Businesses in Africa – whether local businesses trading within and between markets, or global businesses accessing the continent – typically face three categories of risk: working capital and supply chain risk; operational and efficiency risk; and country, currency and counterparty risk. An examination of these broad categories of risk reveals how technology and altered perception are, today, combining to reduce the challenges that have traditionally held back Africa’s ability to increase its levels of both intra-Africa and global trade.
Today working capital and supply chain risk in Africa, for example, is being directly managed by improved technologies. Universal electronic views of cash positions across multiple jurisdictions in Africa provide treasurers with an instant and universal view of cash across the entire business. Overlaying this with their financial supply chain is helping businesses to identify and liberate previously unrealized amounts of working capital. By using technology to release previously trapped capital for productive use, businesses in Africa today are generating significantly higher levels of liquidity themselves. This is addressing on-shore liquidity supply; historically a key challenge and risk on the continent.
At the same time technology is consistently reducing operational and efficiency risk in Africa. While Standard Bank provides its clients with the tools and systems to conduct trade efficiently on the continent, we also support the evolution of new FinTech applications aimed at improving the cost-effectiveness, speed and ease of trade in and with Africa.
Issuing guarantees for construction clients in Africa via blockchain between financial institutions, for example, is faster, cheaper and far more secure, eliminating the risks traditionally associated with paper documentation and its delivery. To this end, Standard Bank with ICBC (the Industrial and Commercial Bank of China), has developed a private permission-based blockchain guarantee platform for the secure transmission of trade guarantee instructions. This technology can measurably speed up document transfers as well as reduce the cost and risk of managing guarantee instructions between Africa and Asia.
Experience and presence
Technology aside, operational risk in Africa is also reduced by experience and presence. The consistently higher growth rates on offer in Africa over the last two decades have seen those companies that have engaged with the continent not only stay, but also increase their investment, growing their operations or level of trade engagement with the continent.
A bank like Standard Bank, for example, that has been present on the continent for over 150 years and is now also present on the ground in over 20 markets, has developed deep insight into the risks, challenges and opportunities associated with trade in Africa – as well as how to manage these. This presence and insight, combined with new technologies, provides a powerful new view and understanding of risk that, 20 years ago, was simply not available.
Similarly, new technologies and the increased transparency and data availability that these provide allow businesses in Africa today to better manage the continent’s traditional country, currency and counter-party risk more effectively. Today deploying technology or partnering with FinTechs allows financial institutions in Africa to distribute their country or counter-party risk exposures across a wider set of players; enabling better risk price discovery to support increased trade transaction levels.
Such developments have combined with increased transparency within and between businesses, their suppliers and clients, exponentially increasing visibility and understanding, significantly reducing the scope of risk in Africa.
As an African bank, we need to be clear on how we help our clients manage risk, by helping clients understand the headwinds in the right context and then delivering the technological and knowledge solutions that mitigate such headwinds. Beyond managing risk, we work across all our markets in Africa to interpret the environment while simultaneously deploying the technology to allow people in Africa to do business within and between countries – as well as for people across the world to do business with Africa.
Using the views and capabilities provided by new technologies as well as the insights delivered by Standard Bank’s presence and experience across the continent is delivering a new understanding of business and trade risk in Africa.
These new views are particularly important for businesses when it comes to rating risk.
Negative risk perceptions of trade can reduce the funding available for trade finance, widening the gap between the need for trade finance and the funding available. This is a characteristic of many emerging markets and acts to reduce the positive effects of trade-fuelled growth, which has a direct impact on increased employment. At both a business and national level, negative risk perceptions reduce the number of jobs created along with the development revenue generated.
While Africa continues to exhibit many of the risks endemic to emerging markets generally, the concerns around operating in Africa are steadily reducing – similar to other large emerging markets, episodic spikes notwithstanding.
Standard Bank has played no small part and will continue to play a key role in reducing this perception gap. At the moment, for example, our own experience in Africa is making us increasingly aware that operating across a broad range of African markets is as much a risk mitigant as a risk driver. Operating a business across many markets, or trading with a range of countries in Africa, might be more difficult to manage from a consistency, compliance and single-view-of-operations perspective, but it is also, actually, a significant country risk mitigator. While improving technologies are mitigating the former risks, only interacting with a broad spread of markets can mitigate the former. As such, Africa’s multi-jurisdictional environment allows for natural country risk diversification.
For example, if a client is trading with Mozambique, Tanzania, South Africa, Zimbabwe and Botswana, and one market has a black swan event, the client’s broad presence across the remaining markets presents a natural country risk spread. If on the other hand the client’s business is heavily focused on a single large market, like China, and China experiences a black swan event, the impact on the client could be materially damaging.
So, looked at differently, the challenge and risk presented by Africa’s multi-jurisdictional landscape is to some extent a risk mitigator, and should not to be seen as purely a risk driver.
Combined with the huge insights and capabilities currently being provided by new technologies and the implications of big data analysis, businesses in Africa today are in a much better position to not only rate and price risk accurately, but also to effectively eliminate or at least mitigate many of the challenges – like transparency, cash flow and liquidity – that were previously considered major impediments to establishing businesses and trading on the continent.
About the author
Vinod Madhavan is head of trade at Standard Bank, which will be attending SIBOS 2018, October 22-25.