With trade flows growing in Sub-Saharan Africa, there are significant opportunities to improve efficiencies and reduce risk by using a single gateway to consolidate and manage letters of credit across the region, write Sanjeev Oza, head of supply chain finance for Sub-Saharan Africa and Wale Soyingbe, trade head for Sub-Saharan Africa in Treasury and Trade Solutions at Citi.
Africa is an increasingly important market for corporates. Although GDP growth in Sub-Saharan Africa (SSA) is expected to slow to 3% this year (from 4.5% in 2015), it remains strong: only South and East Asia will grow more rapidly1. And while the end of the commodity boom has taken its toll, estimates released in October 2015 by the International Monetary Fund show a 16% increase in foreign investment in Africa in the previous year2.
At the same time, companies from the continent are expanding into new regional markets: intra-Africa trade is expected to grow strongly and many companies have created centralised hubs to manage their activities in the region.
However, operating across SSA presents a myriad of challenges. For companies with trade flows in the region, one significant pain point is the complexity associated with the widespread use of letters of credit (LCs) in SSA. LCs remain critical to trade in SSA because of the need for credit risk mitigation given higher levels of risk in many countries compared to developed markets.
Although LC volumes in SSA have fallen steadily in the past three years (from elevated levels in the post-crisis period), there is evidence to suggest that a plateau has now been reached.
The use of LCs is not problematic in itself: in addition to risk mitigation they offer valuable opportunities to enhance working capital via LC discounting. However, for companies operating in multiple countries across SSA the need to establish a relationship with a bank to advise or confirm an LC adds costs and complication to the management of trade flows, not least because of greater know your customer (KYC) scrutiny in recent years. A further challenge is the difficulty in finding a bank that maintains a wide regional and global correspondent banking network to connect exporters in SSA with their various international trade partners.
Changing bank networks
Many banks are reassessing their global operations in light of changing bank regulations relating to money laundering, terrorist financing and capital requirements, as well as the need to manage costs in a tough business environment. In response, some banks are withdrawing from certain relationships, products or even jurisdictions. In addition, some global banks are in the process of rationalising their correspondent banking relationships for many of the same reasons.
Africa has been particularly affected by this de-risking phenomenon, with a number of regional banks retreating or refocusing their activities and some global banks seeking to reduce their compliance risks by ending correspondent relationships, some of which
had been in place for several years.
Some companies have found themselves forced to find new banks to meet their LC needs as a result of bank restructurings and changes in correspondent banking relationships. Furthermore, some corporates have used the opportunity created by banks exiting certain trade finance markets to reorganise their LC-related processes in order to seek greater efficiencies.
Seeking greater trade efficiency
In order to manage growing trade flows in Africa, corporates need an effective solution that streamlines LC-related processes and minimises complexity and duplication of tasks while achieving credit risk mitigation for LCs issued in unfamiliar markets. Ideally, many companies want a single partner to ensure consistency of service and competitive pricing and also require fast trade processing and the ability to gain working capital relief under LC structures. For many corporates, it is important to have access to on-the-ground knowledge so that regulatory, risk management and other issues can be remedied rapidly.
To help corporates achieve these goals some international banks have sought to create hubs that aim to support client trade flows across the region. However, to date none of these have been based in SSA or offered comprehensive coverage region-wide that would enable clients to achieve the efficiencies they want. Alternatively, some local banks have developed a pan-SSA presence but do not offer a full range of LC-related solutions. And importantly, these banks do not have international capabilities that would allow for seamless trade management.
A truly African hub
In response to clients’ needs, Citi has established a new cross-border trade services hub to serve the region. The hub is one of four globally – serving Asia, Latin America and Europe and the Middle East – and is part of one of the largest trade service networks in the world, spanning 124 cities in 71 countries and is served by 200 Citi trade specialists. Citi’s facility is based in Johannesburg, ensuring that its experienced trade professionals can offer authoritative advice and support trade and financing needs on a region-wide basis.
Crucially, Citi’s SSA hub offers a single entry point for LCs coming into the region, which are then advised or confirmed to Citi’s branches present in 11 SSA countries or to its correspondent banking partner network of 130 banks across 34 SSA countries. This delivers considerable efficiency and simplicity benefits: there is no need for LC-issuing banks to establish or maintain relationships with multiple branches or correspondent banks across SSA. Instead, the issuing banks simply direct their flows to one Swift code, namely Citi’s SSA hub. The LC beneficiaries are also able to present LC documents at local Citi branches, enhancing convenience.
Using a single hub for the region maximises operational efficiency and minimises operational risks, delivering faster turnaround times while providing a single point of contact for enquiries and issue resolution. Moreover, the hub makes it easier and faster for companies to grow their business in SSA: entering a new market no longer requires a long and complex search for a suitable bank to manage LC business. And by working with one of the world’s leading trade finance banks, corporates can be confident that they are leveraging best-in-class operations and technology such as CitiDirect BE® for Trade, which provides real-time reporting and transparency on transactions 24 hours a day, seven days a week.