SADC must look at trade finance assets

Lazarus Sauti

Trade finance facilitation is important for increasing trade and integration opportunities in countries within and across the African continent.

“Trade finance is essential for integration and trade. This financial intermediation helps firms to manage risks inherent in international transactions, improve their liquidity and enable them to optimally invest to enhance their growth,” agreed Jason Barras of Barclays Africa.

He went on to say, “Africa should look at trade finance assets as trade in the region is under threat due to a slump in commodity prices.”

Given Africa’s imbalance in trade finance flows, greater trade finance facilitation and a serious look at trade finance assets are crucial steps for the continent, especially the Southern African Development Community (SADC) to promote inclusive growth.

This is so because the current trade finance flows, according to a December 2014 report on trade finance from the African Development Bank (AfDB), are inadequate to the region’s needs.

“The available trade finance in Africa tends to be concentrated in certain regions, especially Northern Africa, causing trade finance shortfalls to be greater in certain regions,” added the report.

Barrass also affirmed that the majority of trade around the region involves smaller clients –people without access to the finance they need.

Because of this, he said, there is a serious need to look for alternative financing in the region; and therefore, urged African countries to explore the option.

“There is increasing trade financing assets in Europe and the United States. Therefore, African countries must also explore that option. The trade assets are becoming attractive because they are self-liquidating and short dated making the risk profile very different,” he said.

It is also important for stakeholders to look for mechanisms to remedy the information gap on trade finance not only in the SADC region, but in the whole continent.

Up to date information on African trade finance is limited, and this makes it difficult for policy decision makers to understand the market and design targeted policy response.

Further, government sectors and banks must work with the AfDB, a regional multilateral development bank, to expand the ‘body of knowledge’ on trade finance in the continent.

They can effectively do this through research and studies.

Member-states must also exploit the opportunity presented to them by the AfDB.

In 2013, the Board of the AfDB approved a USD 1 billion trade finance programme to support African trade and provide financing to under-served African-based financial institutions and enterprises.

The programme seeks to reduce to reduce the trade finance gap in the continent by ‘crowding in’ global banks and strengthening local Africa Financial Institutions that are critical to the promotion of trade on the continent.

Importantly, the Trade Finance Programme offers a wholesale approach to trade finance through the provision of risk mitigation facilities and liquidity support.

“The bulky of the operations are targeted at low-income countries, African local banks, Small and Medium Enterprises in critical sector in the agriculture/business, light manufacturing and intermediate/capital goods in regional member countries,” noted the AfDB.

The instruments used by the Bank under this programme are the Risk Participation Agreements (RPA), Trade Finance Lines of Credit (TF-LOC) and Soft Commodity Finance Facility (SCFF).

“RPAs are arrangements under which confirming banks and the AfDB share the default risk of a portfolio of trade finance transactions.

“The RPA is designed to give regional and international confirming banks partial cover for their trade finance operations in Africa, with the AfDB typically taking a 50 per cent share of the risk,” explained the AfDB.

According to AfDB, Trade Finance Lines of Credit are short term lines of credit, offered to African financial institutions to facilitate their own trade finance operations.

“The African Development Bank seeks to support financial institutions with a strong focus on developing trade finance.

“Proceeds from TF-LOC enable financial institutions to extend credit support to small and medium enterprises operating in either the import or export sectors of the economy,” insisted the AfDB.

The Soft Commodity Finance Facility, says the bank, is a funded trade finance product targeted at commodity aggregators and export marketing agencies for soft and agri-based commodities.

“Organisations which directly deal with farmers can use SCFF loans to support the agri-commodity supply chain at the grassroots level,” added the AfDB.

As trade matters to everyone, every African, countries in the Southern African must address trade finance gaps and strengthen trade finance capacity by seriously looking at trade finance assets so as to stimulate integration and trade in the region.