the reinsurance market, they are not used to that.

Martin: That is why you need a broker, right?

Vincent: That is why you need to educate the market, and be convincing.

Cutler: Based upon the information you are getting on a company, if they are a good business and you do not know about them, if there is a good enough story to get reinsurers or the other insurers involved. We have been able to do open account on sales in DRC. It is based on a good track record with the buyers. Sometimes you do not get the finance, and, if it is short, open account terms – no more than 30 days – people take a view on it. You are not necessarily going to get 90% indemnity; it will be lower, but, for some of it, you are just building an experience pattern with people.

Martin: Have you, in your business, also seen this shift in terms of the geographic location of the risk?

Cutler: Yes. Also, if you take the London insurance market’s understanding of the whole continent, not just East Africa, 20 years ago, insurers were less familiar with the dynamics, economies and politics of each territory. Now there is a much better understanding, as imports and exports have increased with the support of banks and traders. Now there is established transactional deal flow and a better understanding.

Martin: Are you seeing more demand for single buyer coverage as well?

Cutler: Yes. It is normally a bank’s financing secured against the company’s assets, so it is done in that model, but it is still very difficult, as Jef said, to do individual company risks. If there is no balance sheet, we really cannot do anything.

Oliphant: I have noticed, in the last five years as well, that, with an appetite for the East African market, banks are basically forcing clients to put their balance sheets in order and merge the nine different divisions of their companies into one, which can only lead to an improvement in the market in the next 10 years. Their credit ratings are going to improve, because everything is in one, as opposed to having them all registered in separate companies.

Martin: Do you think you have also seen a shift in corporate governance?

Oliphant: Absolutely, and it is a demand from the EU and UK company side, as opposed to the Asian companies. Asian companies want the commodities loaded onto the vessel and delivered. The appetite for risk mitigation is not there from the Asian side. From the EU side, because of the corporate governance for European companies, the risk mitigation is a primary requirement.

Martin: On the Asian side, often, though, you also have government sources, like Sinosure, that are willing to take a somewhat different view on risk.

Oliphant: Also, it would work more or less like the South African market. As opposed to having a collateral manager at site, the freight company will sign off that the commodities have been received or sent. Like Singapore, you do not need a full time collateral management arrangement (CMA). The freight companies will declare that it has arrived. For the whole of Africa, except South Africa, you have a bit more exposure to theft and stock losses, and it comforts the foreign investors that there are extra people there to look after it, particularly the insurance guys.

Cutler: Singapore companies will use insurance in their market to support transactions in the same way as everyone else. Regional export credit agencies and local companies have a different approach and emphasis based upon their own priorities and local knowledge.

Martin: As is the case for Brazil or South Africa, as well. They tend to take a more conservative view.

Cutler: Yes.

Martin: Tom, one of the things that is certainly going to be a key demand over the next five to 10 years is for more energy, both for trade in particular and also in general. How do you see the demand being matched from renewable sources?

Walsh: In this particular region, in Kenya, about 37% will be met by renewables in the expansion of the 5,000MW. Ethiopia is much, much higher than that: they will go probably predominantly renewable, including the new large scale hydro. If we look at Rwanda and Tanzania, they all have extensive renewable build out programmes. I suppose, if you are looking at it from a project finance perspective, in energy projects, it is quite common to structure things in special purpose vehicles (SPV).

If people are looking for balance sheets, typically, what I am hearing over the last couple of days here is that all the local banks are much more comfortable with the balance sheet approach, but in many cases, if you look at the local developers we are working and dealing with here, they are starting from an entrepreneurial perspective. Even if they have another agri processing business that is relatively substantial, in the context of the actual project it still may be small, so there will have to be a tweaking of the system there from a reinsurance perspective so their deals can happen, and with a bit of speed, over the next while. That is a bit of a challenge.

Martin: I think – and, Jef, chime in on this – from the AfDB perspective, certainly, one of the challenges is that governments are much more rarely issuing sovereign guarantees for project financing for these kinds of projects. Therefore, you are usually left with a government off taker, whose creditworthiness may or may not be that good, and maybe a letter of comfort from the government, but that is about the extent of it.

