African Banks Move into Trade Finance as Europe Pulls Back
International commodity traders are turning to African banks to finance trade transactions as the global economic slowdown, eurozone debt crisis and tougher capital requirements force international banks to pull back their lending in Africa, according to local incumbent Standard Bank Group.
Standard Bank is Africa’s largest bank by assets and earnings and its global head of structured trade and commodity finance, Craig Polkinghorne, suggests that the pull-back forced on global banks is happening at a time when Africa’s trade continues to grow across a broad front of nations and sectors.
“The scale of trade finance opportunity is substantial, considering that Africa’s exports alone grew to US$500bn in 2012 from US$445bn in 2011,” said Polkinghorne, speaking ahead of this week’s 2013 Africa Trade and Export Finance Conference in Cape Town, South Africa.
“It is something of a phenomenon that the general tightening of global credit continues to curtail the availability of commodity trade finance from the traditionally dominant players, even as African countries ramp up trade relations with the fastest-growing economies.
Many international banks have reviewed their risk appetite and have withdrawn from, or limited their exposure to trade finance in Africa. Polkinghorne said that a funding gap has resulted, creating an opportunity for other players to fill the vacuum.
“This has created great opportunities for African banks to be more active in trade finance because they have strong balance sheets, the necessary capital and liquidity, and risk appetite. For domestic currency transactions they also have competitive funding costs compared to global counterparts,” he added.
“More importantly, as European and US demand has continued to decline, the liquidity from African banks has helped to deepen intra-African trade and increase trade flows between the continent and other emerging market regions.”
China is increasingly accounting for a significant portion of Africa’s trade compared to its trade with the rest of the world. Trade with China has grown from 10% of overall trade in 2008 to 18% in 2011. China’s dominant African trading partners are Angola, South Africa, Sudan, Nigeria, Egypt and Algeria.
African countries are also importing goods to support infrastructure investment and consumer spending. Standard Bank research shows that imports of machinery, transport equipment and textiles remain buoyant
Standard Bank has used the opportunity to strengthen its position in trade finance in the energy, natural resources and agricultural sectors. Recent deals include providing Tanzania’s Export Trading Group (ETG) with US$250million in trade finance facilities. ETG is a leading integrated agricultural supply chain manager in East and Southern Africa.
The bank also assisted the Ghana Cocoa Board to secure a US$1.5bn pre-export finance facility to purchase cocoa beans in the 2012-13 cocoa season. The facility is currently the largest non-oil deal in sub-Saharan Africa. Standard also acted as mandated lead arranger on the 2012 US$1.5bn Sonangol pre-export finance deal, further cementing its activities in Angola.
Africa has three major global suppliers of crude oil; Angola, Egypt and Nigeria. Significant oil product import lines were provided across sub-Saharan Africa, where Standard provides in excess of US$1bn of import trade finance lines across West, East and Southern Africa.
Polkinghorne said that the bank is seeing indications in the market that South African and other African banks are participating not only as lenders but co-arrangers on large pre-export finance deals. They are also increasingly being called upon to step up their lending for trade transactions because of their stronger balance sheets and risk appetite.
“Natural resources, both within the oil and metals markets and the agriculture sector continue to dominate the African landscape,” he added.
“But it is perhaps the processes through which such resources are utilised, both in the facilitating of international and intra-regional trade and establishment of a suitable environment to conduct business that remain the key challenges. Local banks have increasingly found greater opportunities and increasing confidence to support major trade transactions.”
A significant opportunity
Hennie de Klerk, chief executive officer (CEO) of Pretoria-based treasury services company TreasuryOne adds: “The demand for trade finance in Africa signals the need for improved foreign exchange [FX] and related money market services, especially in the domestic currencies of trhe countries with the most successful growth economies.
“There is increasing scope for new hedging facilities to protect expanding cash flow and earnings and this requires the development of FX forward markets and related products to supplement the dollar-based trade finance operations. These innovations require some investment of resource by African banks to lead the way – and also a growing awareness of the value of prudent and effective financial risk management of the major corporations to generate the demand.
“There is a significant and growing business development and improvement opportunity for both the providers and the users of those services.”