Cross-border trade and gaining access to new markets can help transform local companies into international champions.
At the same time, it creates jobs, increases economic activity and stimulates growth at home. But in Africa, absent or dilapidated infrastructure can stifle these developments. Indeed, the lack of infrastructure is often cited as one of the main issues holding the continent back.
One statistic relating to infrastructure investment has become something of a mantra: as discovered in 2009, and rediscovered every year since then by multiple sources, Africa needs at least $90bn each year over the next decade to address the continent’s infrastructure deficit.
Yet despite the state of infrastructure development across the continent limiting intra-Africa trade, African trade with the rest of the globe isn’t doing too badly. According to a report published by the African Development Bank (AfDB) in 2014, since 2000, growth in African trade has outpaced the continent’s GDP growth at 8% per annum.
Growing trade routes between Africa and the rest of the world have been buoyed by the pervasiveness of trade finance – where banks and other institutions facilitate cross-border trade through various financial means. According to the same report from the AfDB, in 2014, the size of bank-intermediated trade finance in Africa ranged between $330bn and $350bn, and approximately 93% of banks in the region surveyed have trade finance assets.
“Physical barriers in Africa don’t directly impact our ability to offer financial support to companies and businesses in Africa with cross-border trade ambitions,” says Paul Hartwell, chief executive at the British Arab Commercial Bank (BACB). “There are of course logistical issues that can cause delays and this can impact letters of credit and payment, but in terms of originating business this is not a barrier to business.
“Trade finance is a growing business in Africa. And it is radically changing. Trade finance has traditionally been based on physical documents and letters of credit but with the introduction of cloud technology, blockchain and the like, trade finance in Africa could be completely overhauled. Business will be quicker and more secure. This benefits everyone.”
Based in London and regulated by British authorities, BACB has been growing its Africa footprint and has become a major player in African trade finance serving clients in North Africa, sub-Saharan Africa and the Middle East. The bank has roots in North Africa and the Middle East and its largest shareholder is Libyan Foreign Bank, with an 88% stake. In 2013, the bank boasted letters of credit valued over $3bn.
“We are a niche player and all we really do is trade finance. We have the technical expertise at the centre, speak 25 languages and have expertise on the ground. We develop solutions with clients that create long-term sustainable relationships,” says Hartwell.
The year 2015 – the most recent for which financial information on the bank is publically available – was a difficult time for the bank. Uncertainty in Libya created challenging business environments for some of its clients and de-risking was a major theme.
Nevertheless, the bank’s balance sheet remains relatively strong: at the end of 2015, its capital adequacy ratio was 20% and liquidity coverage ratio was around 200%.
In a bid to further diversify its base, BACB has been bullish in Africa. Most recently, it opened an office in Abidjan, Côte d’Ivoire, to access opportunities in West Africa and leverage off the high levels of economic growth in the country, which hit 9% in 2015 according to the World Bank.
“For some banks, opening up shop in places such as Côte d’Ivoire – despite the huge opportunities they offer – is perceived as being just too risky. In fact, sometimes actual barriers to doing business in countries such as Côte d’Ivoire aren’t as big as the perception of risk that some people have,” says Hartwell.
“But this is what we do as a bank, it’s part of our DNA working in challenging environments be that Syria, Iraq, Sudan and Libya. Through our experiences, we understand how African has developed and will develop,” he says.
Since Hartwell became CEO in 2014, there have been no defaults in the bank’s trade finance department. “The interesting thing is that in general if you make a loan, our regulators here in the UK anticipate 45% loss given default.
But with trade finance transactions, default is rare because the reality is countries cannot afford to default on trade obligations. And when things do go wrong, the loss given default is nowhere near 45% – it’s more along the lines of 2%.” Trade finance isn’t as risky as some might expect.
In for the long term
And the trade finance opportunities in Africa for BACB are only getting larger. Perceived risk related to commodity price falls and currency devaluations in Africa combined with the added pressures of Basel III recommendations and limited balance sheets of parent banks back home means that some of the larger international banks that have been present in Africa are beginning to scale back.
“Over the last seven to eight years, the volume of international trade finance has grown steadily but with the recent fall in commodity prices the value of this has fallen. This has restricted the amount of trade that people can afford to do, and because of this the business of doing trade finance globally as well as in and between emerging economies has become riskier,” says Hartwell.
“Large international banks are geared to doing high volume, vanilla transactions in and between developed markets, predicated on well-proven legal economic documents and frameworks. Société Générale, Crédit Agricole and BNP Paribas are either pulling out or making local subsidiaries stand on their own feet without group support,” he says.
For Hartwell, bank retrenching can create new opportunities for niche players such as BACB. “We opened our office in Tripoli, Libya back in 2010, and despite all the issues there, we didn’t pull out. We are in Africa for the long term. We are not about to back out.”