Vincent: That is where some of our member states put us forward. We are more or less the best alternative to a ministry of finance guarantee, because we have this preferred-creditor status. We have been issuing insurance for power purchase agreements in countries where it can be quite challenging. The problem is that these investments only make sense if the agreed tariffs apply for a long period that will cross a number of elections and governments, and you want to have consistency. We also look at each project on its own worth. If the feed-in tariff is very high, you know that it will be challenging, maybe not immediately but in five years’ time.

Martin: For us, it is the same thing. Obviously, we have our partial credit guarantees (PCG) and partial risk guarantees (PRG) that can complement some of the things that ATI has. Certainly, it is something we look at very carefully as well. Even the PCGs and PRGs – part of which count against the country’s performance-based allocation – for the countries are a challenge, because, more and more, we are seeing countries trying to limit their debt exposure as much as possible.

Cutler: The power purchase agreement (PPA) problems that happened over 15 years ago were in countries such as Indonesia and India, where long-term commitments were promised and then rewritten by subsequent governments to the contracting previous sovereign regime. Many plants had PPAs on them to support the investment over a long period, and the private market and some of the export credit agencies (ECA) were left with big losses as a direct consequence of the renegotiation or cancellation of a PPA. Demand for power means that projects sub US$500mn, which are needed more in this region, are not so difficult to insure especially if ATI or MIGA are involved for confiscatory risk.

Martin: For which tenors, though?

Cutler: Well, the private market will do, say, 15 years, but, realistically, up to seven, so you need an ATI.

Mugambi: The biggest challenge has been dealing with the government. Taking on the risk of the government can be tough, especially where a transaction is not concluded within the year of budget allocation or for complex huge transactions. Sometimes payment can be delayed due to unavoidable circumstances and other times due to outright non-performance from either party. How do you handle such risk?

Vincent: It depends on what we are insuring. When you look at PPAs and delayed payments, etc, you have two scenarios. One is you insure the delay in itself, so for instance, if a state-owned utility in any given country has not paid for three or six months, the insurance kicks in. The fact is that there is no reinsurance available for this product, because it is too dangerous, so what is really common is arbitration award default, which goes much further in time. We have done it in the past, for small projects where we could carry it on our own, and the structure was that: we insured the non payment; there is a waiting period of six months; a bank issues a standby letter of credit that covers the six months so the independent power producer (IPP) can continue to work until we have paid. If they stop producing power, it just makes the whole problem more messy and complicated to resolve.

If I can come back to trade, the problem is that, in a lot of cases, power is important, but it is not only power; it is also the whole transport. For a mine in Tanzania to be operational, they need power on one hand; but they also need a railway that brings it to Mtwara, and then, in Mtwara, you need to increase the port capacity. When you add all the investments that are required and compare it against the US$1bn cap that the IMF has put on Tanzania’s additional borrowing, it is going to take centuries to have all that ready.

Cutler: The biggest sector, in terms of commodities, in which trade finance is required, anywhere in the world, particularly in this region, is fuel. It creates headaches when governments do not pay for it, but, if you are talking about mines, quite often, we are helping people that are selling fuel that is going to the mines to run the generators, and that is a lot of the trade finance.

Oliphant: The mining developments in Kenya, for example, vary slightly from Tanzanian processes. Base Titanium have just set up a new titanium mine on the south coast of Kenya, and they have provided all the new dams to generate power for the mine, for the processing plant, and any excess they are going to sell off to the government. With the likes of a new sugar investment, again on the south coast, they are going to produce renewable biofuels. The problem is the parastatal in Kenya have not given them an agreement to pay for the power yet.

KPLC has also just built a new diesel generating power plant. It is six months old. It worked for a week, because KPLC have not agreed to pay for the power they are going to generate. That could run the power from Mombasa to Lamu, and they have just paused the whole thing.

