GTR Africa roundtable: Financial inclusion for SMEs

In a roundtable discussion hosted at GTR Africa in Cape Town earlier this year, GTR brought together trade finance leaders to debate factors around the perennial issue of financial inclusion in trade for SMEs, including the role that digital tools and supply chain finance can play in unlocking access to finance in Africa once and for all.

Roundtable participants:

• Ahanna Anaba, head of sales, digital solutions and partnerships, Finverity
• Bohani Hlungwane, managing principal, head of trade and working capital, pan-Africa, Absa
• Amir Hussain, senior underwriter, political risk insurance and trade credit, Africa Specialty Risks (ASR)
• Admir Imami, head of trade and supply chain finance, British International Investment (BII)
• Victor Mashoko, senior manager, structured trade and commodity finance, Southern Africa region, African Export-Import Bank (Afreximbank)
• Philip Myburgh, group head: trade, business and commercial banking, Standard Bank Group
• Mwaya Siwale, head of trade finance, Trade and Development Bank (TDB)
• Makiko Toyoda, global head, Global Trade Finance Program, International Finance Corporation (IFC), World Bank Group
• Michael Vrontamitis, deputy chair, World Trade Board (moderator)

Vrontamitis: The situation today presents a critical moment for enhancing access to trade finance for African SMEs as they aim to scale and meaningfully contribute to the continent’s economic recovery. From the anticipated growth of the African common market through the African Continental Free Trade Area to import substitution driven by disruptions in global supply chains during the pandemic, what new opportunities are opening up to African SMEs to serve new and bigger markets?

Myburgh: There is nothing like a crisis to drive innovation, and the pandemic certainly accelerated the willingness of a lot of stakeholders to diversify supply chains. That opened up a lot of opportunities for businesses that were previously isolated from various supply chains for whatever reasons. In fact, data from Standard Bank’s Africa Trade Barometer this year shows that there are a number of small businesses in Africa that

are actively diversifying away from China, which as we know is the biggest supplier to most African markets. That presents an excellent opportunity for African businesses in the context of the African Continental Free Trade Area (AfCFTA), which aims to increase intra-continental trade. That’s one of the new prospects we’ve identified, and which clients are talking about.

Imami: New trading opportunities are being created for SMEs, but their funding needs when it comes to financing their inventory or inputs, for example, so they can address these new opportunities, are not necessarily being met. Let’s be frank, for various good reasons, banks are not good funders of SMEs. We need to find different structures for both banks and development financial institutions (DFIs) to be able to finance SMEs.

Hlungwane: I agree. It may be the case that SMEs are seeing new opportunities to expand beyond their domestic markets, which is great, but the fact of the matter is that banks are fundamentally set up to support and service the multi-jurisdictional activities of large corporates – and not SMEs. That’s something we still need to figure out in terms of how banks operate because we need to be able to scale up solutions a lot more quickly.

Banks typically struggle to access relevant data about SMEs, such as how many there are, where they operate, what facilities they have in place and their financial track record. This is particularly tricky when it comes to the conversations we have with DFIs, where we’re trying to find effective ways to carve out programmes aimed specifically at SMEs. We get a bit stuck. What we need to solve for is how to get around the data constraints in as far as SMEs are concerned.

Vrontamitis: Which trade finance products and solutions are most in demand by African SMEs today, and are those needs being met?

Toyoda: I think more emphasis can be put on reverse factoring structures, which sometimes struggle to achieve scale. This could be useful for supporting suppliers in the domestic supply chains as well as helping to facilitate more intra-regional trade flows by broadening the supplier network.

Siwale: As an industry, I don’t think we’ve done enough to tap into the data of the anchor clients that have a solid relationship with financial institutions and an ecosystem of SME suppliers around them. We need to be able to fully understand that ecosystem in order to drive financing to the smaller stakeholders. This could be done in tandem with our current approach, which is trying to access the SME sector directly.

