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Receivables Financing and Africa

Receivables Financing and Africa

Introduction

The African Continental Free Trade Agreement has been signed by 54 (out of 55) of the African Union member states, with Eritrea being the only country not to have signed the Agreement. The Agreement breathes life to the formation of the African Continental Free Trade Area (AfCFTA), which represents the consolidation of the African continent into one major trading bloc. This article takes a closer look at the Agreement and what it actually means for intra-African trade and receivables financing in Africa.

Why the Interest in the AfCFTA

Africa is a sizeable continent, with a surface area 50% larger than North America. It is home to 54 countries with a combined GDP which is 10% smaller than France, yet its population is 17 times larger and contains a wealth of accessible natural resources. Currently, the African population is expected to grow in excess of 2.5 billion by the year 2050. This means that by 2050, Africa will represent 26% of the world’s working age population. Combined with the average GDP per capita of 2% per annum, this points to great potential that requires the right tools and leadership to convert this potential into reality.

Why is Receivables Financing Important to Africa

Receivables financing is a cost-effective alternative form of financing where businesses can unlock funding held in their yet to be paid invoices (essentially their accounts receivables). This funding option remains largely under-utilized in Africa, with the key reasons for this being a lack of awareness, availability and structure in the product offering across the various African countries. Many enterprises and individuals do not fully appreciate its benefits which brings the issue of receivables financing to the fore. Previously excluded Small and Medium sized Enterprises (SMEs) are able to access funding as the risk is taken on the buyer rather than the invoicing company. SMEs represent over 95% of registered entities worldwide and employ more than 50% of the world’s workforce and contribute to more than 35% of Gross Domestic Product (GDP). This makes receivables financing crucial for SMEs, and those in Africa in particular, as they generally face funding challenges and limitations. Through cross boarder receivables financing, businesses can export or import between countries and be assured of payment from their counter parties. This is a vehicle that can easily boost trade immediately, enabling businesses to reach the wider continent and beyond.

Africa accounts for a disproportionate 1% of global factoring volumes. In spite of this, Africa has experienced a significant growth in its factoring volumes, growing from US$16.835 billion, to US$25.195 billion between 2009 and 2017. The bulk of the factoring growth was experienced in South Africa, Tunisia, Morocco, Egypt, Kenya and Mauritius. African Export-Import Bank (Afreximbank) Managing Director of Intra-Africa Trade, Kanayo Awani, estimates that Africa’s factoring transactions may exceed US$226 billion by as soon as 2021 on the back of sustained economic growth, technological innovation and inter-continental integration through agreements such the AfCFTA.

What Benefits does Receivables Financing present for Africa and the AfCFTA?

The purpose of the AfCFTA is to eliminate up to 90% of tariffs that are currently placed on African goods. This will boost intra-African trade as countries are able to freely trade amongst themselves and promote the transfer of technology, industrial development, economic productivity and diversification of economic growth sources. The resultant intra-African trade will require financing tools such as Receivables Financing to ensure that the continent’s 1.2 billion people and an estimated market of $3.4 trillion across the 55 member states of the African Union benefit from the operation of the AfCFTA. This alone makes the AfCFTA the largest free trade area in the world since the creation of the World Trade Organisation in 1995. The United Nations Conference on Trade and Development (UNCTAD) estimates that African countries only conduct between 16% of their trade between each other – a glaring contrast to the 65% intra-European and 58% intra-Asian trade figures. In 2018, intra-African trade was US$159.1 billion, representing 16.1% of total African trade. The top 3 contributors to intra-African trade in 2018 were South Africa (US$36.5 billion), the Democratic Republic of Congo and Nigeria. In 2017, the biggest contributors were South Africa (US$31.92 billion), Namibia (US$7.6 billion) and Nigeria (US$6.99 billion). Most notably, Namibia benefited from its strong trade relationship with South Africa, channeling more than 12% of South Africa’s exports to Africa. It is estimated that the AfCFTA has the potential to boost intra-African trade by 52.3% through the elimination of tariffs between African states. A recent African Union report stated that, in terms of global goods trade, Africa only accounts for 1.8% of imports and 3.6% of exports.

The AfCFTA aims to increase market access, economies of scale, intercontinental bargaining power and competitive advantages. With the absence of customs protocols and technical barriers to trade, the number of days export and domestic (intra-African) products will spend at border posts will drastically be reduced. Although customs revenues will be adversely impacted, it is projected that real income for Africa would improve by at least US$296 million.

With increased market access and reduced trade barriers due to the AfCFTA’s implementation, the scope for receivables financing will be greatly increased. Africa will be strategically placed to grow its factoring volumes by simply leveraging the existing extra-territorial trade networks. For example, if invoices for the fuel, precious stones, vehicles and machinery exported by South Africa to its largest bilateral regional trading partners Botswana and Namibia were to be used to unlock immediate receivables finance, trade volumes would be increased. Similarly, the Democratic Republic of Congo exports copper ores and base metals to Zambia and South Africa; Zambia also imports vehicles, fertilizer and machinery from South Africa; Nigeria exports crude oil to many African states; a growth in the trade of manufactured products and agricultural commodities is being observed within the Economic Community of West African States (ECOWAS), and more than 35% of Zimbabwe’s exports to South Africa consist of fast-moving consumer goods and prepared food items. The market opportunity is firmly before the continent and requires strong public and private sector initiatives to ensure trade growth is achieved.

70% of global trade is conducted on open account giving receivables financing a place to bridge the divide between trading parties with a service that enables them to more securely and transparently trade without worrying about payment terms. With the use of for example the two-factor system in cross-border transactions utilized by members of Factors Chain International (FCI), African exporters can expand into new markets without the use of letters of credit whilst still protected against debtor default. Receivables Financing facilities will minimize payment waiting periods across supply chains which will increase enterprise efficiency and stock turnover. This directly benefits African businesses which will benefit from financial inclusion, thus allowing them to focus on their productivity and long-term business growth. The benefits of Receivables Financing cannot be overstated as the funding model assists stakeholders across transactions by providing confidence across the supply chains, be it the trading companies or the regulators concerned with cross-border payments who are interested in the Know your Client process and Anti-Money Laundering activities.

Africa currently has smaller trading blocs operating within its territory, namely the Southern African Development Community (SADC), ECOWAS and the Common Market for Eastern and Southern Africa (COMESA). The creation of the AfCFTA is projected to grow Africa’s overall trade with the rest of the world by US$17 billion, effectively boosting exports by US$25 billion, with the highest growth observed in the agricultural and industrial sectors. The AfCFTA will defragment the continent and represent an amalgamation of Africa’s trading communities and prospects for continental growth through regional cooperation driven by mutual benefit. This signifies potential for increases in both one and two-way intra-African and global trade, which will be further heightened with the use of alternative funding options such as Receivables Financing.

Conclusion

The African Continental Free Trade Agreement aims to consolidate Africa into one major trading bloc. In this endeavour, receivables financing presents itself as a key catalyst for unlocking working capital and an avenue towards efficient and secure payments across the continent. SME’s are poised to benefit the most which points to a better and economically stronger Africa for future generations to come.

Bibliography:

  • United Nations (2016) African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods.
  • African Export-Import Bank (2018) African Trade Report: Boosting Intra-African Trade: Implications of the African Continental Free Trade Area.
  • African Export-Import Bank (2019) African Trade Report: African Trade in a Digital World. 
  • OCP Policy Center (2018) Rim Berahab and Uri Dadush Will the African Free Trade Agreement Succeed?

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