Vincent: The problem also is that there is a lack of transmission. There are power plants in the Mombasa area that do not produce at full capacity because there is nowhere to go.

Martin: In terms of the energy challenges, the generation, transmission and distribution remain challenging. If there are challenges here in Kenya, imagine what it is like in some of the less developed countries of the region.

Vincent: Power generation can be sustainable in itself, and ports probably can as well. I do not think you can justify the initial investment in rail on a pure economic basis. Running a railway, yes, but, when you look at the new railways, if the country works on electricity, it will require about 300MW, so you also need to generate that.

Cutler: There was a perfectly reasonable railway system with coal and diesel-powered locomotives left behind in Kenya and Uganda at the time of independence, which have been abandoned or neglected. It is not as if an entirely new network has to be built from scratch; you can restore it, but there was an obsession for 30 years around the world to not use railways, when, actually, for freight and trade, it is the most efficient way of doing it.

Martin: Recently, Kenya and China signed an agreement on the railways. Going back a little to our East Asia question, and specifically tying it to another question we have here, do you see this railway in particular, and also some of the other regional projects – like the Lamu Port-South Sudan-Ethiopia, which is going to take much longer, the Tanzania refurbishment – as unlocking new sectors of trade as well? Hopefully, it will unlock some new regions, but will we see areas of trade increasing in terms of some of the commodities? Will some of the commodities change?

Kasuyi: There is certainly going to be a lot more inter-regional trading and cross border trading, as a result of this. As these infrastructure developments are happening now come to fruition in the next five to 10 years, we will see an even greater increase in cross border trading. As a result, we will see a lot more value added processes taking place within East and Central Africa.

Martin: Can I just pin you down a little more? What do you think will be some of the sectors and products where we see more – say tea or coffee from Rwanda and Uganda?

Kasuyi: For sure, tea and coffee, and tobacco as well. The steel industry and the manufacturing sector are also becoming sophisticated within Kenya, Uganda and also Rwanda. Those types of industries are going to thrive if these infrastructure developments take place the way that they should, and employees are getting paid on time.

Martin: We should not forget that that will probably also increase intra-regional trade, which is already important, and probably will become more important as the tariff barriers come down and the infrastructure improves, etc.

Kasuyi: Within these regions especially – we are talking Kenya, Uganda, Rwanda – there is the single currency they are looking to establish. People are free to travel within these borders. In the next couple of years, we will see a lot of transitions in government. Many of these presidents are up for re-election, and many are on their second term, meaning that they have to go. We have already seen this happen today and yesterday, in Malawi, for instance. We are seeing a transition in government. Whether it is viewed positively or negatively internally or even externally, what has happened is a transition of power, and that is something we have not seen happen very smoothly in Africa, but we are seeing it happen now. The test will be what happens in countries like Rwanda, DRC, Uganda, which will be very contested elections coming up. The strength and thrust for intra-regional trade will rely heavily on the stability and resulting growth of these regions going forward, and the co-operation of countries from the sovereign level downward.

Martin: I would like to come back to the changing sectors, but one of the questions here is about political risk in the region. Obviously, we have South Sudan in turmoil. We have, in principle, less bad news out of DRC, which counts as good news, I guess, but you still have Somalia, and, unfortunately, some attacks here in this very city and country. Rupert, if you look at the rates you are getting, do you see East African rates for PRI and trade credit, which is a bit of a different angle, going up?

Cutler: If you are talking about PRI for the region, yes, there has been more than one incident that has apparently involved government ministers, who did not lose their jobs; they actually got moved to another job within government, which has meant investors and lenders do not have absolute confidence. Some of it is also tied to international corruption indices, which is a very western thing, but it is prevalent and it affects pricing and people’s attitudes. If we are talking about the appetite for private company trade, as people outside of the region understand better how the region operates, there is capacity available, and pricing is lower than it was. It is also quite often pegged to external bank lending rates, not necessarily local ones. In that sense, the whole thing is a very difficult question to answer, but, for political risks, it is by territory and what sector you are in. You can have good risk in a bad country, which DRC could be an example of, because it is structurally quite dissolute.

