As businesses around the world navigate the post-pandemic era, new challenges such as global economic headwinds, supply chain disruption and increased requirements to align with environmental, social and governance (ESG) considerations have come to the fore, writes Justin Milo, Executive, Head: Trade South Africa for Standard Bank Group.


Financial institutions have a role to play in assisting businesses with the management of post-pandemic challenges. Encouragingly, the trade finance suite of products is uniquely positioned to add value and manage these challenges through traditional solutions and new innovative solutions, bolstered by digitisation and the evolving technology landscape.

These solutions are not a means to an end in themselves, but rather part of a broader solution to promote economic growth and sustainable development in emerging market economies and especially closer to home in Africa.

Since the beginning of 2022, the global economy has been rocked by rising inflation, increasing interest rates, exchange rate volatility and the threat of recessionary conditions in major economies. In this context, there has been a recalibration in the perceived risks faced by trading counterparties, with businesses becoming more risk averse – especially regarding the mitigation of payment risk.

Heightened risk awareness has encouraged a movement back towards the use of letters of credit (LCs) and LC confirmations to mitigate buyer payment risk, financial institution payment risk and country risk. Swift data for the South African market suggests that the demand for LC confirmations has risen by 47% year on year (y/y) in the first six months of 2022 and export letter of credit transaction values have grown by 28% y/y, while South Africa’s exports have grown by 10.1% y/y over the same period according to the South African Revenue Services (SARS).

As a leading provider of letters of credit and LC confirmations in the African market, Standard Bank has played an active role in facilitating these transactions on behalf of MNCs, local corporates and SMEs. This has been achieved through the bank’s vast network of institutional relationships and the adoption of digital technologies to enhance the speed and accuracy of the document-checking process required to complete these transactions.

Standard Bank was the first bank in South Africa to implement the Traydstream platform, which utilises optical character recognition (OCR) and machine learning (ML) technologies to review and scrutinise documentation presented under LCs and other trade finance transaction types.


The rise of ESG

The movement towards the adoption of ESG key performance indicators (KPIs) started off slowly a few years ago with the rollout of the first green bonds. It accelerated rapidly over the past two

years, with increased publicity and awareness of global warming, the just energy transition, the United Nations Sustainable Development Goals (SDGs) and the United Nations’ Annual Climate Change Conferences. Not only is the adoption of ESG KPIs the “right thing to do”, but in some ways it has become a license to operate and source of competitive advantage in certain industries.

To assist businesses with adherence to ESG principles, financial institutions have rolled out a number of ESG solutions into the market – from green bonds in the capital markets to funds underpinned by ESG principles in the asset management industry, to ESG-linked loans in the banking industry.

These solutions typically adopt one of two approaches:

  1. Use of proceeds, where the ESG merits of the transaction are evaluated based on the counterparties and the nature of the underlying project or type of goods purchased (for example, project financing loans or guarantees for renewable energy projects or LCs issued to support the importation of solar panels)
  2. An ESG overlay, where businesses specify their ESG KPIs and have their loan financing rates linked to the attainment of these KPIs after an independent verification.

Multinationals and local corporates in Africa are increasingly leveraging ESG solutions to demonstrate their commitment to aligning their businesses to ESG principles, but there is consensus that there is scope for more significant growth in widespread ESG adoption. This is most likely due to other fundamental challenges that businesses in Africa face, such as supply chain disruptions, the lack of foreign exchange reserves, electricity supply issues and infrastructural constraints at ports, via rail and in key logistics corridors.

At the same time, supply chains are under increasing scrutiny from regulators, investors and customers: regulators requiring companies to monitor and mitigate environmental and social risks in their supply chains; investors asking companies to address social justice and sustainability through their operations; and customers (and employees) having higher expectations of companies to address ESG concerns. Balancing this equation is critical for all participants in the global trade finance system – and financial institutions have an important role to play in providing solutions to meet the ESG needs of market participants.

ESG concepts have also made their way into the world of trade finance, with the natural application of these solutions linking to the counterparties involved in the ecosystem (typically buyers and suppliers), supply chain sustainability and continuity, the type of goods procured, the nature of projects undertaken and the optimisation of the businesses’ own ESG KPIs.

Standard Bank recently launched the first solution in its ESG trade finance portfolio, being an ESG overlay for working capital facilities, to complement the bank’s established ESG-linked term lending product offering.


Distressed supply chains

Another spin off opportunity for economic growth and sustainable development emanates from an unlikely source – supply chain disruption. This phenomenon first made headlines during the initial stages of the Covid-19 pandemic, in which hard lockdowns led to production stoppages across the world and the resulting acute shortage of key consumer products and production inputs, along with increased shipping and container costs. This was further exacerbated by geopolitical events in Europe and the Suez Canal blockage caused by the Ever Given container ship. These events have forced businesses to reconsider their procurement strategies and increasingly focus on diversifying their procurement by increasing the contribution of regional and local suppliers. This dynamic bodes well for employment, economic growth and the development of SMEs in Africa, and has positive spin-offs for sustainability as regional and domestic transit routes are likely to be more environmentally friendly.

The one challenge that remains, however, is supplier development and supply chain continuity as it relates to domestic and regional players – especially SMEs, which are subjected to long payment terms. One way in which this can be addressed is through the adoption of domestic supplier financing programmes to enable domestic and regional suppliers to receive early payment on their sales to the anchor buyer (typically multinationals or large local corporates), at financing rates aligned to the financial standing of the anchor buyer.

In line with Standard Bank’s platform business strategy, the bank has partnered with best-of-breed technology providers and fintech companies to provide supplier financing and other supply chain financing solutions into the South African market, with Standard Bank also earning the accolade of being the ‘best bank for supply chain finance in Africa’ in 2021, according to Global Finance Magazine.

Traditional trade finance solutions may not necessarily be new, but these solutions continue to have an evergreen value proposition, with applicability to contemporary challenges such as the mitigation of payment risks stemming from recent economic headwinds, the promotion of supply chain continuity in the context of supply chain disruption and the promotion of sustainable development through alignment with an ESG framework.

These solutions are also increasingly being complemented by digital technologies which further enhance their value by adding convenience, speed and efficiency into the proposition. Financial institutions have an important role to play in addressing the unique challenges faced by MNCs, local corporates and SMEs through the provision of trade finance solutions, with the aim of promoting economic growth and sustainable development in Africa.