Sub-Saharan Africa’s economic recovery remains on course, supported by the stabilisation of commodity prices and gradual strengthening of domestic demand. While this augurs well for trade, exporters in the region are facing the same challenges that existed before the commodity price downturn in mid-2014, and these must now be met with innovative solutions, writes Ehouman Kassi, Group Head of Trade Finance at Ecobank.


Although foreign currency shortages stemming from lower oil and commodity export revenues are easing, constrained FX availability remains an important factor, especially in oil-producing economies such as Nigeria and Central Africa. Meanwhile, Africa’s SME sector struggles to access financing, with the African Development Bank (AfDB) estimating that over three-quarters of requests for trade finance by SMEs are rejected. This is a critical blockage, as SMEs make up 90% of all companies in Sub-Saharan Africa, account for over 50% of GDP and are the drivers of economic growth, with an average growth rate of as much as 8% in 2018, versus the average for SSA of 3.3%.

Another major blockage is compliance. For financial institutions, the risks of failing to comply with KYC and AML regulations are simply too high. According to Bloomberg estimates, international banks have collectively paid over US$320bn in fines since the financial crisis. This has led to a wave of de-risking across emerging markets, and particularly in Sub-Saharan Africa, as many international banks have judged the potential risks as too high to justify lending. Indeed, in a recent ICC survey, 90% of respondents highlighted KYC and AML as some of the most important impediments to underwriting trade finance.

As a pan-African bank, Ecobank is working to address these key issues. We are developing supply chain finance solutions to support African SMEs and meet their working capital requirements. We are also supporting several African regional banks’ access to confirmation lines via our Paris office, which serves as a one-stop shop for international investors seeking exposure to Sub-Saharan African assets and currencies.

Given that the ICC estimates that default rates for all trade finance products ranged from 0.03% to 0.24% in 2017, well below the global average of 4% for corporate defaults, our key priority now is to engage regulators on the need to implement capital allocation and liquidity requirements that are in line with the low risk of trade finance. Regulators in Africa have been slow to treat trade differently to other kinds of lending, which has constrained banks’ ability to provide trade finance.


Closing the trade finance gap and supporting informal trade

There have been several recent positive developments in the trade space in Africa. These include a convergence in banks’ and regulators’ focus on closing the trade finance gap, with the growing involvement of development finance institutions (DFIs). Africa’s trade finance gap is estimated at US$120bn per year, while intra-regional trade receives just 43% of its financing requirement from banks.

Over the past two years, Ecobank has been part of a US$500mn liquidity risk participation agreement with DFIs, including the AfDB, the Islamic Development Bank (IDB) and more recently Proparco (DFI of the French Development Agency, ADF). This partnership has led to an increase in liquidity and capacity in the market, enabling greater trade activity.

Exploring ways to support informal trade is of growing importance to banks operating in Africa. At Ecobank, we believe that the proportion of trade that is not reported in official statistics might be as large as, or even larger than, that which is reported. It is therefore our duty as financial institutions to ensure that we come up with solutions to support these flows. The informal and SME sector is the key employer in all the countries where Ecobank operates; it is not going to go away and the business is there.


New African trade landscape

Recently, the debate around global trade has been dominated by growing protectionism and shifting international policy. This has yet to have a measurable impact on African trade, primarily because flows remain dominated by exports of raw commodities, which have received less scrutiny than finished goods. Nonetheless, banks, exporters and governments alike must continue to keep an eye on international trade policy developments.

When looking at African trade, the focus must increasingly be on intra-regional and local trade. Currently, Africa’s intra-regional trade makes up less than 20% of total flows; even factoring in the informal volumes that are not captured, this is well below the level in Asia (40%) or the EU (60%). The objective, therefore, is to increase intra-regional volumes substantially.

There has been some progress: the past couple of years have seen annual incremental increases in intra-regional trade volumes of almost 10%. However, many challenges remain. One of these is high tariffs, especially among African nations that are not part of the same economic zone. Inadequate infrastructure is another constraint, although the quality and efficiency of Africa’s logistics network and customs procedures vary greatly. What is encouraging is that we are seeing more and more investment in Africa’s roads, ports and railways, particularly across East Africa.

The implementation of the African Continental Free Trade Area (AfCFTA) will have an enormous impact on boosting trade within the region. Not only would the removal of tariffs and barriers offer the opportunity to bring vast informal flows into the formal sector, but UNCTAD has estimated that this would boost Africa’s GDP by an additional 1% per year, as well as increase regional trade by 30%.

Nonetheless, full implementation of the agreement is still some way off. And although political stability in most African countries is providing a benevolent backdrop for boosting regional flows, Africa needs to boost value addition in order to achieve its full potential. This means manufacturing consumer goods and foodstuffs for consumption by the regional market and moving away from the focus on exporting crude oil and raw cocoa to the global market.

Africa can only push raw materials trade so far. Until there are factories that can transform that raw material into finished goods, it is unlikely that we will see a meaningful upswing in intra-regional trade. Other than South Africa, which trades approximately US$30bn a year with other African countries, the rest of the continent still has a lot of work to do.


The digital opportunity

Technology is transforming Africa, with innovation leapfrogging older solutions at an unprecedented speed. As trade finance makes the slow but steady move into digitisation, there are myriad opportunities for the continent.

Trade, in its essence, can be boiled down to two aspects: documentation and payments. From the payment standpoint, digitisation is continuing apace. One example is the Ecobank Mobile App. Launched in 2016, it is the first unified app delivered by any institution for use in 33 countries in Sub-Saharan Africa, enabling individuals to make quick and easy cross-border payments. Since its launch, the app has grown to a subscriber base of over 4 million users.

As well as enabling users to make and receive instant payments, solutions such as the Ecobank Mobile App are the beginning of a seismic shift in how banks can support informal and SME trade across the continent. Currently, small traders exchange local currency for dollars, go across borders and make payments in cash. Using a mobile application to make these cross-border payments not only reduces the cost of KYC and AML compliance, but can also build a digital picture of these flows, helping banks work out both how to engage those players and how to support their trade.

On the documentation side, somewhat less progress has been made, with the sheer number of parties involved along the value chain making the shift from paper to digital a more distant goal. Ecobank is engaging with this issue on several fronts. As part of our digital transformation strategy, the bank has set up a desk that is focused on e-government within our Cash Management Unit. This desk has partnered with a number of national governments to incrementally add services with a view to digitising the entire payment system.

In Tanzania for example, Ecobank is working with the Port Authority, the Revenue Authority, and Tanzania International Container Terminal Services Ltd (TICTS) – one of the largest container terminals – to facilitate payments within the landlocked countries that the country’s port serves. This means any trader within the region can make payments that are instantly reflected in the service provider’s system, enabling the agent to clear the goods quickly. The long-term aim is for government agencies to develop a digital platform that is fully integrated, efficient and transparent, in order to facilitate growth in trade activity in the region.

For Ecobank, the prospects of growing intra-regional trade across Africa have never been better than they are today, and the bank is better positioned than most to tap into this opportunity. With a full banking presence in 33 African countries, Ecobank’s trade finance and services group acts as a regional trade hub, playing an end-to-end role for all of its customers in the most cost-efficient way, and enabling them to be part of the African growth story.