Digitisation and frictionless commerce on the African continent

Photo: Reuters

Photo: Reuters

Published Mar 10, 2022

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By Bohani Hlungwane

THE AFRICAN Continental Free Trade Area (AfCFTA) agreement is expected to be transformative for the African economy, but only if African countries can actually produce a financial eco-system that allows African entities to trade with one another.

This might sound obvious, but as the leading Pan-African banking group, we get to see a lot of financial technology systems being developed and rolled out, and it is clear that many of the solutions are not built with emerging markets such as Africa in mind.

It is estimated that the trade finance gap in Africa is between $80 billion (R1.3 trillion) and $100bn at any point in time, and this creates a bottleneck that is stifling growth and the creation of jobs.

We are told: “Technology and digitisation are the answer”, but whenever this statement is made in our cluster or in presentations, we have to stop and ask ourselves: “What does digitising actually mean?”

Intra-African trade is held back due to very low levels of financial integration across systems and regulators.

It is estimated that only 17 percent of the various financial technology solutions are able to share data with one another. Now, add in the complication of cross border trade for things like Foreign Exchange payments, and one starts to realise that we have a lot of work to do to make AfCFTA work.

The natural response is that the banking sector has the regulatory clout, skills and access to both finance and technology. The reality is somewhat different.

As a bank, we are both introspective and intrigued by the trade finance gap. On one hand, it represents a clear and obvious opportunity for anybody who is able to develop solutions that can narrow this gap. On the other hand, banks are governed by significant regulations and are not necessarily agile enough to tackle this challenge on their own.

Solutions are not going to come from the banking sector alone, but rather a combination of banks, telecoms providers, fin-tech innovators, Development Finance Institutions, Export Credit Agencies and many other government agencies.

Solving real pain-points

According to Statista data: as of mid-2021, there were 576 fin-tech start-ups headquartered on the African continent, up 17 percent from the year before, and this has largely been driven by venture capital investments.

According to data out of TechCrunch, fintech start-ups across Africa accounted for nearly $3bn – or two-thirds of all funding raised for technology start-ups in 2021. Names such as Opay, Flutterwave and Jumo have attracted global investors seeking growth markets.

The question one has to ask, though: With all this investment, why does this trade finance gap remain so large?

Buzzwords such as “Blockchains” and “Ledgers” are thrown around when we talk about digitisation in the African finance markets, and there is no doubt that there are some exciting technology offerings out there.

However, we need to ask whether we are solving real-world pains that businesses are experiencing? Can we make it easier for a Zimbabwean trader to do business with a South African and move money around in a frictionless manner - or are we simply going to end up with a number of disparate pieces of technology and regulations that don’t interact with one another?

Our belief is that we need to be far more specific when we talk about “digitisation” – instead of trying to bucket all of the challenges together, we want to be more specific about where the gaps are. South Africa is a perfect example.

We have a well-developed financial system, good banking regulation and access to technology. Yet, we still struggle to find ways to get real-world data out of small-medium enterprises (SMEs) to credit vet them - and so access to finance remains a significant challenge … Until we can get smaller businesses to move away from cash and integrate their banking facilities with their payment wallets, we can’t develop scoring solutions that help us make better decisions on the health of the SME ecosystem.

Supplier finance opportunities

Some of the bigger opportunities we are currently exploring relate to Supplier Development and Supply Chain Finance solutions.

We believe some of these opportunities are highly scalable with the right technologies, but we are yet to see these taking a bigger share of our financing solutions.

SMEs battle to access finance because they have limited trading history, don’t have as much transparency as big corporates, generally do not have the right kind of balance sheet, and are therefore seen as representing a greater credit risk than a large corporate. There is massive pressure on corporates to integrate smaller suppliers into their supply chains.

For the SMEs, this is an exciting opportunity to win respectable contracts but many of them run into cash-flow crunches when they try and fulfil slightly larger orders.

In theory, this should be an easy win for banks because, in reality, they are taking the credit risk on the larger corporate rather than the SME. Despite this, we are still not seeing enough SME finance solutions that are affordable to SMEs and scalable.

Again, it becomes a stalemate for both the anchor corporate and the SME. Both want to work together but don’t have a financial mechanism to do so, and that $80bn trade finance gap can’t be resolved.

Our belief is that some of our innovative technology and developments in this space will allow us to address these challenges in both a local context but also be able to expand across borders.

Digitisation and frictionless trading will be game-changers for the African continent … it's just not coming fast enough.

Bohani Hlungwane is the managing principal, and head of trade and working capital (Pan Africa) at Absa.

*The views expressed here are not necessarily those of IOL or of title sites.

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