Mashoko: We are seeing an increase in cross-border transactions between SMEs. Afreximbank has always provided factoring as a product to enhance the financing of SME businesses as well as supply chains. We’re also doing financing whereby we lend to intermediating institutions, such as commercial banks and factoring companies, who then onlend to SMEs. The system works well because of these companies’ closeness to SMEs – they understand and appreciate their credit scenarios and other metrics.

Hlungwane: The issue with reverse factoring, or supply chain finance, in Africa is that programmes generally cater for suppliers higher up the value chains – the mid-corporates. But the financing gap is predominantly amongst the smaller companies – oftentimes the supplier’s supplier – many of which operate in the informal sector and don’t qualify for access to this kind of support.

Toyoda: The IFC has a global supply chain finance programme, working together with our bank partners. It’s a buyer-led reverse factoring programme. Our ambition is to broaden the offering so that we’re able to directly target the financing needs of deep-tier suppliers.

Incidentally, back in 2018, the IFC launched a small loan guarantee programme where we tried to finance SMEs directly with partner banks. We have been making progress step by step, but it’s proving pretty hard to identify the SMEs so that we’re able to target their working capital financing needs. The supply chain financing route is a lot easier to scale and a far more effective route for a DFI.

Anaba: We’re definitely seeing anchor buyers being a lot more proactive in how they support the SMEs to ensure the resilience of their supply chains. In many instances they’re approaching the smallest of entities in their supply chains and requesting that they provide the relevant information in the appropriate format so that they may be onboarded by the anchor’s financial institutions. At Finverity, we are seeing more and more of these programmes being scaled through our technology. It also helps to develop the marketplace in terms of shoring up the right documents and structures, easy onboarding of suppliers and anchors, and we can start having more strategic and structured conversations with that end of the market with smart and usable data.

Toyoda: Those activities do a lot for helping SMEs to document and build their credit history, which can ultimately set them up for access to financing in the future.

Vrontamitis: Has the African SME trade finance gap changed over the last few years? Is the needle moving? How does the gap compare today to pre-pandemic levels?

Hlungwane: The gap has likely grown as a result of the pandemic. Banks are much more cautious about where they take risk. In our engagement with DFIs, they’re being a lot more prescriptive about the percentage of support that benefits SMEs, and they’re asking us to set up programmes aimed specifically at these smaller companies. It’s putting a lot of pressure on banks, which are challenged by regulatory constraints as well as a lack of data, as already discussed. Nevertheless, banks have acknowledged that they do need to be more targeted and simplistic about the solutions that they offer in this space, which are predominantly invoice discounting, unsecured bid bonds and trade loans, to help us better extend financing.

Mashoko: The war in Ukraine has disrupted supply chains. Whereas corporates are able to pivot relatively easily, SMEs are challenged in their ability to locate alternative routes for the movement of their goods. At the same time, given the macroeconomic environment, financial institutions are focusing on their traditional customers and extending credit to them, likely at the expense of smaller players. As the financing gap grows, there’s a need for a new funding source for SMEs – some of which is likely to come from the fintech world.

Vrontamitis: The World Trade Board has identified a multitude of actions with the potential to reduce the MSME trade finance gap, as outlined in its recently launched ‘Financial Inclusion in Trade Roadmap’. The five key pillars where we think co-ordinated action can make a significant impact are digital infrastructure, legal/regulatory infrastructure, data infrastructure, technical assistance and new funding sources. Which of these actions resonate with you?

Myburgh: I’d say they all resonate, and commercial banks probably have a role to play to some extent in each of those areas.

The one area I’d like to pinpoint is data infrastructure, which relates to what we’ve already been discussing today, and the opportunities for larger commercial banks to service the entire supply chain ecosystem, domestically, regionally and internationally. We haven’t been that good historically at leveraging data to provide the ultimate solution. I think that’s where we’re likely to see growth within the trade finance offerings of commercial banks as they start understanding that data and building the necessary infrastructure around those flows. We’re already starting to see some of this, albeit off a low base.