Martin: If you looked at the oil sector in South Sudan, you might have trouble finding PRI.

Cutler: Well, yes, no one will touch South Sudan. There was great excitement about it, but that has gone by the by. If you were to look at the terrorism risk, unfortunately, it is here regionally. The awful thing that happened in Westgate and happened here in Nairobi recently has made people realise that it is, unfortunately, a blunt tool used by disaffected groups throughout the world.

With the economies developing, there is a frustration. As people get better educated, if they cannot get jobs or their standard of living goes down, they join the disaffected. You see that in every country on earth. It is not just an African problem.

Martin: I have one specific question. I do not know whether anybody at the table would know this. Certainly, we have seen in Spain, the UK and the US, as an answer to increased terrorism, a government-backed reinsurance programme to maintain terrorism insurance as an option. Has Kenya gone down that road at all?

Vincent: I can answer that. We were involved in Westgate, so we were organising the reinsurance. I would like to qualify what Rupert says. The premium rates for terrorism insurance have not gone up significantly, because there is a lot of capacity available in the reinsurance market. It is just like, you could say, there are a lot of bankers still willing to do business, even with political risk in this market, simply because there are more banks coming in, they are hungry for share and they are going to take risks that the traditional banks normally would not have taken. I do not know how long that will last, but, for me, the price range has not evolved as you would expect because of this additional capacity.

Martin: Could it be a binary thing, though, that insurers will say: ‘Sorry, the rates may not be up, but we’re just not going to take terrorism insurance?’

Vincent: I have not seen that. First of all, the demand for terrorism insurance was at its high in February/March last year with the elections. A lot of companies have said: ‘The elections went on. Now that is over, so we don’t need it anymore.’ The volume of demand has gone down, notwithstanding Westgate.

Martin: So, even if I came with a shopping mall in Nairobi today…

Vincent: You would find insurance without any problem.

Cutler: There would be capacity for it. It would be more expensive than last year, but it still would not be relatively more expensive, because they put the premiums up a modest amount.

Martin: It is nice to have a bit of good news as well, which comes from an unusual quarter in this area of the world, Somalia. If you look at the piracy, which of course was threatening a lot of seaborne trade out of this region, and not just out of but through this region, that has decreased significantly for now, which testifies to a fairly effective multilateral response- with everyone agreeing that maritime security is in everybody’s interests.

Rupert, have you seen some indications that that has been reflected in the market?

Cutler: Yes. It is very price driven, so the prices have dropped, but there are still 14 ships tied up, with their crews.

Martin: But the number of new ships captured has gone down to almost nothing.

Cutler: Yes, almost nothing, but the piracy risk has now moved to Nigeria, which is not in this region.

Martin: At least one bit of good news on insurance related to trade comes out of this corner of the world. Certainly, the Somali situation itself seems to be – as I was saying about DRC – less bad news. It does not mean we are talking about good news overall, since some of the problems are apparently being exported to Kenya.

Oliphant: There has also been renewed interested from foreign logistics companies in the region, which halted while the piracy was going on, which is great.

Martin: One has to think, if you look at Ethiopia and this mass market of 90 million people, which, right now, relies on Djibouti to get to the sea, opening up new lines to Kenya is one thing, but, looking down five or 10 years, if there were a more stable Somalia and the situation there were clarified, you could have a situation where that could also be an option.

Oliphant: If we think about some of the statistics that were shown yesterday at the conference, with Kenyan growth in certain commodities, they were almost false, in the sense that Somalia and South Sudan are fed through Kenya, predominantly. As soon as Somalia starts developing and gets over the issues going on there, the markets have to resettle in some way, but it is good for the growth of the current economy.

Cutler: I was going to ask one question. What is significant and constant in this region is there is a huge informal economy. A lot of what we are talking about is the formal economy and the bigger issues. There was a revaluation of Nigeria’s economy, and suddenly they discovered all this trade was going on that apparently no one knew about. That must be also the same here, and I just wondered how that would impact banks. On the informal economy, you are not really going to be lending.

