Many in the financial services industry regard the difficulty of accessing trade finance as one of the biggest inhibitors to more rapid growth in trade in African economies. A number of initiatives and developments are changing the equation and an increasing number of exporters and importers are gaining more confidence in the systems in place. Report by Associate Editor, Neil Ford.
Trade finance relates to the process of paying for goods and services. Companies based in a different jurisdiction to their customers can be nervous when dispatching goods and services before payment has been received. Financial institutions can help to calm these nerves in a variety of ways, including by offering export credit insurance or a letter of credit.
In addition, the importer may require proof that the goods in question have actually been dispatched, so a bill of lading can be offered by a bank. Financial institutions may also provide a loan to an exporter to invest in plant, machinery or staff to fulfil a contract. That loan is secured by the export contract in question.
Banks engaging in trade finance must obviously assess the risk of a deal and their ability to do this depends on access to information. Trade finance can be a liquid form of financing because the finance is often required for a short period of time.
On crops with a long lifespan or mining commodities, risk can be reduced because that commodity could be sold to other customers. Companies involved in infrastructure projects can also make use of short-term trade financing. Such arrangements can also be particularly useful for small and medium-sized enterprises (SMEs) that have the opportunity to export overseas.
African economies have generally received less benefit from trade finance than other parts of the world, although the need is more pressing. Companies’ doubts over a particular deal tend to become exacerbated when one party is based in a less-developed economy with lower sovereign and corporate credit ratings.
Yaw Kuffour, the African Development Bank’s (AfDB) lead trade finance specialist, says: “Trade as a component of Africa’s GDP is about 60%, so we can only expect trade volumes to go up in tandem with the growth in GDP. Some of these volumes are going to have to be supported by credit extension. In terms of its proportion of GDP; however, nowhere is this financing gap felt more significantly than in Africa.”
The Berne Union
The Berne Union is a shorthand term to refer to the International Union of Credit & Investment Insurers. It was set up in 1934 by private and state export-credit insurers from just four countries: France, Italy, Spain and the UK. Dozens of other credit insurers have joined since then, after they have attained certain benchmarks.
The Union aims to facilitate cross-border trade by supporting “the international acceptance of sound principles in export credits and foreign investment”. It actively seeks to recruit new members and provides support for aspiring members, including through the Prague Club, which was set up in 1993 to support new and maturing export credit agencies and insurers setting up and developing export credit and investment insurance schemes.
The big push for expansion came in the early 1990s with the collapse of communist governments in East and Central Europe, when the members of the Berne Union had a big impact in opening up trade with the region. The Berne Union encouraged the provision of export credit and investment insurance, by both Western European providers and local export credit agencies (ECAs).
Previously, industrial and manufacturing exporters had to seek support from state-owned foreign trade banks and most goods were exported to other socialist or communist countries with similar financial systems. It was the countries that had the biggest export sectors in East and Central Europe that were the first to set up their own trade finance organisations.