An innovative trade finance product aimed specifically at enhancing funding opportunities for small and medium enterprises (SMEs) in Africa, has been launched, with the aim of bridging the trade gap, a critical hurdle for economic growth and development on the continent.
The first in a pipeline of innovative solutions, the product combines the legal, product and market expertise in trade finance and capital markets of Investec and Frontclear, to address the pressing need for accessible financial support for SMEs and thereby foster the growth of SME trade portfolios, ultimately driving socio-economic progress across African societies.
In this inaugural transaction, Investec provides a facility to Frontclear, who then uses this liquidity to repo an African bank’s government bond portfolio, together with a global Development Finance Institution (DFI) guarantee, to wrap the developmental impact that has made this solution possible. Both the loan and the repo restrict the use of the liquidity to underlying SME trade finance and there are snapshot substantiation powers for reporting.
The Investec and Frontclear product is able to address the liquidity and capital challenges on the Continent by utilising local African banks’ government bond holdings as collateral, in order to obtain additional cross-border trade finance through a repo structure. Effectively, enabling them to comply with regulation and still be able to make trade finance available to its SME traders.
The product thus delivers an African-originated practical and sustainable solution to address arguably one of the most important development challenges facing society – providing viable SME-orientated trade finance solutions through the local banking system.
Tackling the trade gap to achieve sustainability
“Trade finance is an important and sustainable form of socio-economic development in developing African societies,” says George Wilson, Head of Institutional Trade Finance at Investec. “Trade can contribute as much as 50% of a country’s GDP with medium, small and micro enterprises (MSMEs) employing up to 85% of the workforce – making them strong originators of self-sustaining development. Yet despite this, MSMEs are often denied trade credit by their local banks.”
In fact, failure to receive this essential funding is the root cause of one of the most intractable and troubling issues in African trade and developmental finance: the trade gap. “The unintended consequence of global banking regulation is that often African banks are compelled to invest their limited capital and liquidity in local government bonds, instead of their MSME trade finance clients. Additionally with new and growing complex ESG compliance regulations, which many African banks are unable to meet, African SME trade portfolios are paradoxically disqualified from inclusion as ‘sustainable finance’ and therefore not suitable for international investment. This has resulted in a widening Trade Gap, contrary to the spirit of the UN’s Sustainable Development Goals (SDGs).”
“Recognising that only lower-tier African banks can provide trade finance to deep-level SME transactions in the real economy was key in the design of a workable solution that tackled these challenges,” adds Wilson. “We also wanted to introduce developmental finance to a group of African SME end-borrowers who would otherwise be completely inaccessible to international impact investors, multilaterals and DFIs.”
Recognising on-the-ground realities
“This is a workable solution for the African SME and banking context as it embraces all the existing working analogue administration of trade, as well as supply chain finance and can incorporate any digital trade progress, as and when it happens in Africa. It is not reliant on deep tier digitisation and poses no additional risk to all of the entities throughout the chain,” says Wilson. “There are even future flavours which incorporate the successful implementation of Open Account fintech digital platforms by African banks as a sampling mechanism when the underlying transactional data is available in digital format.”
“Frontclear is proud to partner with Investec Bank to deliver innovative financial products that can improve access to trade finance funding to the SME sector in Africa, and beyond. By combining our respective legal, product and market expertise in trade finance and capital markets, we’re able to directly benefit SME traders in Africa, by providing viable liquidity solutions to the local banks that are best placed to service the SME sector. We are excited by the impact these efforts will have in reducing the trade finance funding gap on the African continent,’’ says Hugh Friel, Senior Vice President – Africa Structuring at Frontclear.
“Importantly, it has been informed by detailed on-the-ground appreciation of the African realities with an acknowledgement that only the local African banks can have any practical impact on SME trade and the trade gap and posits a workable solution to the exigencies of global regulation and a practical path to international developmental additionality. This product structure is the first of its kind to ultimately reach SME traders in Africa by providing liquidity to them and consequently promoting sustainable trade finance on the continent,” adds Wilson. “This is an ’Out of the Ordinary’ innovation structured to truly drive development through sustainable trade finance on the continent. It is a pragmatic example of Investec’s purpose of ‘living in, not off society’ and Frontclear’s extension of its blended finance of official development aid into African trade finance to leverage developmental impact.”
About FrontClear
Frontclear is a development finance institution that aims to support stable and inclusive money markets in emerging and developing countries. Frontclear provides credit guarantees and technical assistance to facilitate access and liquidity in the interbank markets, especially for local financial institutions. Frontclear’s global technical assistance program works in partnership with central banks to develop the financial infrastructure, legal environment and the skills and capacity of the domestic market participants. Frontclear is funded by European development finance institutions and global development agencies. Frontclear is rated A- by Fitch and Baa3 by Moody’s and is furthermore counter-guaranteed by KfW, an AAA-rated German development Bank.