Kommerce — KICKSTARTING TRADE FINANCE IN AFRICA

Introduction

Kommerce intends to remedy the shortage of trade finance in Africa. This because frontier markets lack trust mechanisms which lenders can use to assess the quality of risk they are financing, and ensure fidelity.

Trade Finance

Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade.

Trade finance is a relatively low-risk bank activity in Africa but not to the same degree as other regions. Currently in Africa and in other 3rd world countries, there are two types of Trade Finance. The main on-balance sheet trade finance instruments are short-term loans such as pre-export loans, post-import loans and trade-related revolving credit, while the key off-balance sheet activity is the issuing of letters of credit. In a typical scenario, an exporter (seller) requests the importer to produce a letter of credit that would represent a guarantee that the issuing bank would pay him (seller) provided terms of the contract are fulfilled. In Africa, virtually all banks engaged in trade finance issue letters of credit.

The list of confirming banks reveals that commercial banks confirming the bulk of African letters of credit based on sub regions with the highest proportion are North and Central Africa while the sub-regions with the lowest are West and Eastern Africa.

Trade finance is a powerful instrument which, if well designed, could go a long way to foster intra-African trade and regional integration, calling for closer collaboration among the different suppliers of liquidity and risk mitigation on the continent to create the necessary synergy and to better complement one another.

Background

Trade facilitation and greater economic integration is important for Africa, given its small markets, a relatively high share of its trade with other regions and a high degree of limited access to finance for firms. The estimated size of bank intermediated trade finance was over USD 300 billion in both 2011 and 2012, covering about a third of the total value of the region’s trade. While significant efforts have been made in reducing barriers to trade finance in the recent past, not much is known about the dynamics of the trade finance market in Africa and bridging this knowledge gap has become a critical element.

The estimated size of bank-intermediated trade finance was over USD 300 billion in both 2011 and 2012, covering about a third of the total value of the region’s trade. In other words, the estimated value of trade finance undertaken by our sample commercial banks ranged from 33% to 38% of the African trade over this 2-year period. Which is also true.

Banks in West Africa have more significant exposure to trade finance with a 31 percent share of their total assets devoted to that activity, followed by Central and East Africa at 28 and 25 percent, respectively. Banks are still the first port of call for East African corporate looking for working capital. There is negative correlation between the level of financial development and the share of banks’ income from trade finance activities. Also No large lenders like Banks face the risk of collapse. Also banks in oil-importing countries have a greater share of their income from trade finance (21%) than those in oil exporting countries (17%).In Africa, off-balance sheet operations are more commonly used, with the average annual value of off-balance sheet trade finance assets of USD 297 million in 2011 and USD 270 million in 2012.

Problem

In Africa there are many low-income countries where Trade Finance can please a key role in Small and Medium Enterprises in critical sector in the agriculture/agribusiness, light manufacturing and intermediate/capital goods in regional member countries. Given the continent’s large number of small countries, a relatively high level of trade openness and underdeveloped financial systems, greater trade facilitation is important for Africa.

The share of bank-intermediated trade finance that is devoted to intra-African trade is limited, and comprises approximately 18% (USD 68 billion) of the total trade finance assets of African banks. Given the estimated rejection/approval, the conservative estimate for the value of unmet demand for bank-intermediated trade finance is USD 110 billion to USD 120 billion, significantly higher than estimated earlier figures of about USD 25 billion.

Average trade finance default rates in Africa (4%), while low, are still higher than other regions of the world where it averages less than 1%. The main constraints are limited US dollar liquidity (by far the dominant currency in international trade, and by extension, trade finance) and insufficient limits with confirming banks.

Though greater emphasis is placed on the promotion of regional integration and intra-Africa trade. But when it comes to agricultural, supply chain or import/export finance, traders can’t rely on the banks. One of the possible reason, is that firms in less developed markets are less likely to access inter-firm credit (trade credit) which makes their demand for trade finance more important, all things being equal. There is a need for better Trade facilitation and greater economic integration is important for Africa, given its small markets, a relatively high share of its trade with other regions and a high degree of limited access to finance for firms.

Solution

Frontier markets lacks trust mechanisms which lenders can use to assess the quality of risk they are financing, and ensure fidelity. To restore function to the market for trade finance in frontier markets, it is necessary to inject trust mechanisms and initially participate in the market as a market mediator.

Kommerce uses blockchain technology and game theory concepts where the consequences of credit history, the certainty of it continuing in the market and the making the release of goods (the hostage) contingent on payment, all reduce defection risk. Through Kommerce as a trusted intermediary if people have access to trade financing, they can do business, earn profit and improve their situation.

Kommerce Platform

Kommerce will build and operate a platform that coordinates and tracks the trades and the trade financing, including by using smart contracts and token payment methodologies.

