The Ethiopia Commodity Exchange (ECX) has been heralded a true African success story: it has revolutionised the way that Ethiopian commodities are traded, and helped launch the country into the global market arena. Shannon Manders reports on the ways in which it continues to transform itself to become a model for other commodities exchanges.
Before the launch of the ECX back in 2008, agricultural markets in Ethiopia had been characterised by high costs and high risks of transacting, forcing much of the country into global isolation.
Today the exchange provides market players with a secure end-to-end system for handling, grading and storing commodities, matching offers and bids for commodity transactions, and a risk-free payment and goods delivery system to settle them.
In fact, such has been the success of the Ethiopian model that a number of other African countries are considering replicating the business. The ECX recently signed agreements with Malawi’s AHL Commodity Exchange and Mozambique’s Bolsa de Mercadorias de Mozambique that entail significant technical, training and consultancy co-operation.
Since its creation, the ECX has continued to pioneer new products and initiatives. At the end of last year it successfully launched an electronic trading (eTRADE) platform with the capacity to trade almost 5,000 times more transactions than its open outcry platform. The platform was hailed a “game changer” for the country because of its ability to dramatically increase trade efficiency, transparency and accessibility. It came to fruition in collaboration with the Investment Climate Facility for Africa (ICF), which provided US$2.2mn of the US$3.8mn total project cost (the balance of which was sourced from the ECX itself).
The exchange also recently implemented an independent food traceability system, eATTS, which encompasses over 5 million smallholder farmers engaged in producing multiple commodities traded on the ECX. The system began by piloting coffee some months ago, in partnership with IBM, USAid, Jacobs Douwe Egberts, Mother Parker’s Coffee & Tea and the Sustainable Trade Initiative. It will now be replicated across all the commodities that the ECX trades.
“We’re currently tracking each and every bag and every vehicle that carries the bag, and the person that samples, grades and certifies the commodity from the wash station,” said Tewodros Assefa, senior manager of corporate communications at the ECX, speaking at the GTR East Africa Trade & Commodity Finance conference in Nairobi in May.
“So by the time the commodity is at the exporter’s warehouse, it will be issued with a digital passport which will also be among the shipping documents that the exporter will send out to the international buyer.”
Financiers, unsurprisingly, have been dazzled by the development. “From the financing perspective, it’s music to my ears that you can clearly trace a commodity through a value chain,” Edward George, head of research at Ecobank, told GTR and the audience at the same event. “That immediately means for the offtaker that they can be more comfortable: it’s got to mean something for pricing, reducing risk and profitability.”
ECX’s traceability initiatives include the electronic tracking of bags, innovations in washing and processing and streamlined storage and transportation processes. The new tagging system, which runs on IBM and Frequenz IRIS technology, links bags of coffee traded through the ECX to one of over 2,400 geo-referenced washing, hulling and cleaning stations located in Ethiopia’s southern, central and western coffee-growing regions.
“Improvements in sustainability and traceability incentivise farmers to use the best techniques to grow and harvest different commodities,” reads a statement issued by the ECX. “Innovations in processing stations and ECX laboratories also guarantee world best practice methods are used to grade and certify commodities before they are traded on the ECX platform.”
The exchange is also facilitating better access to its platform through the design of an app, which will be piloted once development is complete. “We want to
go mobile. In five years’ time we want each and every smallholder farmer to be able to trade from his or her mobile,” Assefa said in Nairobi.
It is also making headways into the possible trading of horticultural goods, such as flowers, for which Assefa explained it is thinking about setting up a cold storage network connected to the exchange.
“Our plan is to introduce horticultural products as much as possible and then look at new ways of trading,” he said. But despite the ECX’s successes in revolutionising agricultural trade in the country, it has faced its fair share of challenges along the way, including:
Warehousing: Most commodity exchanges don’t offer warehouse functions, but the ECX has 65 warehouses located across the country and in 2015 formed a new enterprise, the Ethiopian Agricultural Commodities Warehousing Service Enterprise (EACWSE) to undertake its warehouse operations.
When the exchange first launched, its warehouses were not purpose-built for commodities.
“They were built to store other materials like metal, tires and temporary food aids, so that was one challenge that we took on,” said Assefa, speaking at GTR’s conference. “One of the reasons why the exchange is successful is because we guarantee the integrity of the product,” he added.
