While the extractive industries continue to drive the private sector in Africa, small players are floundering in the trade finance market, imposing major constraints on business growth and economic development in the emerging markets.
This was the issue facing finance specialists, economists and academics participating in a Round Table at the UK House of Commons on Wednesday, 25 February convened by the Oval Observer Foundation and the all-party parliamentary group, Trade Out of Poverty (TOP) to address the gaps in trade financing in the emerging markets and to propose solutions.
The Round Table, chaired by the Right Honourable Peter Lilley MP, founder of TOP and a former UK Secretary of State for Trade and Industry was held as African nations prepare their 10-year review of progress towards the African Union’s “Agenda 2016” with its strong focus on trade issues. Sanmit Ahuja, Vice-Chair and CEO of the Oval Observer Foundation, introduced the event.
Key problems identified by the group included:
Withdrawal of Major Banks
Since the global recession, international financial institutions have steadily withdrawn from emerging and non-core markets. Given the higher capital adequacy requirements for trade finance products, this market has been particularly affected. More stringent regulation imposes a heavy burden. This is compounded by the limited capacity of local banks or private sector institutions to fill the financing gaps at national or regional level, particularly given a lack of the necessary manpower and skills to deal with compliance and manage the regulatory burden.
Problems of Scale
A key issue: many emerging economies, particularly in Africa, are characterised by a lack of bankable scale (98% of African farmers own no more than 3 hectares) and a proliferation of informal and un-banked enterprises lacking in the skills required to produce business plans, approach banks, regulators and Government agencies.
Awareness and Institutions
There is no overall understanding among potential investors or those seeking trade finance of the range of funding instruments available in Africa and elsewhere. There is a lack of progress among smaller countries and international assistance for them in setting up corrective institutional frameworks. At the same time, bi-lateral and multi-lateral agencies have a role to play in supporting commercial banks and encouraging them to create new trade flows.
The bulk of African exports go to markets outside the Continent. Enhancing intra-African trade would add significantly to growth and job-creation but progress is slow. Lack of trade infrastructure, particularly in transport, lengthy and inefficient border-crossing procedures and facilities and regulation compound this. The African Union’s policy of regional and pan-African integration has taken hold and removed many of the institutional barriers to cross-border trade in some regions, but elsewhere progress has slowed.
Adding value at local level by developing manufacturing and processing activities is hampered by inadequate capacity, infrastructure and access to investment.
The Round Table considered measures capable or solving, ameliorating or circumventing the principal problem areas. Items for follow up discussion included:
Economies of Scale
Encourage aggregations of small farmers into trading units large enough to attract and benefit from trade finance.
Establish ISO-style standards for co-operatives would ease their access to finance.
-Inland ports which allow goods to be cleared for export closer to production areas and further up the supply chain.
-Upcountry warehouse storagewith proper stock management and quality controls.
-Commodity exchanges where goods can be standardised and transparent pricing established, allowing farmers to deliver smaller quantities of goods and cut out intermediary traders.
Trade finance fits into Islamic Banking code and offers important potential. Up to 60% of the Islamic Development Bank’s current committed resources are in trade finance, mostly channelled through governments. Islamic institutions are currently faced with a serious asset/liability problem globally because of the lack of liquid instruments for their hort term cash management.
Recent trends in IT and mobile technology have lowered the barriers to trade finance, notably mobile finance and remote monitoring of stock using IT solutions. Developing a more systematic method for mobile telephone payments add value to current practice.
Data & Statistics
Trade finance is one of the sectors negatively affected by a massive deficit in trade data, most of that which is available is not in value-added form. There is an urgent need for more and better surveys. National governments need to bolster their statistics departments to meet this need but it is also an area in which the international institutions can provide more support.
Other Points Raised
Trade finance tools for export diversification:
– Short term loans to help liquidity
– Standardisation of TF contracts
– Barriers to protect infant industries
– Create positive FDI environment
– Using lessons of microcredit (impact of empowering at a local level)
– Supply-chain finance
– Model of Shared Interest (providing advance finance)
– Local TF is as important as international TF
– Bigger role for development banks