Martin: Kenya, specifically, seems to be the champion of non-bank banking.

Mugambi: For a long time, banks ignored what M-Pesa was capable of doing. It changed the landscape of money transfer and that is why we have experienced a counter to that by banks introducing alternative banking channels vis-a-vis mobile banking, agency banking, etc. Of course, agency banking could be viewed as either formal or informal, depending on which angle one is looking at. The truth of the matter is that this has really assisted banks to harness huge opportunities in transactional banking and cash management, not to mention penetration into business territories that had been ignored for the longest time.

Martin: Could that be used to be involved in financing for trade via – if you look at rural areas specifically – agri business etc? Do you think that those tools can be developed to penetrate more deeply into rural Kenya, as an example?

Mugambi: Yes, it would in the long term. What banks are doing is partnering with these agents, and they are able to gauge the track record of these customers. For example a farmer in the rural area who hitherto did not experience banking is availed with an agent at his doorstep to offer banking solutions. In this regard the customer in the rural area is empowered with information on how to access banking ranging from savings to financing their working capital. The bank, on the other hand, rides on the comfort of the agent who has a track record of the customer based on the account operation and character. For Co-operative Bank this is not a new phenomenon, only that the legal framework had not been fully developed. The bank since the 1960s has partnered Savings and Credit Co-operatives (SACCO) to do group lending and individual lending through guaranteeing programmes. In 2007 the bank made a deliberate strategy to introduce the SACCOs to what we refer to us Front Office Services Agents (FOSA) to offer bank-like services to their members. In this case the bank offers the SACCOs a platform through which to operate and serve their customers as though they were operating a bank account. The SACCOs in return refer clients to the bank for services not offered by the society. Through this arrangement we have penetrated a new frontier and been able to access customers that we could not in the past. For example, we have financing arrangement for dairy farmers delivering their products at the local dairy processing plant. The bank offers bridge financing to the dairy farmer upon delivery of the milk as they wait to be paid by the offtaker. Yes, agency banking is a great tool and it is working miracles in opening up the rural economy.

Kasuyi: We would like to see M-Pesa continue to grow the way that it has, not only in Kenya but in the rest of East Africa. As you said, M-Pesa is not necessarily banking, but it does reach some of the people that need access to money, as far as some of the smallholder farmers. It does help put virtual money in their cell phones, which is money in their pockets, which is a very innovative and new thing here. If that can also develop into the rest of Eastern and Central Africa, that is a good start to get those people introduced to systematic banking.

Martin: Does that mean that they are competitors or potential partners for PTA Bank?

Kasuyi: They are potential partners. The more that people are logged into a system, the more they are reachable, and that is a two way street. That means that they become aware of the possibilities of what banks can do and how they can provide financing. For us, it is a way to teach each other, and that is what banking is. It is not so much about the client becoming aware of what banking products are, but it is also the banks learning about their clients’ needs and how they can better serve them.

Vincent: I see it as something that is gradual. You start with a purely informal economy, with barter, and then you go to something like M-Pesa, and then cooperatives, etc. At some point in time, you need a bank, and all these alternative banking instruments are eventually preparation for access to banking. I do not see it as a competition to banks.

Kiluva: What is changing in trade and trade finance? The key thing we have seen is collateral management for non traditional goods. Banks were used to doing collateral management for commodities, but now see clients come in with requests for machines and consumables. Collateral management has become a clear source of financing trade more than before. The challenge bankers have is whether this makes sense for the ticket sizes we have seen. As the sizes go up, we will see traditional trade financing being ceded to these trade structures.

Mugambi: That is very true. Lately we are getting very small tickets to finance under collateral management – some of which do not justify the transaction given the cost implication. This is because when a collateral manager is brought on board, their fees affect the profit on the transaction.

