Finance & Investment for Trade Gerald AJUMBO African Development Bank Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

ONRI-Regional Integration & Trade Dept, AfDB Introduction Improving intra-African trade requires complementarity on issues key to reducing costs and improving time taken in doing business in Africa - regional infrastructure, trade facilitation and capacity building, backbone services etc. A key element that is underdeveloped but nonetheless vital to the intra-African trade is trade finance (TF) ONRI-Regional Integration & Trade Dept, AfDB Thursday, November 15, 2018Thursday, November 15, 2018

Slides in the Presentation What is trade finance? - Architecture Status of trade finance in the Continent. Trade services and value chains What African Countries can do:- strengthen financial integration; - enhance the effectiveness of trade finance; - What the AfDB can do. Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

What is trade finance – An LC is the basic trade finance instrument Trade Finance Architecture Confirming Bank CL Confirming Bank “opens” CL Seller requests LC from Buyer Foreign Buyer/Seller Issuing Bank LC Issuing Bank “opens” LC Seller requests LC “confirmation” LC guarantees payment CL enhances creditworthiness of Issuing Bank’s LC Confirming Bank takes credit risk of Issuing Bank Local Buyer/Seller LC = Letter of Credit CL = Confirmation Letter Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

Status of trade finance in Africa cont’d Statistics on trade finance in Africa are scanty. As at 2009 trade revenue in Africa had been projected to decline by US$ 251 billion from an expected level of US$ 634 billion and another decline of US$ 277 billion. The loss in export revenue is bad for Africa’s current account but also poses a challenge for growing the African trade ONRI-Regional Integration & Trade Dept, AfDB Thursday, November 15, 2018Thursday, November 15, 2018

Status of trade finance in Africa Impact The numbers indicate that unless there are mitigating measures then African trade would further be squeezed due to a number of reasons one of which must be trade finance. Export oriented SMEs would be most affected since they have limited access to low-cost foreign currency denominated working capital. ONRI-Regional Integration & Trade Dept, AfDB Thursday, November 15, 2018Thursday, November 15, 2018

Trade Services and Value Chains Due to the scale of operations of many businesses in Africa particularly the SMEs there are a number of ways in which banks may assist corporate clients trade for both domestic, cross-border and in international trade. Pre-shipment finance, post-shipment finance and insurance credit guarantees cut through a number of activities ONRI-Regional Integration & Trade Dept, AfDB Thursday, November 15, 2018Thursday, November 15, 2018

Trade Services and Value Chains For SMEs (backward & forward linkages) typical services from a bank will include:- Letters of credit (LC), import bills for collection, shipping guarantees, import financing, performance bonds, export LC advising, LC safekeeping, LC confirmation, LC checking and negotiation, pre-shipment export finance, export bills for collections, invoice financing, and all the relevant document preparation. Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

Strengthening Financial Integration Financial integration may be unrealizable due to monetary and fiscal challenges. African countries may however speed up macroeconomic convergence, currency convertibility and capital account liberalization crucial to the development of financial institutions. These would deepen financial services across the borders - support intra-African trade Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

Enhance the Effectiveness of TF Strengthen the regional regulatory investment laws to facilitate support of cross-border provision of financial services and contracts enforcement Improve legal and regulatory systems nationally to confer titles and documentation that would make SMEs and local populations bankable Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

Enhance the Effectiveness of TF Improvement the legal and regulatory systems of technologies that have the potential to leapfrog the banking systems and assist in mitigating scale and risks to financial services via mobile phones. Such technologies have no “brick and mortar”, fixed costs and does not require significant intermediation and real costs are truly lower. Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

ONRI-Regional Integration & Trade Dept, AfDB What AfDB can do The AfDB has been requested to consider having trade finance program (TFP). A TFP alone would not be useful without enhancing non-operational activities such as:- - raising the institutional capacity of African banks particularly the indigenous smaller banks in accessing TF and reducing the perceived risks of doing business with and in Africa. Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

ONRI-Regional Integration & Trade Dept, AfDB What AfDB can do cont’d - ensuring that financing does not stop at the banks but also reaches small and medium businesses; Collaborate with governments and RECs to reduce trade and investment barriers such as ensuring that country sign regional protocols on investment, foster international banking and financial standards Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

ONRI-Regional Integration & Trade Dept, AfDB What AfDB can do cont’d - support information access and dissemination to encourage financial literacy amongst institutions and economic agents Ensure the effectiveness of the TFP through partnerships with other institutions such as the WTO, IFC, AsDB that have complementary experiences critical to the African – TFP. Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB

ONRI-Regional Integration & Trade Dept, AfDB Thank you G.AJUMBO@AFDB.ORG Thursday, November 15, 2018Thursday, November 15, 2018 ONRI-Regional Integration & Trade Dept, AfDB