Issues and solutions for African trade finance. Are ECAs and DFIs the answer?

LAGOS (Capital Markets in Africa) – The last few years have proved difficult economically for much of Africa.  This, together with political issues (for example in Zimbabwe, South Africa, and Mozambique) and constraints on access to finance, has resulted across much of the continent in a drop off in inward investment levels. In addition, economic growth has not lived up to hope or expectation. This article looks at some of the issues and how certain types of financiers may be able to help.

A key driver for growth is the ability to borrow both to maintain business and to fund expansion. It has been difficult for borrowers in certain countries to obtain sufficient funding for a number of reasons. It may be because hard currency funding is required, but the level of hard currency reserves, when combined with exchange control restrictions, has meant it has been difficult to ensure borrowings could be repaid offshore in hard currency. With less hard currency liquidity in these countries, hard currency loans have been hard to come by as lenders look elsewhere rather than risk, as has happened, having to convert hard currency loans into local currency loans in order to be repaid or having to wait until cash is allocated from the limited reserves available.

The lack of available funds is exacerbated by many financiers in the international bank market not being able to find borrowers with financeable deals through lack of contacts and an inability to adequately due diligence transactions on the ground following significant de-risking across the Africa markets. Even where these challenges do not apply, the extent of the regulatory framework that applies now and the need for yields to be higher, due to capital relief reductions, means that many deals can only be done on a highly structured basis or for yields which are not feasible economically for borrowers, most of whom in an Africa context are SMEs. Financeable deals are there but the obstacles appear too great for banks to put all the pieces together.

So, what can be done to try to overcome these challenges? In order to achieve an increase in financing volumes and economic growth, two things can help – firstly, finding alternative financiers that can fund those transactions that banks simply cannot finance and seek better yields through increasing the value of what is produced. For example, countries that produce large amounts of commodities such as the DRC, Cote D’Ivoire and South Africa are still only extractors. They do not possess the infrastructure to turn commodities into consumer products or products higher up the value chain which would provide them with enhanced cash flows and put them in a more advantageous position when seeking finance. This would certainly help to plug the trade financing gap.

Secondly, there needs to be a significant increase in intra-regional trade which requires major advances in transport infrastructure to allow for efficient movement of goods and the development of trade agreements between countries and regions within the continent. For this to happen, there has to be much more co-operation and there need to be huge amounts invested into transport infrastructure projects. The continental free trade association is taking steps to try to increase intra-regional trade which is a positive step and can provide a platform to assist future growth. Transport and infrastructure options must follow, and this is where export credit agencies (ECAs) and development finance institutions (DFIs) can help.

An extract from the INTO AFRICA July 2019 Edition: Trading Africa’s Prosperity. The article is written by Simon Cook, Trade & Export Finance Partner at International Law Firm Sullivan in London. To read the full article, please download by clicking: INTO AFRICA PUBLICATION: July 2019 EDITION.

Simon Cook is a partner in the Trade & Export Finance Group in the international law firm Sullivan’s London office. He has experience in a wide variety of banking and finance transactions, including structured trade finance, trade finance, commodity finance, project finance, invoice discounting facilities, warehouse finance, supply chain finance, ECA finance and borrowing-base facilities. He advises on transactions across Africa, the Middle East, Asia and the CIS. His work covers a range of financings acting for both lenders (including multilateral agencies, development finance institutions and investment funds, as well as commercial lenders) and borrowers notably in the oil, telecoms, soft commodities and metals sectors in Africa and the Middle East, where he was based for four years.

Simon also acts for industry bodies such as the International Trade and Forfaiting Association (ITFA) and is a member of ITFA’s Africa Regional Committee.

Simon has recently authored a chapter on Trade Finance in Globe Law and Business’ book ‘Oil and Gas Tradin’ and chapters for Sweet & Maxwell’s book entitled A Practitioner’s Guide to Trade and Commodity Finance. In Chambers UK, 2019 Simon is a Ranked Lawyer for Commodities: Trade Finance and in the UK Legal 500, 2019 he is recognised as a Leading Individual.