One of the biggest problems facing Export Credit Agencies (ECAs) in Africa is the lack of available information. The financial institution in question needs to be able to assess the risks involved, including on the route taken by the goods in question.
It is often expected to make a decision at short notice and may be forced to rely on annual accounts, yet systems of accounting vary enormously across the continent. Indeed, in some countries the standards of auditing are relatively low and it can be difficult to assess the reliability of information.
Legal and bureaucratic processes can be very slow in some countries and even once a claim has been paid, it can prove difficult to recover payment from the debtor because of the lack of a collection agency in some countries.
Minos Gerakaris, head of trade and finance at Rand Merchant Bank, says: “Traders intending to sell their products in trade finance space as well as exporters in the market often make the mistake of entering the market without having done enough research.
“It is important for investors to understand various nuances like different trade control regimes and understand how to obtain foreign currency among others. Prospective investors should always undertake a due diligence exercise, get more understanding from local partners and also assess the situation on the ground so as to have a thorough appreciation of the industry.”
All this points to the importance of local knowledge. There is great variation across the African continent both in terms of economic prospects and the reliability of local information.
As credit insurance becomes more commonplace and the network of export insurers gradually spreads out across the continent, the exchange of information should ease matters. The work of ATI and the Berne Union is therefore vital in promoting the exchange of ideas between different credit insurers: cooperation in a challenging market is certainly the name of the game.
René Awambeng, Ecobank’s group head of global corporates, says: “Financing trade in Africa is a complex and risky business, and the trade financiers who will profit most from the current boom in intra-regional African trade will be those with in-depth local knowledge and expertise. Only banks with a clear understanding of the risks and world-class processes for managing them are able to offer leading regional and multinational businesses the flexibility to trade across Africa that they increasingly are demanding.”
Nicolas Clavel founded Scipion Capital in 2007 as an investment management company that specialises in short-term commodity trade finance. He says: “When you had that Icelandic volcano blocking flights, flowers rotted at the airport – the same with short-life products like strawberries and tomatoes. We like ores and agri-products like potatoes that can tolerate a portside or airport delay. Our average rate of return since launch has been 11%, with no long-term lock-in for investors.”
Short-term credit should be easier to provide, as it can be arranged by a local ECA in conjunction with an overseas agency. However, state-owned ECAs still need a budget in order to operate and many governments do not yet see the benefit. Many regulatory reforms may also be necessary to enable the formation and operation of an ECA.
One factor which points to the increased use of export credit is growing investment by Africans in businesses within their own countries. Until recently, many rich Africans tended to invest most of their wealth overseas but this trend is at least moderating.
However, African governments should be warned that a relatively stable economy and currency are needed for ECAs to operate. Some of the agencies that were set up during the early and mid-1990s in East and Central Europe ceased operations during the 1998 banking crisis and currency devaluation.
The most important factor in encouraging trade finance in Africa is economic growth. Despite rapid population growth, GDP per head is rising, inward investment is growing and export volumes are booming. The total value of African exports topped half a trillion dollars in 2012 and is continuing to rise by about 10% a year.
The development of a host of new port terminals pays testimony to record levels of both imports and exports and much of this trade would benefit from trade finance. The lack of working capital restricts the expansion of many SMEs, particularly in the manufacturing sector but there is a great deal of scope in sectors such as food processing and furniture manufacturing to boost exports if improved credit facilities are made available.