BACB’s Damian Austin, chief banking officer, and Clint Eastwood, head of asset distribution & syndication, explore how specialist banks are working to address Africa’s shortfall in trade finance – and the role of distribution in supplying additional liquidity.
Traders in Africa have long been stymied by the trade finance gap, which poses a stubborn obstacle to conducting business with and within the continent. The deficit between the demand and supply for trade finance – which the African Development Bank estimated to have hit USD$81.8 bn in 2019 and could now be as large as USD$120bn – has been exacerbated by the retrenchment of larger banks from the continent as part of the global phenomenon of de-risking.
Specialist trade finance banks can be more agile than most, making them better equipped to help address the trade finance gap. Deploying deep local expertise, and knowledge of the African markets that they serve, banks like BACB provide much-needed support, helping African businesses to grow and to develop their economies.
The primary issue facing financiers in Africa is the lack of credit appetite for markets that are still – for assorted reasons – often perceived as higher risk. Banks like BACB are addressing this, providing credit lines, and working in partnership with other banks and insurers to increase the appetite for African trade risk, leveraging networks across the global financial markets to make limited capital go further.
Securing a wider pool of liquidity for Africa
Trade asset distribution harnesses the risk appetite of multiple institutions to facilitate the handling of higher values and larger volumes of trade than individual institutions could achieve on their own. Through the power of syndication, banks can increase the utilisation of their credit limits by sharing part of a trade asset with the international markets and collaborating with key partners to share the credit risk. The operation of an originate-and-distribute model enables BACB to seek out other financial institutions or entities, including insurers, willing to participate in, or underwrite part of, the risk of their trade finance assets.
This ensures that the originating bank remains invested in the deal’s success, retaining a stake in the transaction, whilst significantly increasing its capacity to manage larger volumes and greater values of transactions.
This process also helps to optimise the balance sheets of the institutions involved, providing a broader portfolio of assets for those participating in the share of risk, whilst preserving capital for the originating bank. The outcome of this is to expand the reach of international markets, providing enhanced pools of liquidity for African markets. This not only helps secure more investment for Africa but gives financial institutions more room to navigate, opening the door to a wider group of financiers to operate in the African trade space. This is a popular option, and it is estimated that the distribution of trade finance assets to non-bank entities could grow into a market worth up to USD$3tn.
Despite its modest size, BACB has distributed over USD$1.2bn of trade assets over the last year– a testament to the strength of the bank’s international network. This process has enabled BACB to extend significantly more support to African markets than would have been possible by acting alone. The bank now handles around 20% of Mauritania’s foreign trade, for instance.
This model has also enabled BACB to step up its support of intra-African trade. Financial institutions across the continent that have partnered with BACB are able to leverage its extensive network to reduce transaction friction, while major international traders have been able to increase their business in Africa thanks to BACB’s role as a trusted intermediary, providing security and expertise at either end of the supply chain. It is through this mutually beneficial co-operation that African trade can prosper, financing gaps can contract, and regions can come together.
The right partners make for better deals
The success of the distribution model depends, of course, on strong relationships, both with African partners and with the international financial markets. Africa sometimes suffers from a perception problem; the risk of doing business there is often perceived to be higher than it is. Having well-established local market knowledge enables financiers and investors to build reassurance and overcome perceived risk barriers.
Many of the deals and transactions that BACB execute are, in fact, shared with longstanding partners with whom the bank has forged lasting ties. The bank is steadfast in its belief that these relationships, the high quality of service it provides, and the loyalty that it shows to the clients, countries and communities it serves, are key to unlocking the continent’s potential. Through years of collaboration, the parties have earned a mutual confidence that they can rely on one another to fulfil their obligations with each asset brought to market.
BACB also leverages its extensive network to facilitate deals that other institutions may not have access to. This is distribution-informed-origination – making a deal possible due to the knowledge that BACB can find the right organisation to partner with, and with whom the credit risk of a transaction is shared.
Digitalisation brings additional levels of efficiency, creating opportunities in African markets for participants, while reducing transactional friction and increasing accessibility to liquidity for traders. Technological advancement can only help reduce Africa’s trade finance gap, however, to maximise the benefits this can bring, the personal touch, which has become central to successful business, must be maintained.
This is where specialist banks who invest both in technology and expertise can be effective, as ultimately, there is no replacement for market presence, local knowledge and cultural understanding.
Collaboration and education are pillars of success
Africa-focused banks dedicate substantial time and resources towards education. Sharing transactions with partners is a journey, one built upon mutual trust between both parties – and sharing knowledge is the first step.
With representative offices in Africa and a financial institutions team in London, comprised of professionals with trade finance expertise and cultural sensitivity, who regularly travel across the continent, BACB can give confidence to investors. The team produces timely, detailed and unbiased insights on events and trends within the region, as opposed to a reliance on subjective secondary sources. BACB can acquire a depth of knowledge of the markets, businesses and macroeconomic trends that other banks may not possess. Certainly, whenever there is a political risk-related event or sudden macroeconomic activity, BACB will be one of the first to know.
Mitigating the risks
By mitigating the related risks associated with African markets – bringing credibility to the trade flows, guaranteeing and financing transactions – international banks can draw more investors to the continent. Exacting standards of risk management and strict transaction monitoring procedures are therefore key to facilitating safe, sustainable trade.
For international banks operating outside of the region, it can often be challenging to identify counterparties, build a profile on their operations and decide on deals using only the limited information that can be retrieved online.
Specialist trade finance banks, with detailed product and local market knowledge, have the capability of conducting detailed risk assessments at both a country and counterpart level, while also examining the intricacies of individual trade transactions, providing a system of checks and controls that reassure all parties involved.
But narrowing the trade finance gap requires a holistic approach, one which seeks to address the long-term issues that cause African markets to be perceived as high-risk. BACB organises specialised product, regulatory and compliance training workshops for our partners operating in African markets, with the aim of helping the continent’s financial institutions strengthen their capabilities.
With targeted conferences and workshops, BACB provides capacity building to those working in the African financial sector, helping to connect Africa with the global markets. The most recent of these training sessions took place in Tunis in July 2023, delivered to financial institutions and corporate traders, focusing on trade instruments.
A better-informed, better-connected market for trade assets
As Africa looks to take the next step in its economic development, the right financing solutions will be crucial. The role of banks like BACB is not only to provide trade finance but also to involve other international partners in the process. By operating a strong trade asset distribution function from a global financial capital, London-based BACB sources capacity for quality trade assets originated in specialist markets.
Five decades of experience in the continent, and deep technical expertise, provide BACB with the confidence to work with banks and insurers in the UK and further afield. The significant social impact of this work should also be noted. By supporting the bankability of development projects, financial institutions can provide Africa with the tools to invest in communities, helping them to achieve self-sufficiency, and resulting in a long-term positive impact for generations to come.
By championing African markets as a place to do business, trusted financial partners like BACB play a crucial role in growing the pool of liquidity available to Africa. Achieving greater financial inclusion, and closing the trade finance gap, will require similar commitment across the international community.