But it’s certainly a step in the right direction.

Hlungwane: We hear a lot – often in the mainstream media – about various dedicated funding programmes for women-led businesses and ESG-related activities. Yet we still hear from SMEs on the ground that they don’t have access to finance. So where is that funding going? Commercial banks have a very important role to play to ensure that all new financing pools – as driven by the five activities that Michael has outlined – are directed to where they are most needed.

Anaba: When it comes to data infrastructure, while we may ultimately be heading towards a future where we use digital identities at scale, the reality is that we’re still very far away from that. As a first step, we should be addressing the digitisation and standardisation of data and internal processes. I’m talking about all the information that is required in the KYC process; the fact that it’s generally in paper format means that there’s no transparency in the engagement between these companies, the bank, and ultimately the DFI that is providing a line to that bank. They’re not able to see the track record, monitor utilisation or even verify that the funding is going to where it’s ultimately needed.

Toyoda: From that point of view, maybe the legal entity identifier (LEI) will be a game changer, given that it’s able to authenticate and verify these companies. Nevertheless, we definitely have a lot of education to do in terms of what LEIs are and the ways in which they can benefit companies.

The IFC is very active in the technical assistance space. For example, we host SME workshops where we facilitate learning about financial instruments and application processes. I think raising awareness is going to be key to making progress on all the pillars identified by the World Trade Board.

Myburgh: The success of trade on the continent and, for that matter, commercial banks, has traditionally been through the lens of trying to solve for what corporates need. At times, commercial banks try to reverse-engineer systems by trying to squeeze something that has been designed for corporates into the SME world. This is evident in the way that we design our products and processes, but also in the way we educate and the language we use. For an SME entrepreneur, it’s a very intimidating space.

Anaba: That’s right. The average SME entrepreneur doesn’t know what reverse factoring or an LEI is, nor do they care. At the end of the day, they want to know how to move their product from A to B. Financial institutions don’t have to make it complicated for the clients. Some banks say they do supply chain finance, but it’s really just a working capital loan against some collateral and it still requires too much manual intervention at all levels. I think if we focus on making the internal processes within financial institutions a lot more efficient and digital, we can actually share information amongst ourselves. That’s the necessary first step and exactly what we deliver for not just banks but also non-banking financial institutions that use Finverity’s platform. Not to mention that it addresses the much-feared cost of manually financing SMEs.

Imami: I hear a lot about the importance of leveraging data, but we can also leverage some of the anchor buyers to offer supply chain finance without the need to enhance any existing infrastructure. To get these programmes off the ground in the first place, we need local banks able to implement them, and corporates willing to sign up to them, which we know is a challenge. The introduction of these programmes is not a priority for banks.

What we might need is some kind of government-led prompt payment directive that would require companies of a certain size to cut their payment periods to smaller businesses to, say, 60 days and ensure payment within that period. If companies don’t have the liquidity to do so, they could approach a commercial bank or DFI and be able to structure a supply chain finance facility that would enable the company to meet the demand but also pay 30 to 60 days later. Ultimately, it would unlock a good chunk of money into the market without any major additional risk.

Siwale: Legislative moves can be vital for SMEs. For example, in Zambia, mining companies are compelled by law to give local suppliers a fair share of procurement, which is a boon for smaller companies. Incidentally, the country has a government Ministry of SMEs which works to promote their interests. Frameworks like this can help to provide a conducive environment for facilitating financial support.

Hussain: Listening to all of this, clearly, the trade finance gap remains, whether because of appetite or administrative issues. The reality is that you need to diffuse this risk within the financial infrastructure. From an insurer’s point of view, we’re used to working with businesses from outside of Africa that are looking into the continent and finding opportunities to trade with it. But I don’t think it takes much to extrapolate from that and look at the cross-border transactions that might arise from the AfCFTA, for example, and create local capacity to insure these products so that banks can expand the level of their lending, because perhaps they have shifted the risk to higher-rated entities, or to provide banks with capital relief on their lending to SMEs.

