CDC Group is expanding its trade finance offerings in Africa, lending US$100mn to South African bank Absa and establishing a US$75mn risk-sharing facility with the Eastern and Southern African Trade and Development Bank (TDB).
London-headquartered CDC, the UK’s development finance institution, says the two agreements are aimed at tackling the continent’s sizeable trade finance gap by providing greater funding opportunities to SMEs.
Bleming Nekati, chief trade finance officer at the African Development Bank, tells GTR the gap is currently estimated to stand at between US$90bn and US$120bn.
According to Admir Imami, director and head of trade and supply chain finance at CDC, two thirds of that gap “is related to open account and working capital needs, and not letters of credit and documentary trade finance”.
“As such, innovative products based on cashflows and other non-conventional methods of assessing credit worthiness offer an excellent opportunity to address the trade finance gap,” he tells GTR.
“This will require banks to partner with and fund alternative trade financiers such as fintechs, tradetechs and trade finance funds who are willing and eager to address the market segments that banks have been unable or unwilling to serve.”
Both deals were announced at Monday’s UK-Africa Investment Summit in London, alongside a string of other CDC investments in funds across Africa totalling around US$400mn.
There have been recent parallel efforts to close the trade finance gap from within Africa, including a US$250mn risk participation agreement signed between Absa and the African Development Bank (AfDB) in November last year. That agreement will see both entities share default risk on trade transactions originated by African issuing banks, with a focus on SMEs in low-income countries.
However, speakers at this week’s investment summit emphasised that investment from the UK’s financial market brings unique advantages.
Addo Dankwa Akufo-Addo, President of Ghana, told attendees: “I think that the City of London, which has been a major instrument of mobilising global capital, can play a very significant role in trying to change the equation.”
Sola David-Borha, chief executive for Africa regions at Standard Bank Group, adds: “It has liquidity, which is very important for financial markets. It also has credibility. It helps in terms of helping to craft innovative structures for financing, and we’ve had a few firsts in the City of London.
“The London markets are flexible, they’re deep, they’re willing to try new things, they’re innovative, and more importantly they provide the expertise that is required to scope transactions to meet particular needs.”
For CDC’s Imami, partnerships between UK institutions and banks in Africa “strengthen and enhance the essential banking connectivity vital to intra-regional trade finance”.
The loan to Absa follows an October agreement to provide a US$75mn funded and unfunded facility for onlending to other banks. CDC says the combined total of US$175mn in funding marks its “largest trade finance commitment in Africa”.
According to CDC, the loan is intended to enable trade finance lending to Absa subsidiaries in Botswana, Ghana, Kenya, Mozambique, Tanzania, Uganda and Zambia, as well as to other correspondent banks in Africa.
The company also hopes the injection of funding could help compensate for the withdrawal of international banks from African markets, a practice known as derisking.
“Over the last few years, banks headquartered in places such as the US and Europe have reduced their exposure to Africa which has led to an acute shortage of trade finance capacity in African countries that need it the most,” Imami says in a press release.
Meanwhile, the risk-sharing facility offered to TDB – set up to support regional economic integration and facilitate trade to, from and within Africa – is expected to enable the bank to increase trade flows by as much as US$420mn in the next three years.
CDC says the bulk of funds provided “will be used to provide African banks with greater liquidity to support SMEs, entrepreneurs and microbusinesses in their markets”.
“CDC’s investment, its third with the bank, will allow TDB to increase its trade finance support across the continent in areas such as the importation of essential commodities which are key inputs to human and socio-economic development,” it adds.
January 22, 2020