Rubber, Meet Road: Lessons from Kommerce’s First Commodities Trade
Rice to Congo for Christmas
Over the Christmas and New Year holidays, the Kommerce team successfully conducted a trade in Central Africa. This trade was for a twenty foot container of IRRI-6 Grade 2 rice for a Congolese businesswoman.
Over the course of the trade, we were reminded of our good fortune to be able to have Nicholas as our “man on the ground”. His decade of experience running Kenyan Riders, Kenya’s elite professional cycling team, have equipped him with the experience of operating under high pressure in difficult environments with imperfect information.
Commodities trading is a competitive market with strict regulatory requirements, and his ability to troubleshoot tricky situations proved invaluable in successfully concluding our first trade.
One of the primary objectives of this trade was for us to verify the key assumptions behind our platform solution for Emerging Markets, as well as to surface any unknown unknowns in the process. Here are 3 of the main issues that we encountered.
Broken Telephone: Transaction Hiccups
Banking Infrastructure and Services
Thanks to our CEO Harveen’s 7 years of experience in Africa, we were mentally prepared for the quality of banking services to expect when executing our trade. However, the following observations would be illuminating for people unaccustomed to the developing world, and represent the opportunity for Kommerce to improve upon the existing market conditions.
First off, while basic financial services and online banking services are available, the reliability of said services are lacking when compared to what we have in the First World.
Case in point: Nicholas needed to pay (in USD) for an invoice for services in Rwanda. The bank account number provided to him erroneously was a Rwandan Francs only account. He carried out the transaction, and the bank allowed him to do so without highlighting this as a problem, and in the developed world, it wouldn’t be. Because of the mismatch, the transaction should have either been rejected, or, if it was approved, recorded in the system. Neither happened.
Instead, money was debited from Nicholas’ bank account and there was no corresponding notification on the receiving account that money had been remitted. To make matters worse, right after the money was deducted, the e-banking site was closed for a day for maintenance.
The transaction remained in limbo for a few days, with no clear indication of where it was. Calls and emails to the bank did not yield any useful responses. The payment did eventually go through, but there were a few days of anxiety and confusion.
Moving forward, all bank accounts will be verified in advance with low value transactions to test their validity before being added to a whitelist for actual higher value transactions. Thankfully, this was a transaction which was low value and not mission-critical and therefore did not result in any serious problems.
Despite the inconvenience, this also represents opportunity, as we seek to transition users to crypto over the course of on-boarding them onto the Kommerce platform. Visibility of the status of transactions in Ethereum are as transparent as you can get, and will be a palpable improvement over the status quo.
Charge like a rhino
Banking Charges
The banking system in Rwanda is fraught with fees for almost everything. The fees aren’t high in and of themselves, but the pervasiveness of fees for every transaction means that the cost of bank services accumulate quickly.
The fees came up to 1.27% of the total value of the transaction, with simple transactions like USD cash deposits, withdrawals, payment orders, SWIFT fees and account management charges all taking small bites along the way resulting in fees totalling up to USD 130.49.
Given the competitiveness of the commodities market, where prices are priced with very low margins, these banking fees and miscellaneous charges can really eat into the profits of any trader in Africa. The average profit a trader can expect to make is about USD 1400–1500 per container. Now consider that the banking fees of this transaction alone take 8–10% out of his income.
Through our prior research, we expected the high cost of banking services in Rwanda. Still, the actual figures gave us yet another opportunity to appreciate the financial services that we take for granted in the developed world.
In the course of our research, we also enquired about the cost of attaining a line of credit from the bank. The answer? An eye watering 17.85% per annum for secured risk against property. Adding a Letter of Credit (LC) to this facility would incur a 1% charge every quarter, as well as a USD 50 initiation fee. The documentation fees for LCs also start accumulating very quickly.
We now have a more nuanced understanding of the problem of credit availability of Importers in our target market. In theory, any trader can get Letters of Credit/Loans, but the collateral requirements and fees are often unreasonably high, causing small traders to self-disqualify themselves from getting bank financing.
Spread ‘em
Currency spreads
Despite sharing a border and trading relationship with Uganda, the currency exchange spread between the two East African neighbours is a horrendous 63.61%. This high spread can be observed with all African currencies, with only the USD having a spread that approaches usability. This means that traders consistently deal with forex fees and spreads whenever they do business across borders, and this represents another opportunity for our project to improve upon the current system.
The gap between design and reality
Liquidation and Multi-Stage Financing
As an aside, the liquidation process also departed from our envisioned ideal. In the Smart Contract, the liquidation of goods is easily represented with the click of a mouse. Understandably, it would be much more complex in reality.
One of the challenges was that additional permits are required to liquidate goods at sub-container levels from the warehouse facility. These regulations are intended to protect small-traders from being out-competed by Importers who ship by the container load.
In essence, we could only liquidate the container as a whole unit and had to seek buyers with cash in hand to purchase the entire container from us. That being said, these issues are solvable once more information can be collected on these buyers, and there are a few possible implementations and adaptions we have in mind for this.
Structuring the trade terms in reality was more complicated than our initially proposed Smart Contract. We did not anticipate the deposit payments being carried out in multiple stages, and for these to be dependent on a new variable: the location of goods. As such, we have to tweak our smart contract to accommodate these new parameters. Suggestions for how to do so will be covered in our next Medium post, so stay tuned!
Concluding thoughts:
Overall, it is always interesting to learn new things, and we have definitely learnt a great deal from this particular experience. The mindset of perpetual learning is especially crucial when we are trying to solve problems in emerging markets through the lenses of a developed country. In the following posts, we will touch on some of our newly proposed solutions to incorporate the lessons learnt from this experience.
