With so many factors holding back the trade credit insurance market in Africa, it is testament to the hard work by a handful of public and private institutions that an increasing amount of trade is being done on credit. Helen Yates reports.


If one looks at the markets where trade credit insurance has high take-up rates and compares these markets to Africa, it is easy to see why there are so many barriers to growth of this instrument on the continent. There are two main issues that explain why Africa remains, for the most part, a cash economy. The first is the lack of credit information and the second is the continent’s poor bankruptcy laws and lack of enforcement.

“You’ve got a market of a billion people-plus where something like about 10% of all transactions are done on credit, as opposed to the rest of the globe where something like 85% of business is done on credit. So it’s largely a cash economy,” says Bernie de Haldevang, head of FINPRO International at Aspen Insurance and formerly chief executive of the African Trade Insurance Agency (ATI).

“You’ve also got a market which is completely disparate,” he adds. “Legislation varies hugely from area to area and so does wealth. If you look at East Africa in the last two years it is on the way to transforming itself into a major oil economy.”

Given these issues it is understandable why even the most adventurous of credit insurers have given the African market a wide berth. “If you try to pursue somebody in the courts for a defaulted debt in Kenya you’re probably wasting your time – insolvency legislation or court processes to enforce a debt or protect your rights as a creditor are far from effective so it’s a very tough area in which to introduce credit insurance,” says de Haldevang.

The lack of credit insurance in the market creates a vicious cycle and is a significant factor holding back trade. Companies can often only sell to customers who pay with cash or that have letters of credit (LCs). Where LCs are available, there is a steep price to pay, typically 5% of the purchase price (although it can go much higher).

However, change is afoot. An increasing number of Western companies are operating in Africa; companies that expect to be able to access trade credit insurance. Local African exporters are beginning to see the benefits in taking out credit insurance versus expensive bank loans.

“The price of borrowing in parts of Africa can be around 30% and the average is probably around 15% to 18% in the more developed countries. Credit insurance begins to look quite attractive because you can do it at a much lower price, provided of course you put something in place which is enforceable and works well,” says de Haldevang.

For African buyers, credit insurance is preferable to the steep cost of LCs and punitive payment terms. “We are approaching exporters around the world who are supplying companies in our member states,” says Jef Vincent, chief underwriting officer at ATI. “Together with our clients we approach the exporters and say there is potential cover from ATI. We say: ‘Would you be willing to replace advanced payment terms or LC by open account, knowing you will be protected up to 85%?’ That makes a lot of sense for the local importers because they can save 60 or 90 days in credit terms.”

In 2003 the World Bank and African governments teamed up to provide ATI with the funds it needed to starting providing products for some of the region’s political and commercial risks. Kenya-based ATI is the only pan-African multilateral import and export credit and political risk agency. Public funding has been used to encourage private insurers to increase their participation in the market.

“This remains a small segment of our book compared to political risk insurance but we’re trying to develop that,” says Vincent. “We have been asked by the World Bank and shareholders to develop this area. Credit is important in helping the economy grow and to be resilient.”

What was once a largely political risk play has now turned its focus to credit insurance. “What we have done over the last three years is try to develop whole turnover credit insurance for the domestic market and we are also developing invoice discounting for different banks,” says Vincent. “The problem remains the bankruptcy law, the enforcement of the law and the speed of the judicial system traditionally.”

“There is potentially a big market in Africa for credit insurance but we have to be very careful in the types of risk that we can take,” he continues.

“In short it is exporters, large companies and usually they have foreign shareholders who have experience in credit insurance in other parts of the world, and
then banks as well.”


Plenty of hurdles

It is clear that many challenges remain as Africa’s credit insurance market grows and develops. With no laws that require companies to provide financial information, even Africa’s credit reference bureaus struggle to get hold of reliable credit data.

“The key problems are a lack of legislation, lack of competent and dependable judicial process and lack of transparency on credit information,” says de Haldevang. “Those are the big hurdles you have to get over if you’re going to do business in most parts of Africa. Given all that, it’s done remarkably well in growing to the extent that it has with 10% now sold on credit where previously pretty much nothing was sold on credit. A lot of the growth in recent years has been down to the activity of the ATI, which is backed by multilateral agencies and private sector insurers.”

