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Digitisation to overcome African trade barriers
2018-03-01Staff Report 2 Vinod Madhavan, Digitally integrating Africa’s higher risk trade transaction ecosystem into a global economy returning to growth offers Africa a unique opportunity to drive inclusive and sustainable development. Standard Bank’s achievements in leveraging digitization to support the growth, efficiency and reach of African trade is built upon a unique understanding of the broader landscape of challenge and risk that defines the scale of the opportunity presented by trade to transform African growth. With broad-based growth expected across 120 world economies this year, 2018 is currently presenting potential for a globally synchronized return to growth. Significantly this growth is, for the first time in decades, expected to occur across both mature economies such as the United States, Germany and Japan - as well as emerging economies such as Mexico, Brazil, India and China. Africa is no exception. The African Development Bank (AfDB), for instance, is predicting the average growth rate across 54 African markets to reach 4.1% in 2018. This represents a 30-basis point increase over 2017’s estimated average growth rate. Following a decade of low growth and poor commodity prices, optimism - and some green shoots - are emerging on the continent. From Nigeria to Mozambique, Ghana and Zambia, improved commodity prices are combining with new global growth opportunities to drive positive emerging market sentiment. At the same time political stability appears to be returning to Kenya and other leading African economies. Even growth-challenged South Africa is currently experiencing a bout of optimism as political events point to the prospect of improved policy certainty. In short, if the risks of doing business in and with Africa can be managed, and global growth and some of the consumption variables turn favourable for the continent, Africa’s chances of benefitting from this generalised return to growth in 2018 are strong. In a globally generalised growth environment Africa’s demand for trade finance is only likely to increase. This means that 2018 is likely to see Africa’s bank-intermediated trade finance deficit significantly exceed the AfDB’s estimation of a c. USD 100m shortfall. Given these numbers, using digitisation to increase the efficiency and reduce the cost of trade will be essential if Africa is to – quickly leverage the full potential of this historically unique instance of synchronised global growth. In particular, access to trade finance remains a challenge for Africa’s small and medium-sized enterprises (SMEs). Developing effective SME financing able to support the rapid expansion of intra-African trade remains critical to both growth as well as social and political stability. Trade finance in Africa is currently heavily paper-based and siloed both within and between nations. For a while now African governments have been encouraging digitisation as a way of boosting domestic and global trade in markets that lack traditional domestic and cross-border trade infrastructure. For example, the tea industry in Kenya has adopted a platform that brings buyers and sellers together. Other similar digital platforms in Kenya, Ghana and Tanzania provide services to businesses in the bulk oil importation space. What is immediately obvious is that Africa is being transformed by digitisation on three levels, namely; through the digitisation of the physical supply, the financial supply and also via the documents chain. Standard Bank has been most directly involved in digitising the financial supply chain for some time now. For example, the bank has worked with regulators supporting price discovery and risk management in the tea industry in Kenya. Standard Bank has also been working hard to digitise the documents chains, including proof of concept tests using blockchain to digitize bills of lading, for example. Developing digital solutions that simplify and broaden access to trade finance amongst Africa’s SME segments in key markets is a strategic focus for the bank over the next 12 to 18 months. Supporting trade in Africa also means working with clients to manage multiple categories of risk, including; counterparty credit risk, country risk, FX risk and operational risk. A key element in this is helping clients match responses to real rather than perceived risk - by partnering with FinTech firms operating trade contingent and asset risk distribution services, for example. Standard Bank provides support and strategic guidance to regional organisations working to reduce trade barriers, speed up the clearing and release of goods, increase the predictability of landing costs, and support compliance – so as to minimise the disruption and costs of legitimate trade. Leading examples include Standard Bank’s work with the Tripartite Free Trade Area which is working to promote a Cape-to-Cairo regional economic block. Developing the digital platforms for organisations of this nature to accomplish their work on the continent is a key area in which banks can support the expansion of trade in and between African markets. In short, through collaboration and partnership across Africa, Standard Bank is developing the digital tools to support the efficiency and effectiveness of intra-African trade. This process will reduce the costs and promote the expansion of trade while realising the benefits of trade within and amongst African countries - and between Africa and a world economy returning to growth. *Vinod Madhavan is Group Head of Trade for Standard Bank Group. 2018-03-01Staff Report 2
