$120bn trade finance gap is holding back African growth opportunities, cautions Standard Bank

Johannesburg - Lack of access to affordable trade finance is holding back the economic and employment potential of African countries, says Standard Bank.

According to the African Development Bank’s recent report on trade finance in Africa, the conservative estimate for the value of unmet demand for bank-intermediated trade finance is between US$110 billion and US $120 billion, which is significantly higher than earlier estimated figures of US$25 billion.

“Imagine the number of jobs that would be created if small and medium enterprises (SMEs) in Africa, could do the cross border transactions that would have been supported by the unmet gap in demand for trade finance. The gap means there are corporates out there who would have liked to have done that business but just because they could not access trade finance they could not do those trades,” says Vinod Madhavan, Head, Transactional Products and Services, South Africa at Standard Bank.

Trade finance has a direct impact on employment and Mr Madhavan, who was recently appointed as a new member of the Banking Commission Advisory Board to the International Chamber of Commerce (ICC), the largest business organisation in the world, says the African market is clearly underserviced from a trade finance perspective.

“There is an opportunity for trade financiers to help fill this void but there are a number of barriers to trade that need to be removed. This is why creating uniform rules and standards across various facets of trade will go a long way to closing these gaps and removing these barriers,” he says.

The ICC Banking Commission produces universally accepted rules and guidelines for international banking practice. ICC rules and guidelines on documentary credits serve as the basis of US$ 2 trillion worth of trade transactions a year. The ICC Banking Commission helps policymakers and standard setters to translate their vision into concrete programmes and regulations to enhance business practices throughout the world. 

Letters of credit are very popular in cross-border trade as they are legal and enforceable in all markets that have adopted the ICC standards.

Mr Madhavan says South-South trade in the developing world would be significantly increased if trade finance could meet demand.

According to the World Trade Organization (WTO), not all developing countries participate equally in international trade, with Africa having the smallest slice of world exports. The WTO’s World Trade Report 2014 says the potential of trade in supporting development has not yet been fully realised. The emerging trends suggest, however, that trade will be a major force for development in the future.

Despite the positive outlook, the WTO report says 2014 was the third straight year of below average trade growth and that this will not change in 2015.

“There is a need for education; and by that I don’t mean just training corporates and businesses about trade rules and risk, but also the market participants and regulators. Regulators also need to understand that when they make a change it has both a direct and an indirect (sometimes unintended) impact on what happens,” says Mr Madhavan.

A better understanding of risk finance is needed. “There needs to be a better understanding of how the trade between these markets will grow by taking on more risk in an appropriate manner. This is also where you need the local market participants to give their input and advice,” says Mr Madhavan.

There needs to be more understanding of risk, not just counterparty credit, country, currency risk, but also compliance risk, which is on the rise in Africa (and other emerging markets) and there is a growing concern of de-risking by certain players, who would rather step back than face the higher risks. 

While global initiatives in the space of managing compliance risk will benefit businesses in Africa, more hard data on the problem is needed so proper advocacy actions can be taken. This is where collaboration at a forum like the ICC can help get a better handle on the problem and come up with solutions that are relevant and appropriate for emerging markets (such as markets in Africa).  This needs to be augmented by increased awareness and support from corporates. 

“There is also a need for corporates to realise they need to be more responsible,” says Mr Madhavan.

Mr Madhavan's Banking Commission appointment is in line with the Banking Commission's goal to penetrate new markets, particularly in Africa and is timely ahead of the 2016 ICC Banking Commission’s Annual Meeting, to take place in South Africa.

“Everyone has realised the potential for growth in Africa and now everyone wants a piece of the action. But this does not come without risks. This is where the framework for trade being developed by the ICC and with participation of stakeholders like Standard Bank can go a long way to improving understanding of Trade and Trade Finance and thereby ultimately enhancing employment opportunities, across the continent,” concludes Mr Madhavan.