Africa’s trade financing gap is one of the key topics on the continent as far as access to debt is concerned. So much has been done in the last few years: AfCTA, increased liquidity capacity – especially since the pandemic – the digital booming (Orbitt, Asoko, dltledgers) and innovative solutions of which factoring is perhaps the most significant one. These will require time and endeavours to come into line with expectations. One of which is governance. The derisking process has boomed since the 2008 crisis, although sadly still on-going, and is showing its negative effects on Africa’s trade economy. Insufficient financing in many cases relates to the lack of information and quality of data sharing. To avoid this requires robust governance.
‘Real Trade’ needs to be an existing transaction and properly documented, which the blockchain and fintech surge understand very well. So where are the bottlenecks around existing transactions? The 2017 IFC survey on the Derisking process highlighted (i) a lack of adequate information provided (ii) sovereign-related governance concerns (iii) AML/TF considerations.
In other words, from a lender/service provider perspective, where can we find the common ground between the required enhanced due-diligence, local regulation, risks (credit, operational, compliance), law enforcement assessment and monitoring?
Any borrower and trade player – be it an SME or an FI looking after financing – should hold detailed/approved governance and risk management frameworks, but more importantly ensure their efficient application and steady improvement in the long-term. Of course, over the years 2010’s regulation constraints have been very much there in SSA. The endeavours that followed were focused on the quick application of domestic requirements by local regulators. The local banks, and by extension SMEs, were pushed to accommodate their day-to-day businesses to address the regulatory pressure but also to secure in the long-run their existing international correspondent banking relationships (cash & financing alike).
As much as it was and is mandatory to do so, the burden was and is that domestic constraints, albeit designed to meet international standards, are not necessarily in line with the expectations of the international trade players. The AML & FT concerns on the clients of clients (the renowned KYCC), sanctions management, adverse medias, KYC checks and renewal upon risk classification are not necessarily domestically addressed as much as it is internationally required. Hence a gap which often needs to be filled.
While it is appropriate from a lending and clearing (Open Account transactions) perspective, this topic is eventually even more important in the factoring and receivables businesses. The latter will provide tremendous opportunities, partially through the AfCTA should the above be in place. The risk approach will relate in that respect more from an underwriter perspective rather than a traditional lender one. On top of the underlying credit risk of the debtor(s), the underwriters lean to ensure that the potential insured has set adequate means to reduce to a maximum its own remote risks i.e. is this receivable to be financed properly managed and monitored? At the end of the day, it refers to the insured risk policies, the company’s body of work and daily endeavours to provide as much comfort as possible. What funds, insurers, bankers are looking after.
These topics often come at the very early stage of a company’s assessment along with the country risk, sometimes even prior to the trade asset appraisal or the balance-sheet consideration. The need for strong external market knowledge and expertise praised by international financiers (commercial banks, DFIs, funds) partially lies on these considerations with a view to avoid unnecessary dealbreaker situations. Trade is an asset that should not be plagued by the uncertainty for a borrower to maintain in the long-run sufficient resources and knowledge to monitor and manage its risks. This is true for debt raising of course but perhaps even more on the Correspondent Banking cash services: several historical (European, US) players have reduced their exposures or closed their USD services as they were eventually not comfortable with the above.
The resources and goodwill to mitigate such risks are there. Along with the exciting years to come in SSA from a free-trade area perspective, boosting financing capacities will materialise thanks to the cooperation and information sharing between all the parties involved: domestic players, financiers, insurers, and intermediaries.
Mathieu Saadati is the founder and Managing Partner of Fitracor, a Paris based company providing arranging services in the African Trade & Debt spaces as well as advisory in the Governance & Risk Management areas.
Fitracor strongly believes that Africa Trade Finance Gap can successfully be addressed with joined cooperation with all stakeholders involved: first and foremost, through proper endeavours from the borrowers/players looking after capacity, banks, funds, intermediary platforms, underwriters, and regulators.
At Fitracor, our mission is to make the trade debt raising bankable. This can be achieved by proper structuring, accurate data information sharing but also by mixing this approach with steady governance improvement to meet not only domestic regulations requirements but also the best international practices expected by most potential lenders and service providers.
If you are a player in Sub-Saharan Africa, either on the English or French-speaking regions and looking after trade financing, contact us by email (mathieu.saadati@fitracor.com) or via the Orbitt platform so that we can share further and explore joined opportunities.