Lack of insight into the end customer means insurers must instead focus on the policyholder. There is a big emphasis on policyholders’ credit management, thorough audits of credit information and scrutiny into how they react when a non-payment occurs. It is more of a partnership approach compared to the whole turnover credit insurance typically offered in developed markets, an approach that is necessary in an opaque market such as Africa.

By focusing on and understanding the seller rather than purely focusing on his buyers, insurers can write more meaningful limits, explains Neil Ross, trade credit regional manager, at AIG Europe.

“There is often a lack of reliable information on end-buyers in new developing marketplaces, so with excess of loss structures we become very policyholder-focused. We place a lot of faith in the resources that our policyholders have on the ground, their knowledge of their buyers and the experience they have trading in challenging markets as well as their long-term commitment to that market.”

“Where we are providing coverage in challenging markets such as Africa it is important we need to understand our clients, what controls they have, what steps they can take to mitigate the risk and what policies or people do they have on the ground to manage the local relationships,” he continues. “AIG is prepared to offer non-cancellable country and buyer limits, but to do this we want the client to feel they have some real skin the game so they are managing the risk as though they are uninsured, but they have the backstop of the balance sheet protection provided by AIG.”

“A lot of what we’re doing in Africa tends to be fairly basic commodities at this stage,” he adds. “We work with a number of trading companies selling grain or minerals into certain countries, or certain machinery for the extraction of minerals. We tend not to want to insure luxury items at this stage.”
For the immediate future the growth of the credit insurance market in Africa will remain limited by the lack of credit information and legal environment. The big three credit insurers have very limited involvement, if any, in the market for this reason. At present, only a handful of private insurers and export development agencies are willing to provide cover.

“For credit insurance companies in emerging market it’s a long shot and requires a serious investment and you can’t make a profit in the first few years so this is not the biggest priority,” comments Vincent.

“I’m not sure from a developmental perspective that it’s sensible for credit insurers to give blind cover on something you can’t make work because it will go wrong and then they’ll pull out and that will leave a big hole,” adds de Haldevang. “Until you can reliably take a defaulting obligor to court and the courts are not going to take a partisan side, credit insurance will be difficult to sustain.”


A slow burn

However looking ahead, there are plenty of reasons to be positive about Africa’s economic growth and the role that credit insurance will play in that. Its annual average growth rate of 5% has matched Asia in recent years. And when funding from European banks was withdrawn during the financial and eurozone crisis, African banks stepped in to fill some of the gap.

Another element is the slow but sure increase in intra-Africa trade. Trade links are currently very weak within Africa, constituting just 12% of overall trade, according to Ecobank. In Europe, by contrast, 60% of trade is with its own continent. The same is true of Asia. In North America it is slightly lower at 40%. While there are many hurdles to overcome in improving regional trade investment in infrastructure continues and political barriers are beginning to come down.
“Rather than African companies selling their raw materials and commodities to China and buying finished goods from China, more and more trade barriers are getting removed,” says Vincent.

“There’s a big effort to improve infrastructure and, as a consequence, there will probably be more regional trade and as a result, more requests for insurance of local and regional companies, so that definitely is a trend.”

ATI estimates at least US$93bn a year is needed to modernise Africa’s decaying infrastructure, including roads, railways and utilities networks. African banks have increased their lending capacity in response.

Of the US$3.5bn worth of transactions ATI covered in 2011, US$900mn represented projects insured on behalf of banks. This contrasted with just US$121mn out of a US$1.2bn portfolio in 2010.

“One of the problems we have looking at Africa risks is trying to identify which of these projects are economically viable and worth covering,” says de Haldevang.
“Are they linked to a mine or some sort of urban development? Will they reduce the cost the country has on importing material and will it lead to sustainable growth? There’s a development angle in the way we think when we decide if it’s a realistic risk.”