I think that capacity creation in the insurance space is something that is happening, but slowly. This is certainly our focus at ASR, and over the last two years since we’ve been in existence, we have met with corporates, banks and brokers to provide a level of education as to how it can be done in the African context.

One of the things we’re doing in Morocco, for example, is partnering with SCR, the second largest reinsurer in the country, to insure local SME business. This partnership has transpired largely because there have been legislative and regulatory changes that make the payment of trade creditors and debt important from a legal point of view, which has opened up an opportunity for us to enter the market. In essence, insurance has a massive role to play in all of this.

Hlungwane: The point about bank capital regulations is a good one. Our models necessarily mean that we have to reserve more capital for SMEs while lending to them. We probably need to drive more favourable capital treatment for SME lending as a first step.

Hussain: The reality is that these regulations are set in the financial centres outside of Africa and as such are not fit for purpose on the continent. Insurers cannot balance sheet underwrite African risk – it’s not the way it works.

Vrontamitis: What role do digital innovations and tools play in unlocking SME financing?

Anaba: I’m biased but I think technology has a big role to play. One thing we haven’t expanded on today is the operational cost of SME financing. If it’s going to cost financiers an additional three people in their back office to do this type of financing for much less return and not as interesting names, what’s the point? Yes, they get to announce that they finance some SMEs once in a while, but it has to make sense, there needs to be a financial profit. That’s where technology is critical. Financial institutions need to be able to scale these programmes without the steep costs of onboarding and monitoring numerous transactions manually.

I think as an industry we’ve been trying to jump the gun a little bit with some of the digitalisation initiatives in the market today. We need to focus on the parts of the process that we can actually digitise – the steps that are mundane and labour-intensive but that can be sped up by technology – before we can get to the intricacies of digital identities and digital trade documents.

Mashoko: Digital innovation is also important in the KYC space in terms of helping to reduce the associated costs. A few years ago, Afreximbank launched its Mansa customer due diligence repository, which is a digital single source of primary data on financial institutions, corporate entities and SMEs. We hope that this will be a way forward in terms of credit analysis for SMEs, and ultimately enable them to engage in more trade.

Myburgh: The financial industry is very insular in that we think about the answers to problems only in terms of our own, limited ecosystem. I’m sure a lot can be learned by stretching ourselves a bit further by looking at some of the technology advancements happening in the agricultural sector and other industries that are somewhat removed from the world of finance, but where risk is being evaluated and managed in the context of some of the challenges we’ve been talking about today.

Siwale: That’s a good point. I think the telco industry, which operates very closely to the grassroots level, is an area of potential partnership that remains relatively untapped by commercial banks.

Vrontamitis: Very briefly to end, will we see more African SME financing needs being met in 10 years?

Imami: I don’t think there will be enough SME financing. The issue is not Africa-specific.

Hussain: Given the various initiatives and technologies we’ve talked about today, I am hopeful there will be.

Anaba: I think financing will increase but I think we’ll also figure out that the gap is a lot bigger than we anticipated.

Myburgh: From a visionary perspective, we would want an environment where there are at least some financial products and processes that have been developed from the ground up, from the SMEs’ point of view, as opposed to trying to be successful with the traditional products that were designed for corporates.

Mashoko: Given the increased focus, I think we should see some implementation of what we’ve discussed today. To date, there has been a lot of talk about supporting SMEs, but without much happening on the ground. With more digitalisation and new funding sources, that should change.

Siwale: I’m optimistic that the gap may narrow in the next 10 years, especially if we go the digital route, particularly around greater support for the agricultural sector.

Toyoda: We would like to see some progress in 10 years – but potentially it may still not be enough, given the challenges.