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Date: 26 January 2021

Overcoming Trade Finance Barriers for African SMEs

Making Finance Work for Africa

In the December 2020, Verdant Capital’s Patrick Ball was a panelist in a session focused on overcoming trade barriers for African SMEs at the MFW4A’s Annual General Assembly. The session focused on the initiatives to facilitate trade finance in Africa, as well as the enabling potential arising from the advent of the African Continental Free Trade Area (AfCFTA). The discussions focused on the challenges and opportunities for African SMEs, notably new forms of finance building on supply chain links such as factoring that can increase their access to finance.

Commenting on the impact of the Covid-19 pandemic on African trade finance, Patrick discussed both the challenges but also the opportunities presented in the current environment. The trade finance gap was already increasing pre-Covid due to factors such as increased cost from higher capital and liquidity requirements to comply with Basel standards and the declining correspondent banking relationships on the Continent. The financing and technical support provided by Development Finance Institutions (DFIs) such as Afreximbank has helped stimulate risk taking by global banks and thus trade finance liquidity for African banks. However, there is additional initiatives to increase SME-focused trade financing via risk reduction mechanisms, such as the increased digitization of the traditional paper-based factoring transaction, KYC and monitoring process.

Another area discussed were the increasing number of alternative funders and funding platforms to unlock this finance across the Continent. These models are more broadly classified as “receivables finance” and can take the form of traditional factoring activities as well as “reverse factoring” (or “supply chain” financing), which is debtor-led typically via an large so-called “off-taker” such as an retail supermarket chain, construction company or government body. Increasingly, banks are also using these products as a preferred risk-managed tool to fund SMEs, ideally helping unlock more working capital at the “micro” end of Africa’s real economies. Verdant Capital is currently responsible for providing such specialist financing, via its $30 million invoice discounting facility, which is wholesale funding available to African institutions in order to grow their SME-focused portfolios.

Such macro and micro initiatives were seen as important as ever in the currently dislocated economic environment in order increase access to trade financing for SMEs across Africa. A link to the full panel webinar can for the 2020 Annual General Assembly can be found here.

Sources: Africa Global Funds,Making Finance Work for Africa (MFW4A) , Verdant Capital

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