Commercial Bank of Africa (CBA), Kenya’s largest privately-owned bank, has launched a new supply chain platform to finance more SMEs.
With Kenya’s commercial interest rate capped at four percentage points above the central bank’s benchmark rate, the move could provide much-needed capital to small businesses in the country.
CBA has launched the solution in partnership with Nairobi-based fintech firm Ennovative Capital (ECap), which built the platform, and the African Guarantee Fund for Small and Medium-Sized Enterprises, which funded the acquisition of the technology.
Implementation of the system started in April last year, and CBA has been running pilots with one of its big corporate clients since December.
It has also been piloting by buying goods itself, financing its own suppliers (including marketing agencies, IT vendors, suppliers of food, water and cleaning services) via the platform.
The technology enables CBA to offer reverse factoring, a form of financing that allows suppliers of its corporate clients to get paid before the stipulated credit period. The platform works as a marketplace where suppliers can trade their approved invoices, with no need for credit assessment.
Speaking to GTR, CBA’s value chain financing manager Euster Seghete Gerald says the bank has had “substantial interest” from corporate clients in the new solution.
She expects CBA to onboard at least five corporates and their suppliers over the next year, but going forward this specific form of financing is “a very clear growth area for the bank”.
“We have buyers who do over €200mn of supply payments in a year. So the potential is immense,” she adds.
Supply chain finance has been of interest to banks around the world for many years, as it offers them an opportunity to move away from traditional trade finance instruments like letters of credit, towards open account trade.
In Kenya specifically, however, it could be a crucial way for banks to be able to provide funding to SMEs under the country’s current interest rate cap.
Since September 2016, Kenya has capped commercial lending rates at four percentage points above the central bank’s benchmark rate, which now stands at 9.5%. While the aim was to limit the cost of borrowing for businesses and individuals, it has to a large extent had the opposite effect, with banks deeming SMEs too risky to lend to under the cap.
“Supply chain financing is big because, with the interest rate capping in the industry, many banks are looking at lending to the SMEs without having to take the risk of the SME,” Gerald explains. “Supply chain financing offers that comfort where the actual beneficiary of the funds is the SME, but the payment is coming from your corporate buyers. So the risk is way lower than any other financing, it’s almost risk-free if you are comfortable with the buyer”.
The new platform is also open to overseas suppliers, which according to ECap’s CEO Kefa Nyakundi makes it “a perfect solution for boosting intra-Africa trade and therefore facilitating the aspirations in the Africa Continental Free Trade Area agreement signed earlier in the year”.
His statement follows doomy predictions from Moody’s saying that lack of trade finance and other non-tariff barriers would limit the full potential of a continental free trade.