''Closing the Trade Finance Gap for African SMEs'' Workshop - Event Report
Closing the Trade Finance Gap for African SMEs
In close cooperation with the Trade Finance Division of the African Development Bank (AfDB), the Making Finance Work for Africa Partnership (MFW4A) hosted a two-day workshop, entitled "Closing the trade finance gap for African SMEs," in Abidjan, Cote d'Ivoire Ivory from 19-20 June 2018. The workshop highlighted the findings of the recently-published AfDB trade study in Africa. The study exposed a persisting trade finance gap in the African region of approximately USD 100 billion (excluding the informal sector’s needs). This gap will require stakeholders and financial sector experts throughout the continent to design and implement tangible solutions, including:
- Creating new financing vehicles;
- Restoring the relationship between African banks and correspondent banks;
- Building the capacities of local banks; and
- Improving the collaboration of the members of the African banking ecosystem.
The AfDB's Trade Finance Program (TFP) helps to provide concrete responses to the challenges of international trade in Africa. The main components of this program are the Risk Participation Agreement (RPA), the Trade Finance Lines of Credit (TFLoC), and the Soft Commodity Finance Facility (SCFF). Beyond credit risk default coverage, the idea of using the RPA’s guarantee to cover compliance risks was raised during the Workshop—subject to the proper assessment of compliance frameworks of financial institutions and drawing on market knowledge.
As a leading trade finance institution in Africa, Afreximbank presented its mandate and focus areas: Industrialization, Medical Tourism and Agriculture. The African Trade Insurance Agency (ATI) also provided an overview of the trade insurance products it offers and made suggestions to central banks in order to create favorable conditions for the development of trade insurance. For instance, ATI underscored the need to align the waiting period for non-performing claims in banks from 90 to 180 days as it is with the insurers. Following presentations made by ATI and Afreximbank, the discussions then focused on the implications tightening international financial regulations—notably, anti-money laundering (AML), combat financing terrorism (CFT), and tax evasion (FATCA) policies—might have on trade finance.
Potential sanctions (fines) faced by international banks (main correspondent banks) in the event of compliance default by client banks in Africa have had an adverse effect on correspondent banking relationships, in a context where African local banks were already considered relatively unattractive, given the limited volume of business generated. There is no doubt that the de-risking phenomenon (total or partial withdrawal by the correspondent banks from certain markets) strongly hinders intra-African and international trade. In this regard, the suggested actions include:
- Developing a database which provides the current status of correspondent banks by country, with the most affected countries and institutions as a priority;
- Pooling the efforts of African banks to meet compliance requirements; and
- Creating a multi-stakeholder consultation framework that includes the main players, particularly African and international banks and regulators.
Beyond compliance requirements, it should also be noted that the required actions are costly. In many cases, the withdrawal of the corresponding banks resulted in recourse to intermediaries and surcharge for transactions in USD dollars. The multiplication of intermediaries also leads to significant delays in processing transactions, and may ultimately cause or exacerbate customer dissatisfaction. Case studies highlighted the need to carry out significant capital and human investments to ensure compliance and to improve customer care. Compliance costs go far beyond compliance with AML/CFT regulations. It is broadly about complying with the internal rules of the institution, national laws and regulations, as well as with international regulations. As such, any newly-applicable national or international regulations will entail new costs for banks, related to information systems (updating, development and deployment), staff training, change management, and human resource needs. The following recommendations were also made to MFW4A, with regard to compliance issues:
- Help strengthening the capacities of Compliance Officers (COs) and recognizing their crucial role as well as raising the profile of COs within banking institutions;
- Lobby financial sector regulators and authorities to upgrade legal and regulatory frameworks in their jurisdictions closer to the pace international standards are evolving; and
- Assist banking institutions in pooling their compliance efforts with regard to international correspondent banks.
Furthermore, a special emphasis was placed on improving access to finance for small and medium-sized enterprises (SMEs), considering their role in promoting inclusive growth. Indeed, SMEs face much greater constraints with regards to access to finance, including for trade finance operations. Beyond the responses provided by development partners—such as the AfDB with its Africa SME Finance Program and the TFP; or the French Development Agency (AFD) with its ARIZ guarantees—it is indisputable that information registries can play an important role in improving the risk perception of SMEs. In order to help banks in their "customer due diligence " actions, Afreximbank has developed and presented the "MANSA" platform which, once operational, should significantly improve the knowledge of SME clients in Africa.
Credit Bureaus (CBs) also contribute to reducing information asymmetries between lenders and borrowers. Cognizant of the importance of CBs, the authorities in the West African Economic and Monetary Union (WAEMU) helped establishing the BIC-UEMOA which offers various services, including credit reports, credit scoring, corporate assessments, and other value-added services to help institutions better manage their credit risks. Moreover, it would also be recommended to promote collateral registries and land registries. In addition to the MFW4A and AfDB staff in attendance, the workshop gathered approximately 40 external participants, representing both local and regional banking institutions, as well as development partners supporting trade finance and SME operations.
The workshop is also part of the Trade Finance Initiative (TFI) launched earlier this year by MFW4A, with the support of the AfDB and the German Agency for International Cooperation (GIZ). The TFI aims to improve the understanding of the trade finance market in Africa, promote regulatory compliance, and to build the capacity of local banks introduce sophisticated products and grow their trade finance business, with a particular focus on SMEs.
Download the presentations:
Session 1: Trade Finance in Africa: One Problem, Multiple Facets
Session 2: Trade Finance in Africa – The Role of Regional Institutions
Session 3: Trade Finance in Africa and global financial regulation
Session 4: The Costs and Implications of regulatory compliance from a local bank’s perspective (FR presentations)
Session 7: Africa Customer Due Diligence Repository Platform (ACDIRP)
Session 8: How are DFIs helping to address the SME Finance Gap