As a major importer of cars and other products across almost the entire African continent, CFAO Group is at the coalface of the financing challenges faced by importers and exporters. GTR speaks to Yinka Ogunnubi, the company’s group treasury manager, about how CFAO finances its trading activity and what it would like to see from banks.

 

Snapshot:

  • Name: Yinka Ogunnubi
  • Company: CFAO Group
  • Title: Group treasury manager
  • Country: Pan-African
  • Sectors: Mobility, pharmaceuticals, fast-moving consumer goods, infrastructure

 

 

GTR: Can you tell us about CFAO’s history and your current operations?

Ogunnubi: CFAO is a trading company. It’s about 170 years old, and in Nigeria is more than 20 years old. It’s in four major lines of business, mobility being the biggest one, which represents big brands like Toyota, Mitsubishi and Suzuki. We are also in pharmaceuticals, with various types of business all over Africa distributing drugs and representing big labs in the distribution network. The third part of the business is fast-moving consumer goods, including distribution arms like the Carrefour business. The last business line is infrastructure, which is IT and technology.

In 2012, Toyota bought a large stake in the business and eventually increased its share to almost 100% and CFAO was delisted from the Paris stock exchange. The structure of the company is still very much European, and the headquarters is still in Paris, but over 80% of our revenue comes from Africa and it’s a company that always believes in Africa and continues to invest in Africa.

 

GTR: What role does the company play in the mobility space in terms of international trade?

Ogunnubi: We have internal buying offices that have arrangements with original engine manufacturers. They aggregate orders from all the CFAO entities all over Africa. They can get a good idea of what orders are likely to come in and make the purchases, so when they receive an order, they are ready to ship without having to wait for the manufacturer. They look at what structure works best to be able to not just aggregate the order, but seamlessly get it through in terms of logistics and the supply chain.

 

GTR: What kind of trade finance facilities and products do you currently use?

Ogunnubi: Two different types. First, the supplier finance side is largely handled by HQ, but they will generally use standby letters of credit, to ensure that the manufacturer is able to supply directly. The second type is import finance, which is for the local entities importing directly from the suppliers. They need basic trade finance products such as import finance facilities, which are usually denominated in US dollars. Those import finance facilities will allow the local entities to be able to open confirmed letters of credit, because usually the supplier will not just want a letter of credit, but one confirmed by a bank in Europe.

CFAO is diverse across Africa, which is divided into Anglophone and Francophone countries. In the French-speaking region, it’s a bit more regulated and predictable, because you have the shared currency of the CFA franc, which is pegged to the euro. CFAO entities in those countries might not necessarily need a lot of trade finance products. They will probably use an open account system to fund trade. But for Anglophone countries, like Nigeria, Ghana, Kenya, Zambia and Malawi, it’s a lot more volatile. The trade finance products they need are those tied to a letter of credit, meaning some kind of product that provides a guarantee to allow the supplier to ship without first getting paid. Once the shipment is done and the terms are acceptable, payment is made to the supplier, most likely offshore.

 

GTR: It is well known that African countries trade far, far more with countries outside the continent than those within it, but with initiatives like the African Continental Free Trade Area (AfCFTA) and the Pan African Payment and Settlement System, do you think it’s getting easier to conduct intra-African trade?

Ogunnubi: We see all the publicity given to it and all the buzzwords, which gives you the idea that they are working on something and it is getting better. But in practical terms today, it doesn’t work, it really doesn’t. The currencies are not convertible between themselves and as long as we don’t fix that challenge, it will be problematic. There are some banks, like Ecobank for instance, that are trying to provide that kind of convertibility within their network. Ecobank prides itself on being a pan-African bank, and it offers solutions for intra-Africa trade. The feedback I get from some of our corporate partners is that it works within the ecosystem that they’ve created. That gives you the impression that this can work if all the issues around translation, convertibility and double tax legislation between different countries are fixed. I think that that’s where the AfCFTA team needs to focus. I can’t say that I know better than them, and I’m sure they know what they are doing, but I can only hope that, at the end of the day, it works for everybody.

 

GTR: Have the currency woes experienced over the last few years by countries such as Ghana and Nigeria caused issues for you?

Ogunnubi: It has caused significant issues. What you’re seeing right now is that correspondent banks that have provided lines to local banks to finance trade are beginning to withhold those lines from those local banks. They’re doing so because of country risk assessment concerns that if they book import loans, they’re not sure that those loans will be paid on time because they know that there’s a liquidity crisis. Even if you have your local Nigerian or Ghanaian currency, you’re not sure you’re going to have enough liquidity to convert. Because of that worry, correspondent banks are holding back or putting restrictions on access to the bank lines, and when it cascades down to local entities, companies like ours, it means that we cannot access trade finance.

If we want to access trade finance, we have to provide additional levels of comfort. For example, the banks are asking for additional guarantees. Some of those guarantees will require that you provide cash collateral in US dollar – but that defeats the purpose of letters of credit. To offer local banks a line for confirmed LCs, correspondent banks are asking for evidence that the local banks can pay on time. In turn, the local banks are asking their customers, the importers, for US dollar cash collateral. Therefore, if I want to import something to the value of US$1mn, I have to give the bank US$1mn today. So what’s the point? That’s the impact of it.

Africa is a stock-based market. People come to your showroom to buy vehicles and they want to see the stock. If they see the stock, they can buy immediately, but if they don’t see the stock, they will go next door. But if I’m keeping inventory, I’m taking a risk, because I don’t know if they’re going to come. The current financial system has made it difficult to actually keep those inventory lines open. Sometimes we’ve had to make the decision to stop imports completely, because the risk is just too much, and you want to prioritise repayment of your import loans. You don’t want to have such large open positions in US dollar, because you know that you have this volatile currency that’s devaluing quickly. The next thing you know is that you have these open positions, and you’re going to have FX losses, which have a huge impact on profit and loss.

 

GTR: Do you have a wish list of things your banks, whether local or international, could do or provide you with in terms of trade finance?

Ogunnubi: The first thing on my wish list would be for correspondent bank partners to have a second review of some of these risk decisions. In Nigeria, recently, there’s been some reduction in volatility and an assurance of liquidity. Liquidity’s expensive, but it’s there and some of the concerns about lack of liquidity and the ability to liquidate import loans really don’t exist anymore. I expect a reassessment of some of those risks and a relaxing of some of those restrictions, releasing back some of those lines to let trade continue.

The second thing also would be trade finance costs. It’s freaking expensive, excuse my French. For instance, if you’re doing a confirmation, the bank will have pre-negotiation and multiple post-negotiation charges. The post-negotiation cost is tied to Sofr, which is tied to the Federal Reserve rate. With a post-negotiation rate of 6% plus 5, it’s at 12%; that’s expensive. By the time the product gets to Nigeria, it’s expensive for the consumer, especially with added custom duties to it. Consumers in Africa pay more for cars than consumers in Europe. Whatever cost I can take out of that, it only makes my product competitive, makes me sell more, and makes me order more, and everybody is happier. I think trade finance costs are something that could be looked at.