Investec and Frontclear are seeking to expand access to trade finance for African SMEs, launching a “pioneering” product that releases liquidity from government bonds held by local lenders. 

Micro, small and medium-sized businesses across Africa often struggle to access trade finance from local banks, which tend to invest their capital in government bonds, the two institutions say in a joint announcement. 

The duo’s product involves wealth manager and international bank Investec, which is listed in London and Johannesburg, providing a financing facility to Frontclear, an Amsterdam-headquartered development finance institution. 

Frontclear then provides funds to local African banks, taking their existing government bond holdings as collateral through a repo structure. Those banks are required to use the liquidity generated in support of SME trade and supply chain finance. 

“By combining our respective legal, product and market expertise in trade finance and capital markets, we’re able to directly benefit SME traders in Africa, by providing viable liquidity solutions to the local banks that are best placed to service the SME sector,” says Hugh Friel, senior vice-president for Africa structuring at Frontclear. 

“We are excited by the impact these efforts will have in reducing the trade finance funding gap on the African continent.” 

George Wilson, Investec’s head of institutional trade finance, adds: “Recognising that only lower tier African banks can provide trade finance to deep level SME transactions in the real economy was key in the design of a workable solution that tackled these challenges. 

“This product structure is the first of its kind to ultimately reach SME traders in Africa by providing liquidity to them and consequently promoting sustainable trade finance on the continent.” 

Africa’s trade finance gap, defined as the overall unmet demand for facilities across the continent, totals more than US$80bn per year, according to African Development Bank research from 2019. 

SMEs and domestic companies typically face the greatest difficulty in accessing support, and Investec and Frontclear say regulatory developments are at risk of making the problem worse. 

African banks can struggle to keep up with sustainability-related compliance requirements, meaning their trade portfolios are deemed “not suitable for international investment”, Wilson says. 

He adds that the product recognises the “on-the-ground realities” of bringing trade finance to African markets, as it is not reliant on deep-tier digitisation.