The platform will do the following functions:

• Capture that the goods meet specifications
• Capture payment of deposit by the Importer towards purchase of the goods
• Capture financing by the Lender on each deal
• Capture payment to the Seller on each deal Ensure exchange of (1) payment to the Seller with (2) release of title to the goods to the Lender
• Track the movement of the goods from Seller to Buyer via the Lender Track collateral management of the goods on behalf of the Lender
• Calculate amounts due to Lender at each stage (including partial paydowns)
• Capture payment of balance amounts to the Lender (with fees and charges)
• Ensure exchange of (1) balance payment to the Lender with (2) release of title to the goods to the Importer
• Record credit history of the Importer
• Allow the Importer to own its credit history
• Allow the Importer to selectively expose its credit history to third party prospective lenders
• Also by allowing participation by Insurers such that parties can purchase insurance through the platform
• Allow participation by Logistics providers such that parties can contract logistics services through the platform
• Blockchain elements will specifically be deployed to: Track and execute codependent obligations using Smart Contracts
• Verify the movement of goods through the stages of transit from Seller to I importer
• Verify receipt of payments made Selectively expose the credit history of the Importers to third party lenders

Note Validation of the goods following specifications will be done per the usual process, eg through surveys and certifications thereof. Pan African Logistics Ltd (PAL), will be a Kommerce partner, and the initial logistics participant on the Kommerce Platform. Once designed and commissioned however the Kommerce Platform will be opened to a wider set of capable logistics providers. Once there is sufficient third party financing on the platform Kommerce may step back from its role as a Lender.

KTF Token

KTF is:

• a utility tokens
• Built on ERC-20 standard
• a 3rd level functionality token built on the Ethereum platform
• a proof of asset
• intended for use on the Kommerce platform for participants to transact with one another
• tradeable

KTF is intended for use on the Kommerce platform in the following ways:

• For parties to pay one another
• Honesty Mechanism to Achieve a Cooperative ‘Game’
• Tracking token movement within the platform will generate payment history.
• Seamless Payment from within Africa

Tokensale

The Kommerce token is designated “KTF”. Price: 1 KTF = 1/300 ETH (approximate)

Price in ETH will be determined and announced 3 days prior to each sale round opening.Announcements will be made on Kommerce channels (website and communications media).

Soft Cap 50,000 ETH

Hard Cap 85,000 ETH

(Price we will announce closer to the date)

(Price we will announce closer to the date)

For any Private Sale or Pre-sale enquieries on please contact HARVEEN NARULLA on https://t.me/joinchat/AsCHKQ8-wkEQYo5BXDQgZQ

Please check out their website for more details.

Team

Core

• HARVEEN NARULLA
• KAREN TEOH
• MARKUS KIRCHBERG
• DUSTIN LAU
• JAIN SUGU
• CHUA TJU LIANG

Advisors

• ERIC FIECHTER
• ANDRAS KRISTOF
• PRADEEP AVADHANI
• AUDREY TAN

Challenges

The only key challenge I see is the regions they are operating in, these are highly volatile regions and hence rightly frontier regions. Apart from Regulatory, Liquidity, Counterparty risks. There is high risk that the whole operation may become capital intensive and given that these are semi organized markets, there is also a high risk that adoption of crypto may take time and effort. The good part is that the founders have a significant presence in Rwanda and experience of the market as show in their white paper. Hence with these key risks in mind I have a positive outlook on this project.

Final Thoughts

Trade finance is highly centralized industry with only Banks or international financial organizations being the intermediaries. But frontier countries like East Africa, Central Asia or parts of South America still have lot of scope to grow in case of Private trade finance is concerned. For me this has been the best use case so far in implementing Blockchain, because here we don’t have a high volume transaction and there are many intermediaries and use of tokenomics to incentivize honest usage and also creating credit history for a region where lot of the trade and financing is off the books is simply fabulous. I see a huge potential in Kommerce, and also the white paper exemplifies the pain points faced and the positive opportunities and disruptions that

Blockchain can bring to the region and also mindful of the initial limitations of running the business instead of leaving it to a community for decision making which shows how serious the founders are to make this project successful. And it’s with good reason, they are going to disrupt a 300 Billion + market and if they can get even a small share of this pie, Banks and financial institutions will take notice. And for them the good thing would be of a first mover advantage if they can start rapidly building the platform. So, it’s now up to the founders how they become an unstoppable force in Trade Finance in Africa, while still being grounded. Which brings me to the fact that I see a long-term potential in this project and wish it luck.

Reference

• http://kommerce.com/en
• https://www.facebook.com/kommerceTF
• https://twitter.com/kommercetf
• https://sg.linkedin.com/company/kommerce
• https://t.me/kommercetf

Disclaimer: This is not investment or trading advice, always do your own independent research.

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