BIZweek n°299 17 jui 2020
BIZweek n°299 17 jui 2020
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  • Parution : n°299 de 17 jui 2020

  • Périodicité : hebdomadaire

  • Editeur : Capital Publications Ltd

  • Format : (260 x 370) mm

  • Nombre de pages : 8

  • Taille du fichier PDF : 3,8 Mo

  • Dans ce numéro : SADC réponse régional à la pandémie covid-19.

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VENDREDI 17 JUILLET 2020 BIZWEEK ÉDITION 299 [Source  : Special Report by Ibrahim A. Zeidy, Director, COMESA Monetary Insti-tute] The Implications of COVID-19 on Trade Finance in Africa The Role of Trade Finance in Promoting Trade  : The Implications of COVID 1g on Trade Finance in Africa Trade is a key driver of economic growth and poverty reduction and drives the exchange of goods and services, capital movement, and fosters cultural links between people and between countries. It is an important catalyst for regional economic integration, economic growth and poverty reduction. According to UNCTAD, for the period (2015- 2019) total Africa trade average value was USD 760 billion per year which represents 29% of Africa’s GDP. Despite trade’s im-portance as an engine of growth, Africa’s share of global trade is only estimated at 3%, with an even lower share of intra-regional trade compared to other regions (Africa:15%, European Un-ion  : 63%, North America  : 50%, and Asia:52%). Increased intra-African trade POST SCRIPTUM THE ROLE OF TRADE FINANCE IN PROMOTING TRADE The objective of this paper is to examine the role of trade finance for promoting trade in Africa. It covers trade financing gap, obstacles which limit growth, opportunities for ex-pansion, the impact of COVID-19, interventions by Multilateral and Development Finance Institutions to mitigate the impact of the crisis and recommendations on structural measures to strengthen trade finance facilities in Africa can contribute to-wards the development of cross-border infrastructure, catalysing intra-regional investment, and reducing the constraints of unfavourable boundaries for landlocked countries. However, Africa is yet to address the constraints to trade and fully capture its growth-enhancing benefits. One of the constraining factors for expanding trade within Africa and with the rest of the world is a trade finance gap estimated at USD 82 billion by AfDB-Afrieximbank in 2019. Filling this gap means addressing the obstacles African banks face in expanding access to trade finance. It is worthwhile to note that lack of trade finance is a significant non-tariff barri-er to trade and can limit the full trade potential of African Continental Free Trade Area (AfCFTA) and Tripartite Free Trade Area (TFTA). Banks and other financial institutions help companies engage in world trade, mitigating risks so that goods and services can flow across the globe in a smooth and secure manner. Trade fi-nance is especially crucial for smalland medium-sized enterprises (SMEs), which may lack the resources to import or export valuable goods on their own. Historically, trade finance has tended to be highly vulnerable in times of crisis such as the cur-rent pandemic. Indeed, trade finance differs from other forms of credit, such as investment or working capital, in ways that make it higher risk—during periods of crisis—because of the diffi-culty of securing and enforcing credible commitments across borders in times of turmoil. In ad-dition, the costs of trade fi- Cont’d on page 7 6
VENDREDI 17 JUILLET 2020 BIZWEEK ÉDITION 299 nance could be substantially higher than they were pre-crisis, raising the problem of affordability for exporters. While the commercial risks involved in an international trade seem in principle to be larger than in a domestic trade transaction, trade finance is considered to be a particularly safe formof finance since it is underwritten by a strong collateral and documented credit operations. Research suggests that an absence of or weak access to trade finance by SMEs limit their level of involvement in international trade. Market failures, notably in financial markets (be it crisis or information asymmetry) fall disproportionately on SMEs, resulting in more credit rationing, higher cost of screening and higher interest rates from banks than larger enterprises. The Trade Financing Gap in Africa Trade finance in Africa is a relatively unexplored topic. The patterns of the market in Africa us-ing primary survey data from commercial banks spanning 2011 to 2014 indicate that banks in-termediate almost a third of trade activities across the continent, but still reject a Obstacles which limit Growth of Trade Finance The following are some of the key obstacles which limit the growth of trade finance  : (i) Limited foreign exchange liquidity. Lack of foreign exchange liquidity is a weighing con-straint. This is obvious, as the bulk of international trade transactions are priced in US dollars. In addition, when it comes to trade finance transactions, 80 percent of letters of credit are de-nominated in US dollars (ICC, 2012). (ii) Regulatory restrictions. Regulatory restrictions and risk capital requirements present con-siderable challenges to banks and are among the main constraints to expanding their trade finance portfolios. This is of particular concern since international standards, especially anti money laundering (AML) and Know Your Customer (KYC) rules have become more stringent since the global financial crisis and may be even more so, when banks will have to comply with Basel III requirements. (iii) Response of banks as leveraged institutions to heightened risks. In a crisis, banks gener-ally do not differentiate between the risks associated with trade credit and other credit expo-sure with longer tenors that may entail greater transfer and convertibility risk. In the height of a crisis, banks typically reduce overall exposure. (iv) Absence of sufficient insurance when it is needed. Trade credit insurers, private and pub-lic, tend to tighten their cover policy in response, particularly when there is crisis. (v) Decision making by international providers of trade finance particularly when there are crises is often dominated by perceptions rather than fundamentals, and a withdrawal by one player tends to trigger similar actions by others. Herd behaviour in the formof creditors’« rush for the exit » and inadequate information about the financial condition of corporate clients or of economy-wide prospects can aggravate risk perceptions and make a prophecy self-fulfilling. (vi) Weak domestic banking system. A decision by international banks to reduce trade credit lines to a domestic bank will clearly limit the latter’s ability to provide trade credit to its do-mestic corporate clients. However, external factors are not the sole reason for sharp cutbacks in trade credits by domestic banks. It is noteworthy that banking systems that were weak prior to theonset of a crisis contributed significantly to the collapse of trade credits. In such cases, banks under stress will seek to reduce their exposure to risk and raise their capital ratio by