As I was in my office the other day, I received a report, compiled by the African Development Bank Group (2017). The findings therein explained Trade finance in Africa. It is of utmost importance for every business man and entrepreneur to be up to par with the current happenings that are happening in the economy at large. I comment those that took their time to analyse the trends taking place and urge my fellow business tycoons to engage in doing the same.
This subject, Trading Finance, was of particular interest to me because, the correct use of Trade Finance instruments can even help strengthen exporters’ competitive advantage by being able to offer supplier credits. Trade Finance can improve liquidity and cash flows while reducing risk if managed well.
For those who are unaware, Trade Finance relates to the process of financing certain activities related to commerce and international trade. The entity includes activities such as lending, issuing letters of credit, factoring, export credit and insurance. Although International Trade has been in existence for centuries, Trade Finance developed as a means of facilitating it further. And interestingly, the widespread use of trade finance is now one of the factors that has contributed to the enormous growth of international trade.
The advantages of Trade Finance are:
- It is a comparatively effortless and less strenuos way that helps to arrange short-term finance.
- It assists in the running of business growth activities.
- The finance is typically secured against the goods or backed by an insurance policy
- Trade Finance also allows an organisation to handle its international transactions quickly and more efficiently, since documentary credits, collection and guarantees can be processed electronically. This is applicable to both import and export documentary credits and collection
- Flexiblility and simplicity in use – it provides a clear description of business transactions and financial position. It therefore makes it easier to monitor each individual transaction from its beginning till the end. This also means that previous transactions can be monitored without interfering with those current
- Data can easily be transferred to spreadsheet for re-use. This is very time conservative and eradicates errors.
- There is a simultaneous way of communication between the bank and an enterprise.
Recently, in our very own dear Africa, commodity prices, particularly oil, have fallen precipitously. If you take a look at it, you will find that since mid-2014 there has been a continuous strain in the availability of foreign currency liquidity. Especially in many oil-dependent African countries.
Furthermore, the scaling back of unconventional monetary policy in major advanced economies has seen excess foreign capital that used to be channeled towards emerging markets in search of higher yields starting to dry up including in Africa. This has reduced the supply of foreign currency which is vital for the growth of trade finance markets.
True, the Trade Finance gap has reduced but is still fairly large. The Trade Finance gap in 2013 and 2014 was estimated at USD 94 billion and USD 91 billion respectively, while the comparative estimated gap was USD 120 billion in 2011 and USD 105 billion in 2012. Although, this trend suggests a gradual narrowing of the gap over time, the latter remains quite significant.
The two major reasons for banks’ rejection of Trade Finance facility applications are weak client creditworthiness and insufficient collateral. Banks are also facing several challenges hampering the growth of their trade finance portfolios and cite competition, lack of suffcient risk capital and limits with correspondent banks as the main constraints.
This is such an interesting topic and throughout this week. I will be sharing more with you my own personal views concerning the subject. It’s time we talk about issues affecting our global economy currently.
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