The global financial crisis has resulted in a funding gap that is disproportionately affecting small businesses and emerging market companies. Daniel Schmand, chair of the International Chamber of Commerce (ICC) Banking Commission discusses the situation in Africa
With a wealth of natural resources, developing infrastructure, and improving business environment – in addition to a working population of 600 million, set to double by 2040 – Africa has emerged as an attractive investment destination and a key market for trade. Indeed, it has been widely coined as the “new economic frontier”.
However, post-crisis regulation and the resulting trade finance gap is halting its progress. The implementation of stringent regulation has forced many global banks to scale-back lending. Basel III, for instance, requires banks to keep more capital on their balance sheets meaning that, quite simply, they have less to lend. And when they do lend, they prioritise core operations, deals with higher returns, and domestic markets. Which, of course, leaves trade-reliant African companies facing a funding gap – estimated by the African Development Bank to be between US$110 -120 billion for the region; staggeringly higher than previous estimates of US$25 billion.
What’s more, more stringent compliance standards, such as KYC and AML, are forcing banks to further reassess their trade finance business – widening the gap even more, particularly in traditionally less secure regions.
Africa’s funding gap
Hardest hit, perhaps, are the Small to Medium-sized Enterprises (SMEs) – with the International Chamber of Commerce (ICC) Banking Commission’s 2015 Global Survey on Trade Finance reporting that SMEs are being hit significantly harder by the funding gap than large corporates. Specifically, 53% of SME’s trade finance applications are refused – contrasting the 79% success rate of large corporates.
While the withdrawal of funding from the emerging markets and increased compliance measures certainly make their mark on African companies, it is perhaps the lack of funding for SMEs that causes the greatest strain to the region.
Indeed, SMEs play a significant role in the region’s economy – employing 80% of Africa’s workforce, according to the World Economic Forum. What’s more, not only do SMEs provide jobs, they are also creating a middle class and consumer market that could drive further trade opportunities for the region.
In order for Africa to bolster trade, there must be accessible funding. Fortunately, alternative sources of funding are emerging in the wake of global banks’ retreat.
Export credit agencies (ECAs) and multilateral development banks (MDBs), such as the African Development Bank, play a crucial role for African business by funding projects that promote economic growth and development.
Another option is the non-bank financing industry. With a wide variety of players, the industry is varied, sophisticated and offers companies the opportunity to diversify their funding options – crucial against a turbulent economic backdrop. Among these are specialist trade and corporate financiers who, smaller and subject to less regulation than banks, are often more flexible. They are also known for working closely with clients to develop bespoke solutions – leveraging local knowledge.
Finally, multibank options are becoming increasingly popular – combining local banks’ familiarity of SMEs and their business environment with the extensive resources of global banks. Sharing the funding and compliance burdens minimises risk and means more freed up funding for SMEs.
Yet while such alternatives play a valuable role in filling the gap, they are not able to entirely close the gap alone. While the diversification of the funding landscape is certainly positive – and necessary – a long-term solution relies on banks regaining their lending power. Of course, this is something that is only possible through a change in attitude towards regulation. It is crucial to get the balance right between ensuring banks are operating safely in a secure financial landscape – and that they save capital for a rainy day – and making sure they aren’t stifled. Only once we achieve this balance can the trade finance gap in Africa be truly closed.
The fact that Africa offers many opportunities cannot be denied. And the need to fund it – through alternatives, but also through traditional banking – is clear. What is still to be determined, however, is “how”.
Interested in learning more? Africa’s funding gap will be discussed at length at the ICC Banking Commission Annual Meeting in Johannesburg, South Africa on 4-7 April. Register here to attend: https://fr.amiando.com/JOBUR-ICCBCAM.html?page=1269051.