Hope for MSME exporters in sub-Saharan Africa as bankers propose new trade financing measures (en)
Trade financing in sub-Saharan Africa is not suffering the same contractions as long-term financing and investment, an innovative survey of trade finance bankers in the region shows.
The survey also reveals how the high price of trade-related financing for exporting micro, small and medium-sized enterprises (MSMEs) could be reduced.
The Pulse Check Survey Report, commissioned by eight multilateral development banks and development agencies, including the International Trade Centre (ITC), provides insight for the first time into the state of international trade financing across sub-Saharan Africa.
Ian Sayers, ITCs Senior Adviser for Access to Financing, says the Trade Finance Pulse Check Report, marks "a potential turning point in the understanding of the role that trade financing can play in COVID19 recovery, given the insights it has revealed into financing opportunities."
In the report, 70 bankers call on development finance institutions (DFIs) to urgently expand guarantees for risk-sharing in trade-related financing for the private sector and SMEs. This kind of support would allow banks greater leeway in financing exporters responding to sectors showing an uptick in orders, such as food commodities, health products, technology, logistics, renewables and communications.
For all other sectors, the report reveals that while demand for trade financing had flattened by September 2020, it has not collapsed.
"MSMEs struggle to respond to new orders, pivot to new markets or engage new staff to re-start their businesses after COVID lockdowns," says Mr. Sayers. "One of the main reasons is the high cost of the short-term advances required to accept new orders. Even businesses with years of good banking relations face rates of more than 20% per annum for loan advances against export orders from reputable buyers."
Mr. Sayers continued: "The current price of trade financing is simply unaffordable. MSMEs' normal sources, such as family and friends and remittances, are down by 40% because of the pandemic. At the same time, MSMEs do not usually qualify for safety-net support that focuses on larger businesses. If DFIs can provide SME-facing banks with majority risk-sharing arrangements, the price of short-term financing should fall, and availability should increase - spurring recovery and growth."
Shared financing frustrations
The report highlights the frustrations of bankers who say that additional lending is possible given their strong liquidity positions built up after the previous Global Financial Crisis. However, banks are constrained by regulatory underwriting and macro-prudential rules that require high risk-reserves and stringent reporting for new small client and trading sector business.
The Pulse Check Report offers practical measures for DFIs to ease these constraints on smaller country banks with SME exporters and start-ups as clients.
"First-loss guarantees and risk-sharing arrangements are mechanisms that we want to explore with DFIs and country banks who serve ITCs beneficiaries," said Mr. Sayers.
However, bank guarantees are not the end of the story. Interviewees remarked that no one has any appetite to accept poorly prepared SME lending applications with associated high management overheads and low returns.
"This is where ITC's access to financing project work can be an essential complement to risk-sharing by DFIs," Mr. Sayers said. "We reinforce business development services (BDS) to increase the numbers of enterprises entering our operational and financial management Boot camp process. For those firms that have secured orders, ITC mediates with local financing providers. At the same time, our local BDS partners coach viable SMEs through post-financing performance and reporting."
"ITC's approach leads to durable solutions," Mr. Sayers said.
"The number of SMEs eligible for financing increases, credit risk scores and bank onboarding costs are reduced. Trade-related loan defaults are already very low, so if we can find a way to reduce the banks' pricing of short-term loans, many more African SMEs would recover more quickly from the impact of COVID, expand their businesses and be able to afford sustainability improvements too."
The Trade Finance Pulse Check report was released on 9 October 2020. It can be found at https://itfc-idb.cld.bz/Pulse-Check-Trade-Finance-in-Sub-Saharan-Africa-during-COVID-19
Mr Sayers can be reached at:
Ian Sayers, Senior Adviser, Access to Financing
Division of Enterprises and Institutions
International Trade Centre, Geneva, Switzerland
Email: sayers [at] intracen.org