As African trade flows begin to alter to reflect greater demand for the capital goods needed for industrialisation, so African banks are beginning to adapt. Elsewhere, non-bank institutions are finding a rich seam financing trade in riskier SME markets, writes Sarah Rundell.
Ecobank Nigeria, one of Africa’s biggest banks, has just announced plans to increase its trade finance offering to the continent’s fast-growing companies. Via the UK government’s £3bn direct lending facility, designed to help overseas buyers purchase goods and services from UK exporters, Ecobank will offer longer-term finance to its thousands of African clients on the ground to help them fund capital goods imports.
Food processing groups and assembly plants buying manufacturing equipment, renewable energy companies sourcing solar panels and wind turbines, or telecom and construction companies building communication networks or power plants will be able to finance costly inputs with three to five-year loans, rather than the shorter-term loans typical of most trade finance on offer in Africa.
“Companies importing capital goods won’t have to worry about immediate repayment. It takes time for these companies to generate the cash flow to repay the financing and this is exactly what they need,” says Yaw Adu Kuffour, lead specialist in charge of the African Development Bank’s (AfDB) Trade Finance Programme.
Ecobank’s move reflects the shifting landscape in African trade finance that began when dominant western banks retreated to their core markets in the wake of the credit crisis. Africa’s biggest banks are stepping up to address the shortfall and new players have emerged, including specialist funds financing riskier SME trade where banks are still wary of lending.
Africa’s estimated US$4bn annual shortfall in trade finance has long been seen as one of the biggest brakes on the continent’s economic growth: so big that it dwarfs the capacity of any one group of lenders to finance. Africa’s own banks are an essential piece in the jigsaw in a market where challenges go beyond access to trade finance to include the infrastructure deficit’s impact on flows as well as new challenges, such as Ebola. In fact, their growing financial clout and confidence has come just in time.
OUT WITH THE OLD
It used to be international banks that dominated trade finance in Africa. The financial crisis forced the retreat of many, and disappearance from the market altogether of others. Now new regulations around Basel II and III, which ask banks to set additional capital aside to guard against operational and financial risk, is restricting the ability of international banks still active in the market to close deals and price them competitively.
Compliance measures such as know-your-customer (KYC) demand in-depth analysis and bring new complexity and costs. French bank BNP Paribas’ recent falling foul of US sanctions policies displayed the consequences of getting it wrong, further dousing enthusiasm for African risk amongst western banks, particularly for longer-term finance. “Big banks still doing African business are becoming very selective,” says one trade finance expert.
Bruised by a record fine and barred for a year from conducting US dollar transactions, BNP has dramatically slashed its African trade finance operations, having held one of the biggest short-term books in the market. This has opened up an even bigger hole. “BNP supports close to US$8bn-worth of African trade in terms of volume and their absence will be seriously felt. Somebody has got to step in to make up that shortfall and it will be a combination of DFIs, regional development banks and ECAs as well as African banks,” says the AfDB’s Kuffour.
IN WITH THE NEW
Africa’s banks are fit and primed to muscle in on the market. During the financial crisis, banks in Nigeria, Ghana and Kenya consolidated and grew their balance sheets. Now they are able to offer better credit lines and increasing expertise on structuring deals, especially in commodity and warehouse finance. Ecobank and other Nigerian national champions such as Zenith, Access and United Bank of Africa have opened offices in London to get closer to clients and facilitate capital raising to finance their lending capacity back home.
As intra-African trade grows, estimated at US$150bn today up from just US$25bn in 1995, but still only 10% of Africa’s total trade compared to its trade with other regions, these regional banks’ multiple offices mean transactions no longer have to go through London or other European centres. Ecobank has a presence in 33 African countries, UBA is in 22 and Access Bank is in 11. South African banks have also expanded into East and Southern Africa and even Kenyan banks like KCB Bank and Equity Bank are getting in on the act, growing their regional footprint.
“In the old days a buyer in Ghana wanting to open a letter of credit in Côte d’Ivoire would have to use a foreign bank based in London or Europe that had offices in both places: now this is no longer the case,” says Benedict Oramah at Afreximbank, which recently set up an intra-African Trade Facilitation Programme. Adding to this, these banks’ local knowledge around specific foreign exchange controls or tax and stamp duty, plus the fact African banks are not working to the same regulatory timeline as international banks nor subject to US sanction regimes, and they have a real advantage.
