Some insights to guide efforts to unlock trade finance in Africa

I’m working on a project to bring a systems approach supported by blockchain technology, to unlock trade finance in frontier markets.

The early focus will be in East Africa, as I’ve built up capacity on the ground there in a logistics venture, and have good insights from time on the ground there.

The insights below are from my time in East Africa and from countless conversations with other entrepreneurs and business associates across the continent, some of whom were/are customers of the logistics operation.

• Demand for consumer goods and staples is high. Africa is growing. There is enormous appetite to consume. However, most importers face bottlenecks in how much they can finance. This limits the volumes they can move.
• Trade finance on the continent is hugely underdeveloped. Those that have access to finance, usually have this because they have raised cash against assets they own — typically property. Those that don’t, usually end up working for those that do. In this way the lack of trade finance entrenches long existing gaps between those that have and those that don’t.
• Most merchants could be doing more business. Containers of staples typically sell out shortly after being imported (within 1 to a few days, in most cases). Merchants are limited by how much volume they can finance.
• Despite what they may say, banks in Africa will mostly lend money to merchants only on the basis of security, usually real property. Term loans for businesses are rare. Support for businesses is mostly poor.
• The informal lending sector thrives. Loansharks are a part of life for most people and businesses. Loan interest rates of 10–20% a month are normal. Many sink from just being poor, to being destitute because of availing such services. I’ve seen promising businesses go into stress because of ad hoc loans that were taken
• Hard currency shortages are endemic. It’s not unusual in some countries to go to the bank to do a mid-sized withdrawal (say ~ USD 10,000 in cash) and be told to come back the next day or later in the week. This is a concept alien to most people in developed markets.
• Banks gouge. It’s common to lose 1% on your own money just to receive it into your account at a bank. Then, you lose more if you need to send it out, and if foreign exchange is involved, expect to lose yet more. There are entire industries running on fees and charges squeezed out from people in developing countries. The burden of this falls disproportionally on the mid to lower income.
• Bank transfers take time. In some countries, such as South Africa (and others where currency controls are in place), it is common for an international transfer to require several layers of approval and take up to two weeks to execute from start to finish.
• Legal systems are of little help in giving restitution when counterparties don’t uphold their end of the bargain. Slow moving processes, variable understanding of the law among counsel and arbiters, and the very real possibility of corruption, all lean away from using legal remedy and restricting business and risk to fewer but reliable partners that businesses know well.
• The poor always pay more. Some of this is because their cashflow only allows them to purchase smaller or micro-sized packages of consumer products (eg 100ml, 500ml instead of 5, 10 or 20 litres of cooking oil). Small packages are always sold at a premium compared to proportional weight of product. It’s a perverse lesson the FMCG companies of the world have internalised — it pays to serve the poor — just so long as they don’t get too well-off.
• Short-termist thinking is common. A counterparty without a history with you, has little reason that he understands, to be faithful to a contract with you. Even if that party could make more money overall by honouring bargains struck with you over time, the lack of any systemic certainty of a continuous relationship inclines his behaviour towards that in a lemon market. It requires a systemic approach to overturn this behaviour for more long-term oriented behaviour.
• It does not take much to improve people’s lives in frontier markets. The base is so low that even a small amount of capital injected into the system will make a very meaningful difference to smaller traders (and their families). I’ll write separately about some examples.
• Despite all these issues, Africa has youth and energy on its side. There’s a real desire of people to engage in economic activity, and to gather in the benefits of that participation. For example, at the border between Rwanda and Congo, there are two main crossings — one that I’m familiar with sees about 50,000 people cross daily to trade; another 3 times that number.
• The markets are ripe for a systemic approach and the deployment of trust-less systems that do not require a central authority to lend enforcement muscle. Blockchain has huge promise on the continent, but the challenges cannot and should not be underestimated.

Harveen Singh Narulla