Lack of a national payment system: “It meant we had to create a system to exchange and partner with commercial banks to address this,” said Assefa. “The ECX is the only exchange that settles T plus 1 – meaning, if you sell your commodity today, you are guaranteed you will get your money tomorrow at 11am.”
Convincing stakeholders: In order to persuade stakeholders to believe in the system, the ECX had to conduct an extensive awareness campaign among the farmers and brokers. “The government’s commitment towards the exchange was the key to our success as a public-private partnership,” noted Assefa.
“When we set out to establish the exchange, we created co-operatives [primary co-operatives and then co-operative unions]: we have 33 of the largest co-operative unions in the country that have a membership at the exchange. They are the main drivers behind the ECX’s success. They are very much empowered and supported. And there are several co-operative banks in the country.”
Human resources: Finding the properly skilled human resources was difficult, as this was the first initiative of its kind in the country – and the continent. The ECX launched the ECX Institute last year, which Assefa described as a “pan-African knowledge transfer for commodities exchanges” dedicated to providing training, advisory services
5 things we learned about trade finance in East Africa
A report on the key findings of GTR’s East Africa Trade & Commodity Finance conference, hosted in Nairobi
on May 10 and 11:
There are no systemic risks to the Kenyan banking sector.
“No large lenders face the risk of collapse,” said Exx Africa executive director, Robert Besseling, speaking at the event. “While small Kenyan banks are more susceptible to tightening in the inter-bank market, liquidity risks are unlikely to pose a threat of systemic contagion to the country’s banking sector, and bank profitability is likely to be boosted in the near term,” Exx Africa wrote on its website in late April.
“The three banks that have been taken into receivership [Chase Bank, Imperial Bank and Dubai Bank] are too small to cause a systemic risk,” the report read.
Chase Bank, currently in receivership, resumed operations of key banking servicessuch as electronic funds transfers (EFT), trade finance, foreign exchange transactions and cheque clearance facility in mid-May, barely a fortnight after the bank reopened.
“The bank has resumed trade finance operations, especially to meet trade obligations that are falling due,” a spokesperson told GTR. “We are currently not taking any risk that is not 100% cash secured on any new trade facilities until the receivership banner is lifted.”
The role of banks is highly contested.
Banks are still the first port of call for East African corporates looking for working capital, said 62.7% of conference delegates in a live vote. However, 30.5% backed the option that this wouldn’t be the case for much longer.
Throughout the conference, heated debates took place between speakers and members of the audience, with corporates calling for more lending to SMEs and banks maintaining that the funds aren’t theirs to give away.
“When it comes to agricultural finance, we can’t rely on the banks,” said one speaker on the panel dedicated to modernising the banking sector with fintech, suggesting that the likes of supply chain service providers such as Umati Capital, eBiashara and FACTS have more of a role to play in this realm. “Mankind has figured out how to send people into space, but still hasn’t worked out how to finance SMEs and farmers,” remarked another panellist.
The appeal of private equity for corporates in the region is growing.
Private equity is becoming increasingly practical for the bigger players in the region. Kenyan supermarket chain Nakumatt is finalising a private equity deal to restructure existing debt levels, fund expansion and secure a lower cost of capital, said Vijay Kumar, Nakumatt’s group controller, finance, during his panel on working capital strategies for a challenging global environment.
Africa is (mostly) for Africans.
Local players are convinced that no foreign bank will ever truly understand the DNA of the African continent. The Middle Eastern banks are an exception to this rule, said a former international banker.
Ethiopia is more of an enclave than a regional economic hub.
Ethiopia is the “last game in town” when it comes to new opportunities and undiscovered markets in Africa, said head of research at Ecobank, Edward George. But despite all the opportunities in soft commodities and hydro-electric power, the country needs to do more to enable access to these markets. Ethiopia’s government is ambivalent towards foreign investors: the economy is opening up to foreign capital, but cautiously. “Sugar, cement and infrastructure have been opened up to foreign investment, and telecoms could follow soon,” said George.
The country’s accession to the World Trade Organisation will make it a more attractive investment destination. “Joining the WTO will bind the Ethiopian government to international trade regulation and best practices,” George added. But until then it cannot be seen as a regional economic hub: it is less connected to the rest of the continent than Mauritius, he said.