International commodity traders are turning to African banks to finance trade transactions as the global economic slowdown, Eurozone debt crisis and tougher capital requirements force international banks to pull back their lending in Africa.
Standard Bank’s Global Head of Structured Trade and Commodity Finance, Mr Craig Polkinghorne, says the pull-back forced on global banks is happening at a time when Africa’s trade continues to grow across a broad front of geographies and sectors.
Mr Polkinghorne says: “The scale of trade finance opportunity is substantial when considering that Africa’s exports alone grew to US $500-billion in 2012 from US $445-billion in 2011. It is something of a phenomenon that the general tightening of global credit continues to curtail availability of commodity trade finance from the traditionally dominant players, even as African countries ramp up trade relations with the fastest-growing economies.
Many international banks have reviewed their risk appetite and have withdrawn from, or limited their exposure to trade finance in Africa. Mr Polkinghorne says that a funding gap has consequently opened up, creating an opportunity for other players to fill that vacuum.
“This has created great opportunities for African banks to be more active in trade finance because they have strong balance sheets, the necessary capital and liquidity, and risk appetite. For domestic currency transactions they also have competitive funding costs compared to global counterparts,” he says.
“More importantly, as European and US demand has continued to decline, the liquidity from African banks has helped to deepen intra-African trade and increase trade flows between the continent and other emerging market regions.”
China is increasingly accounting for a significant portion of Africa’s trade compared to its trade with the rest of the world. Trade with China has grown from 10% of overall trade in 2008 to 18% in 2011. China’s dominant African trading partners are Angola, South Africa, Sudan, Nigeria, Egypt and Algeria.
African countries are also importing goods to support infrastructure investment and consumer spending. Standard Bank Group research shows that imports of machinery, transport equipment and textiles remain buoyant
“So, we see strong trade and constrained competitors as an ideal growth environment for banks with local presence and technical banking expertise,” says Mr Polkinghorne.
Standard Bank Group has recently expanded its client base to incorporate new jurisdictions in Africa. Mr Polkinghorne notes that the growth Standard Bank Group has experienced in issuing letters of credit shows growing trust in its ability to take on and manage the “Africa risk” portion of these transactions.
Standard Bank Group has used the opportunity to strengthen its position in trade finance in the energy, natural resources and agricultural sectors, says Mr Polkinghorne.
In one such recent deal, Standard Bank Group provided Tanzania’s Export Trading Group (ETG) with US $250-million in trade finance facilities. ETG is a leading integrated agricultural supply chain manager in East and Southern Africa.
In another transaction, Standard Bank Group assisted the Ghana Cocoa Board to secure a US$1.5-billion pre-export finance facility to purchase cocoa beans in the 2012/13 cocoa season. The facility is currently the largest non-oil deal in sub-Saharan Africa.
Standard Bank Group also acted as mandated lead arranger on the 2012 US $1.5bn Sonangol pre-export finance deal, further cementing the banks activities in Angola. Africa of course had three important global suppliers of crude oil; Angola, Egypt and Nigeria. Significant oil product import lines were provided across sub-Saharan Africa, where the Bank provides in excess of US $1bn of import trade finance lines across West, East and Southern Africa.
Oil and oil products remains a dominant influence in the continents GDP and is viewed as being strategically important to the success of the growth achieved by the continent as a whole, and as consumer discretionary spend increases, and car ownership rises, this will continue to be an important trade flow where the bank can provide bespoke trade finance solutions across the supply chain.
Mr Polkinghorne says: “An important change in growing our share of the trade finance market is that liquidity pressures have made the cost of funding for Standard Bank Group and its African counterparts more competitive when compared to European banks.
“We are seeing indications in the market that South African and other African banks are participating not only as lenders but co-arrangers on large pre-export finance deals.” he says.
Mr Polkinghorne notes that African banks are increasingly being called upon to step up their lending for trade transactions because of their stronger balance sheets and risk appetite.
“Natural resources, both within the oil and metals markets and the agriculture sector continue to dominate the African landscape. But it is perhaps the processes through which such resources are utilised, both in the facilitating of international and intra-regional trade and establishment of a suitable environment to conduct business that remain the key challenges. Local banks have increasingly found greater opportunities and increasing confidence to support major trade transactions, says Mr Polkinghorne.”