Difficulty obtaining trade finance among many African businesses is hampering economic growth in the region’s markets. Yet there are solutions, and the CDC Group plays a key role, writes Admir Imami, CDC’s Head of Trade and Supply Chain Finance.
Stimulating trade in African businesses is one of the most important elements in alleviating poverty across the world’s most economically challenged continent, where average GDP per capita stands at just US$1,930, according to the latest International Monetary Fund figures. Critical to this, and to Africa’s wider economic development, are the region’s SMEs, which create around 80% of the continent’s employment. Yet these smaller-sized businesses often face constraints in accessing finance, which stagnates potential growth, with trade finance a particular issue. Current estimates for Africa’s trade finance gap are US$90-$120bn, although many experts believe the actual figure is far higher.
This financing gap prevents businesses across Africa from taking advantage of trade opportunities domestically and internationally. One of the main contributors to the gap globally, according to a 2019 Bank of New York (BNY) Mellon survey of global, regional and local banks and trade finance providers, is compliance constraints and the inability for SME applicants to provide quality know your customer (KYC) information. Nearly three quarters (71%) of respondents claimed this was one of the top two reasons for rejecting trade finance requests.
Many of these regulatory requirements, put in place following the 2007-08 financial crisis, have led to banks becoming more selective and moving away from regions where they perceive higher risks. “Without the support of global banks,” the report says, “many local and regional banks in emerging markets have been less able to offer trade finance to SMEs.”
If African businesses are to take advantage of important initiatives, such as the African Continental Free Trade Area (AfCFTA) and be able to export internationally, this trade finance gap needs to be bridged. This is where development finance institutions (DFIs), such as CDC, play a transformational role. DFIs provide risk capital, through equity and debt instruments, to promote the development of emerging markets as well as providing technical assistance to build capacity in developing economies.
At CDC, we have been operating for over 70 years with a mission to support and encourage private sector development throughout Africa and South Asia. We aim to create jobs and make a lasting difference to people’s lives in some of the world’s most challenged countries. We achieve this through direct equity investments, fund investments and a variety of debt products, including lending to financial institutions and providing trade finance facilities.
CDC accelerated its commitment to trade finance when it signed its first master risk participation agreement (MRPA) in 2013. We offer these facilities on an unfunded and funded basis to support our partner banks’ trade confirmation services. Under this arrangement, the bank provides confirmation lines to local financial institutions to support their trade businesses and increase capacity to undertake trade finance transactions. Currently, we have MRPA commitments in place totalling US$700mm with four such partner banks. Through these facilities, CDC has supported over 1,500 transactions across Africa and South Asia since 2015. And through these partnerships, we currently share risk on trades with over 50 local issuing banks.
CDC’s Trade and Supply Chain Finance programme enables us to partner with both international and local banks, which in turn can provide higher levels of trade finance to their clients, with a focus on countries where it can be difficult to raise capital. Our Development Impact Grid, a proprietary impact screening tool, identifies the countries where it is most difficult to invest as well as the propensity of investments to generate employment. Many African countries fall within the most difficult categories, and our programme is therefore designed to help capital reach these markets, which banks might otherwise consider too high-risk.
Our decades of experience in African markets means that we have a deep understanding of the needs of international, regional and local banks as well as those of SMEs on the ground. Through our trade finance products, we are providing a low-risk instrument alongside reputable partners through tailor-made arrangements. Our investment performance to date demonstrates the value of this approach, with a significant proportion of our facilities targeting import-export of agri-commodities such as soy, wheat and cotton.
The role of DFIs such as CDC in facilitating access to trade finance for SMEs is clearly recognised in the BNY Mellon survey: “development bank-sponsored trade facilitation programmes” were ranked as the second most important factor in creating additional financing capacity. “Local banks regarded development banks as a key potential source of finance capacity,” says the report, “suggesting that the industry as a whole might explore how such trade facilitation programmes could help generate funding resources for those markets struggling to access trade finance.”
Please contact Admir Imami, CDC’s Head of Trade and Supply Chain Finance, at AImami@cdcgroup.com should your institution wish to further discuss partnership or have questions on our programme.