Digital Dynamite: Lighting up African Trade

African trade stands on the cusp of a revolution. As a result of bank-led trade initiatives, regulatory standardisation, new technologies, and fintech partnerships, African trade is now becoming a focus for many global corporates. And for domestic entities, intra-African trade is opening up a host of growth opportunities.

The combination of digitisation and Africa’s market dynamism is one of considerable opportunity for regional and international corporates. With this in mind, improving access to trade finance is something the banking sector is working hard to deliver across the continent. 

However, with a US$1.5tr. trade finance gap, the opportunity to meet the needs of global business is, to a degree, offset by the demands of effective risk assessment around trade fundamentals. One major issue here is the inconsistency of available KYC information. This causes banks to experience difficulties in identifying underlying beneficial owners, a problem largely attributable to data accessibility.

For the banking sector to meet the widening trade finance gap, it needs to increase its credit risk appetite. A crucial remedial step must therefore be the streamlining of technology, helping to unblock process bottlenecks, not least in the KYC area.

In response to this and related challenges, the Asian Development Bank (ADB) is working on draft proposals to facilitate greater trade finance accessibility. Under its auspices, a series of bank-driven working groups, representing global interests, has been established. Technology is underpinning the effort as stakeholders seek transparent, user-friendly regulatory-compliant solutions. It’s a work in progress but the need to address the accessibility issue is clearly acknowledged, and Standard Bank is putting Africa on the map through its work with the ADB.

Leaving paper behind

Fintechs are also starting to challenge the trade status quo in Africa. Advanced trade platforms, such as Voltron, are working towards using blockchain as international trade finance consortia open up to digitisation. The idea is that corporates can connect with their trade partners via a single, simplified channel, enabling the exchange of documents and value across an open network. In addition, trade documents produced on external networks by a corporate’s supply chain partners can be digitally sent, verified and processed in Voltron. 

Standard Bank is proud to be part of this collaborative movement to deliver an open platform for documentary trade, using Corda blockchain technology to bring significant efficiencies to transacting Letters of Credit through digital channels.

Other technology-driven initiatives around open account trading are exploring the leveraging of blockchain in the issuance of guarantees, remedying a major pain point for banks globally. It’s anticipated that some solutions emerging from ADB’s KYC workstreams will overlap with these initiatives, helping to ease client on-boarding.

With KYC workstreams seeking to address the issue of trade finance accessibility, and specifically data accessibility issues, the development of data repositories is already making life easier for corporates. Compliant documentation can be uploaded to a central utility, accessible by banks and thus removing the painful repetition of KYC document provision There have been efforts made to create a unique KYC identity for corporates across the globe. SWIFT’s own KYC Registry is complemented by solutions from third parties (including a development bank in North Africa), for example. And the potential benefits for banks and corporates, as well as global trade, are clear to see.

Regulatory balance

Nevertheless, it is important to retain the right amount of regulatory rigour around such solutions since there is a necessary assumption that available documentation has been subject to strict due diligence by all stakeholders. The willingness of banks, over the past decade, to be seen to meet regulatory requirements has, to an extent, encouraged ‘over-compliance’. This conservative approach has reduced lending appetite, arguably playing a part in extending the trade finance gap. 

Part of ADB’s workstream has been to try to balance the need for compliance with the needs of the market. This is not an easy task, requiring intensive discussions with multiple local regulators to seek a happy medium. The creation of an ombudsmen scheme is facilitating some fruitful discussions, however, providing welcome guidance for both bank and regulator. The response has been encouraging thus far, with the development, for example, of training programmes ensuring every stakeholder understands where the most effective compliance thresholds sit.

The move towards a standardised regulatory model is an important part of the groundwork for the adoption of new technology. With a multiplicity of disruptive innovations emerging, banks and corporates are able to deploy evermore appropriate tools to assist the advance of trade finance, and begin closing the gap.

Africa in focus

With the intelligent deployment of technology presenting opportunities in the trade space, Standard Bank focuses on four core trade-related sectors across Africa: financial institutions, consumer and retail, oil and gas, and power and infrastructure.

Africa is a multi-faceted growth market, however, so approaches to leveraging trade opportunities must be examined on a country-by-country basis, not just at a continental level. In East Africa, markets such as Kenya and Uganda are expanding. West Africa is seeing the rise of Ghana, Angola and Nigeria; Nigeria being Standard Bank’s biggest market for trade finance outside of South Africa. In the southern African country of Mozambique, the rapidly expanding oil and gas extraction industry is creating opportunities for infrastructure development and growth in the consumer sector as companies establish their presence on the ground.

Clear winners, in terms of current levels of trading progress, are Mozambique and Angola, the latter being heavily commodity-based with an abundance of natural resources. Indeed, with some commodity prices having climbed back from historical lows, and liquidity issues being addressed as Angola moves towards a more regulated environment, the need for trade instruments has increased. Documentary clarity is assisting local authorities in managing their balance of payments reporting.

There is noted foreign direct investment across the continent too, with China’s presence in Africa well-documented. China is currently Africa’s largest trading partner and the MENA region, according to the American Enterprise Institute’s China Global Investment Tracker, is now second only to Europe as an investment destination. In this context, Standard Bank has a mature relationship with the Industrial and Commercial Bank of China (ICBC), helping to facilitate growth in the China-Africa corridor. Active dialogue between the banks is helping Chinese corporates establish footholds in Africa, covering all points, right down to the provision of local facilities.

Free trade opportunity

Together with international trade, Africa is of course making great headway in terms of intra-continental trade. Of note is the African Continental Free Trade Agreement (AfCFTA). This is a trade agreement between 52 African Union member states. The goal is to create a single market with free movement and single-currency union.

The AfCFTA was signed in Rwanda in March 2018 but signatories were not immediately bound by its remit. However, by April 2019, the minimum threshold of 22 country ratifications was reached, enabling AfCFTA to enter into force on May 30 2019.

 Standard Bank has been instrumental in establishing discussions around this momentous push for co-operation, engaging with stakeholders both continental and inter-African. As a measure of what AfCFTA means, intra-Africa trade flow is only around 17%, with more than two-thirds of that concentrated within Southern Africa Development Community (SADC) members. Collaboration opens up a US$3.3tr. trading opportunity in a pan-African market of some 1.2 billion people.

By reducing import tariffs among its members, AfCFTA makes trade less cumbersome and more commercially viable. However, discussions around ‘rules of origin’ will open up the debate on the interpretation of the rules, and how each member country will protect its own industries. This may require certain percentages of goods to be ‘local’ in order to meet thresholds of tariff relief. The discussion is underway.

To ensure future prosperity for all across Africa, private sector intervention is needed on a wide scale. As such, bank and corporate stakeholders should start seeking involvement in the drafting of forward planning wherever possible. It is equally important for corporates to seek opportunities to diversify their business to the extent that they can sell or buy goods from neighbouring countries rather than operating in isolation. After all, Africa is a market of true diversity – and dynamism is its stock-in-trade.