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    New Directions for African Financial Services

     

     
     
    International Trade Forum - Issue 2/2005, © International Trade Centre

    Photo: AFP With sharper risk management skills, African banks can help meet the region's big demand for trade finance.
    Above: A bank in Dakar, Senegal.

    Debates thrive between African and developed nations over a "Marshall

    Plan" for Africa, debt cancellation and support for small firms. To

    ensure competitiveness, Africa's own financial institutions must point

    the way in supporting trade and investment.

    As we enter an era in which it seeks to increase its share of global

    trade with traditional and emerging partners, Africa must develop new

    strategies to avoid being left behind. For trade, Africa's

    over-reaching challenge is replacing its reliance on commodity exports

    (oil, precious minerals, cotton and various other cash crops) with the

    manufacturing and export of finished goods and providing globally

    competitive services.

    Transforming economies 

    Unique among services, the financial sector has the largest capacity 

    for transforming economies through increased trade and investment.

    Ignoring the potential of Africa's varied financial sectors also

    disregards the largest dedicated source for growth on the continent.

    The demand for trade finance in Africa far exceeds supply from

    commercial or non-commercial sources, foreign or local. Paradoxically,

    in many African markets, capital is not in short supply. For example,

    in the single-currency, eight-nation West African Economic and Monetary

    Union, over US$ 2 billion in excess liquidity lies dormant in the

    central bank.

    Neither trade nor investment will grow sufficiently

    without an innovative and competitive regional financial sector that

    provides efficient access to structured capital. Ultimately,

    traditional notions of development assistance ignore or even supplant

    the regional financial sector.

    African banks can fill the gap 

    The commercial banking sector across Africa is dominated by the 

    affiliates of European global banking corporations whose core business

    is short-term trade finance of commodity exports. African banks, on the

    other hand, have a vested interest in filling the gap in the supply of

    trade finance to underserved sectors. These include unconventional

    long-term, value-added or smaller-scale trade deals.

    For example,

    countries that produce crude oil but do not refine it can find markets

    in neighbouring non-oil producing countries with refinery capacity.

    Countries that produce cotton, such as Mali, can export semi-finished

    garments to neighbouring economies to finish them for re-export through

    strategically located ports in Ghana, Mauritania or Senegal that have

    quick access to the West.

    Other countries have the ability to produce

    advanced housing construction materials for export. Still others have

    the benefit of financial markets and institutional capacity to issue

    mortgages.

    Mitigating risk is key 

    What strategies and skills must African banks possess to pursue new 

    classes of deals that the global banks reject systematically? The key

    is in achieving new levels of proficiency in assessing and mitigating

    risk. This begins by developing market-specific data collection methods

    to measure previously undocumented credit risk. Once risk is measured,

    it can be mitigated through a variety of financial engineering and

    hedging strategies.

    Most importantly, to spread risk across multiple

    participants, African banks must form syndicates amongst themselves,

    both within and across borders. These syndicates should be capable of

    using a variety of financial techniques to transfer commercial risk to

    markets, first amongst which is the technique of securitization. They

    must acquire the financial engineering and risk management skills that

    are normally obtained through international syndications involving a

    global bank and a local partner.

    This can be achieved by strategic

    hiring and consultants, but also through more effective negotiating

    with international partners. Local market information, for example, can

    be exchanged for training in financial engineering and risk management.

    Break the status quo

     

    Trade is an essential component to sustainable growth in Africa.

    African banks are more apt to respond to local and regional interests

    than foreign banks. Therefore, unless African banks lead the way in

    promoting trade finance, there will be much less capital directed

    towards regional trade in products and services.

    If African banks can

    effectively deploy Africa's capital to where it is needed, then the day

    will come when a garment made in Mali for export to global markets will

    be the new norm. Change of this magnitude can be brought about only by

    a clear desire within the African financial sector, and their global

    partners, to break from the status quo. 

    James French (french@pangeaglobal.net) was formerly head of Treasury,

    Capital Markets and Corporate Finance for Citigroup, stationed in West

    and Central Africa. He is founder of Pangea Global Financial Solutions,

    specializing in private equity, investment services and capital markets

    in Africa.


     

    Swaziland investigates trade finance options


     

    "As part of our services exporting promotion, we held a networking event for banks and financial institutions.

    "Out of that event, we saw a need to look into a financing model for

    small firms. Three Cabinet ministers - including the Governor of the

    central bank - met with local commercial banks. We're now setting up a

    task force to advise the Minister responsible for industry on financing

    small services exporters."

    Zodwa Mabuza, Director of Trade and Commerce, Federation of Swaziland Employers and Chambers of Commerce