downsizing their balance sheets. As a result, they will reduce their intermediation of trade fi-nancing provided by foreign banks. (vii) Low country ratings is another reason that is likely to have a negative impact on trade finance. (viii) Another driver of cost is the labour intensive, physical handling and checking of docu-ments. This is more so the case with LCs, Guarantees/standby Letter of Credit that are paper heavy, very fragmented, and labour intensive. POST SCRIPTUM significant value of trade finance applications mainly due to weak client creditworthiness and inadequate collateral. The trade financing gap in Africa was estimated of $90 billion to $120 billion be-tween 2011 and 2014. A disproportionate share of the available financing is provided to large corporates (top ten clients) at the expense of SMEs that makeup more than 80% of all busi-nesses in Africa. In 2019, the trade finance gap in Africa was estimated at USD 82 billion by AfDB and Afreximbank. Filling this gap means addressing the obstacles African banks face in expanding access to trade finance. In the African context, many of these obstacles have a disproportionate impact on SMEs, which are already struggling to access other forms of finance. Impact of COVID-19 on Trade Finance To mitigate the potential impact of Covid-19 on African trade and keep market access channels open, uninterrupted supply of trade finance by banks is vital. But there are reasons to believethat the measures adopted by governments to combat the pandemic may also impact firms’ability to obtain trade finance at a time when they need it the most. The following are some of the impacts of the pandemic on trade finance  : (i) In the short-term, the low digitization rate of trade finance transactions could slow down ap-proval rates and therefore decrease supply of trade finance during the pandemic. The pandem-ic may expose one of the biggest weaknesses in trade finance supply in Africa – the over reli-ance on paper-based transaction processes, compared to the rest of the world. Adopting digital solutions to trade finance transactions could reduce the time and monetary costs associated with document processing by banks and increase supply of trade finance. Yet for many banks across the continent, trade finance origination and authorization are paper driven due to regu-latory requirements. For instance, only a handful of countries (Nigeria, Cameroon, Egypt and South Africa) in Africa allow e-signature and electronic authentication of official documents. Most banks therefore require « wet-ink » authentications before transactions could be approved. But the fear of the pandemic could make such simple processes suddenly burdensome and cost-ly, slowing trade finance approval in the process. (ii) The pandemic could also increase the trade finance gap by limiting access to forex liquidity required to finance African trade. It could worsen the shortfall in liquidity experienced by banks engaged in trade finance in Africa. Foreign exchange liquidity shortages in the region could encourage global banks to reduce correspondent banking lines for domestic’s banks in Africa. This could limit the supply of dollar liquidity demanded by firms for trade, increase trade fi-nance rejection rates, and increase the size of the trade finance gap in Africa above the USD 82 billion recorded in 2019. Smalland medium-sized enterprises could be particularly exposed to higher rejection rates. When liquidity is low, banks tend to favour larger clients to the detri-ment of Smalland medium-sized enterprises (SMEs). Opportunities Governments and development partners have made significant efforts to reduce barriers within Africa’s trade finance industry in the last decade. Multi-lateral Development Banks Trade Finance in brief By providing critical fluidity and security to enable the movement of goods and services, trade finance lies at the heart of the global trading system. Trade finance mechanisms exist to sup-port two fundamental aspects of the trading process  : risk mitigation and liquidity  : (i) Risk mitigation  : Any economic exchange involves an element of risk, principally that the seller will fail to deliver the goods or services as agreed or that the buyer will fail to pay or to accept the goods or services. In an international trading environment these risks are heightened by such factors as macroeconomic volatility, political risk, information asymmetry, and moral hazard. As a result, traders require facilities which mitigate and/or compensate for these risks. (ii) Liquidity  : Suppliers normally face a gap in time between when they incur production costs and when they receive payment from the buyer. This creates a liquidity gap, which is often made greater by payment terms that grant buyers a period of days or weeks in which to make payment. In an international trading environment, this time period tends to be extended still further due to the relatively longer time required for products to reach their markets. Firms typically require access to credit to offset this liquidity gap. have creat-ed facilities to de-risk transactions for banks, by using their strong financial backing and credit ratings, through facilities like the AfDB’s Trade Finance Program and the IFC’s Global Trade Fi-nance program. Afreximbank’s Mansa, a due diligence platformlaunched in July 2018, aims to facilitate African trade by providing a single trusted source of primary data for due diligence checks on African counterparties. Technological innovation is also being explored to stimulate trade finance. In-deed, according to a recent survey conducted by the International Trade Centre, African MSMEs have cited failure to accessinternationally recognized payment systems as a major ob-stacle to cross-border e-commerce. Although domestic e-commerce offers a wide range of payment possibilities – including cash on delivery – cross-border transactions with customers in high-value markets such as the European Union and the United States, require sellers to have access to internationally recognized pay-ment systems. In a number of African countries, MSMEs can only receive payments from for-eign credit card holders through costly intermediaries, as the domestic system lacks the neces-sary international links. Global platforms such as PayPal or Google Wallet offer integrated payment solutions that could overcome some of these transaction barriers. However, these ser-vices come at a cost, and are not available in all countries. Finally, the African Continental Free Trade Agreement (AfCFTA) signed by 52 countries in May 2019 is a major step forward. Through the creation of a single continental market for goods and services, with free movement of businesspersons and investments, it will expand intra-African trade through better harmonization and coordination of trade liberalization and facilita-tion instruments across the Regional Economic Communities (RECs) and across Africa in gen-eral. This represent a unique opportunity to strengthen and develop the trade finance sector. 7

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