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