In another trend, experts predict African banks will begin to collaborate on deals. African banks still lack liquidity for the biggest deals, but collaboration will allow them to underwrite bigger tickets and benefit from sharing the risk. “Once banks begin to collaborate they will realise their strength in numbers. It is about the culture changing and experience,” says Ayodipo Ogunmoyela, deputy director, structured trade commodity finance at First Bank of Nigeria (FBN).
As local companies grow, banks – like Ecobank – are adapting their offering with more flexible long-term finance, but also a broader suite of products. “Many commercial banks are now more open to receivables financing, with or without recourse, as well as invoice discounting and, to a limited extent, factoring products,” says Benjamin Mugisha an underwriter in the Kampala office of the African Trade Insurance Agency. He also notes a growth in supply chain finance. Here, banks are lending to all actors in a supply chain from farm to fork, encompassing packagers to distribution companies, on the back of their contractual relationships with end users such as processing plants. “Banks are taking a portfolio approach to supply chain financing, where they try to support suppliers to larger corporates based on the financial strength of the anchor,” explains Mugisha.
Strong local content laws are driving the trend to manufacture and add value at home across different industries from the mining and oil sectors to food processing. It means that instead of Africa just exporting its raw materials, local companies are investing in machinery and expertise to add value themselves. “In Ghana and Nigeria’s oil sector they used to outsource drilling to a foreign company. Now a local company is doing it. They need equipment and that requires trade finance,” says Oramah.
Trade flows are also changing. The stalled passage of Nigeria’s Petroleum Industry Bill has halted foreign investment in the oil and gas sector and has pushed trade flows to other sections of the Nigerian economy, particularly in agriculture and manufacturing.
RINGING IN THE CHANGES
Non-bank players such as specialist funds and hedge funds are also changing the market. Although these funds, which generally lend to SMEs with small balance sheets, don’t compete with international banks that serve the large trading houses, they have benefited from the banks’ exit. “We are not in a market that competes with the banks because our hurdle rates are much higher, having said that we have seen a definite pick up in our deal pipeline because of banks withdrawing from the market,” says Paul Paxinos, a Johannesburg-based fund advisor to Barak Fund Management, an alternative asset manager running a US$98mn structured trade finance fund investing in commodity-based trade finance for medium-sized businesses. “There is massive demand, but the analysis and due diligence has to be correct as this is more risky than where the banks play,” he says, adding that although structured trade and commodity finance is a relatively new asset class, it is increasingly popular with Barak’s investor cohort that include family offices, institutions, high net worth individuals and fund of funds favouring the asset’s short-term, self-liquidating characteristic with a debt profile return.
London-based ex-Sumitomo Mitsui trade finance specialist Christian Karam agrees: “African trade assets pay a better yield than any other trade finance in the world at an acceptable risk level. While interest rates are low and short-term investments rare, more investors are getting involved and choosing Africa because it ticks so many boxes.” Karam aims to introduce new investors to trade finance via his Africa Trade Finance Fund which lends to Africa-based institutions specialising in trade finance.
Local banks are also pushing into the SME space. FBN’s Ogunmoyela oversees a growing SME book where trade finance depends on rigorous due diligence in the absence of robust balance sheets. The Ebola crisis is making the West Africa market even more challenging, he says. “We recently turned down a transaction in Liberia because we couldn’t carry out the due diligence. It was for a fantastic importer and distributor of commodities around Liberia but we couldn’t get on the ground to guarantee the supply chain.” SME trade finance accounts for about 30% of FBN’s total trade book structured with commodities or assets as security. “We’ll look at balance sheets more when the market matures and there are ratings systems. Africa’s SMEs aren’t there yet and this is the way to mitigate,” he says. However, due diligence is set to get easier with improved access to corporate information via the introduction of credit information providers and credit reference bureaus. It’s already happening in countries like Kenya and Rwanda, where agencies gather information on loans and borrowers for banks.
African banks say they struggle to access the dollars their customers require. “For many local banks, even though they have an appetite, the challenge comes with matching the pricing,” says the AfDB’s Kuffour. Conservative Central Bank regulations also still hinder trade. Many countries don’t allow their banks to lend more than 20% of core capital to a single obligor and are restrictive on mechanisms by which the risk can be transferred to third parties. “It means innovative solutions including ECA support aren’t recognised in many jurisdictions,” says Mugisha at ATI. It’s a challenging market, but Africa’s strongest banks are in the best position to finance African trade, and the exit of key international players has opened up the market like never before.