What normally happens is that since the client does not have any other form of collateral, the commodity under consideration is financed under a commodity finance arrangement. The collateral manager, whose role is to protect the integrity of the commodity, will levy a fee on top of bank charges. This further increases on the cost of the transaction. It becomes a very big challenge for both the bank and the customer as the margins are normally very thin. Given this, the SME or microenterprise being financed is not able to grow at the rate you expected them to grow, so one has to look for other options to work with them. Of course, bringing in trade insurance to mitigate against payment risk is another added cost that the client has to absorb.

Oliphant: From the collateral manager point of view, local banks in Kenya have a misconception of collateral managers, to be blunt. It is not just Kenya; it is Tanzania and Uganda as well. Unless you are a big trader who has the budget to pay US$3,000 to US$20,000 a month to mitigate your credit risk, which is what the credit department wants, your collateral manager is never, ever liable for the commodity, has no right to cede the commodity, so they are never bringing additional insurance. The collateral manager is there to be the eyes for your credit department to say: ‘Your trader has gone behind our back and taken something.’ It is up to the banks to then claim it from the trader, unless the collateral manager was involved in opening the gates and loading that truck. Then you can claim from their insurance and their professional indemnity insurance for misreporting.

Going to the micro economy, to the small traders, the problem is, appointing a collateral manager. You need a reliable collateral manager with adequate insurance – in this region there are possibly four.

Kiluva: We send the small traders to the not very well-established collateral managers, those they can afford to pay. Incidentally, these small traders are more dedicated and committed to their businesses, and co-operative to the process. Banks appreciate the risk and mitigate by either taking additional securities in the form of property or credit insurance.

Martin: Who have what credentials?

Kiluva: The banks know the kind of risk they’ll be taking, vis-a-vis the value of professional indemnity. The residual risk is covered separately. The trader’s knowledge that his activities are being monitored – under collateral management or monitoring – introduces caution that gives the bank more comfort than doing unsecured lending.

Oliphant: I find it tough to accept that any bank in the world is going to accept a collateral manager who is going to charge you US$150 to go and look after your stock for a month. It does not seem credible.

Kiluva: Depending on the ticket size of what is being imported, and knowing what can go wrong and the contract, we are able to engage someone to count on a weekly basis and report to us. We’ve however seen a trend towards non-conventional products being floated for CMA: products whose prices cannot be benchmarked. These include machinery, timber, chemicals, apparel, and fast moving consumer goods.

Martin: James, have you seen a similar shift?

Kasuyi: For sure. We have been using CMAs much more often, especially as these trading houses that are operating out of Mombasa and Dar are getting larger and there are more numerous. For sure, we need strong collateral management to help not only the banks but also the client maintain sound and auditable operations.

Martin: Have you seen a shift away from commodities towards semi-manufactured goods?

Kasuyi: We have not seen that type of shift as much as local banks would. But as PTA Bank is financing many local banks, we have seen increased demand for lines of credit, which they utilise towards the working capital requirements of their clients in these industries. We hope that this growth further fuels the cross border and intra-regional integration as certain countries and regions become proficient in certain value chain capabilities.

Martin: Particularly in the power sector, it is a whole other issue of legal and regulatory change. You are making a long-term investment based on a certain legal and regulatory framework, and then the tectonic plates shift. That is nice with geothermal power perhaps, but…

Walsh: The stability of the regulatory side of things is a big issue. From the development of a project perspective, because there is a bit of speed in the market, Rwanda is probably, in some sense, the best in class in terms of defining their regulatory framework around energy projects. They have introduced that primarily in the development phase, in terms of environment impact assessment and the phase up to PPA, with a very hard timeline for the project developer to meet. That is positive, in some senses, in that you have certainty around that, and it allows local developers to get to the PPA in a fairly fast timeline. Then you get into the start of your bankability phase for the project.

If that was adopted in some of the other markets, especially if you are talking about this 5,000MW for Kenya, it will be tough. For any project, the preparatory phase is a minimum of 12 months, but it is up to three years from the preparatory phase to financial closure, before you start building the project.