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Anglo-South African firm Investec sets up trade-finance business to target African corporates, banks

By David Whitehouse
Posted on Wednesday, 23 June 2021 17:55

Banks intermediate about 40% of African trade, compared with a global average of 80%. REUTERS/Njeri Mwangi

London- and Johannesburg-listed financial services firm Investec is betting that African free trade is on the cusp of becoming reality as it sets up a new trade-finance business in South Africa.

The business, launched at the start of June, aims to become fully operational within a year, Investec’s new head of institutional trade finance George Wilson tells The Africa Report from Johannesburg. He argues that trade finance accounts for up to 30% of African GDP growth.

Investec will be targeting companies, their banks and development agencies. The scale of Africa’s trade-financing needs means that Investec will not need to directly compete with incumbents such as Standard Bank and Mauritius Commercial Bank, Wilson says. “Africa needs more trade-finance capacity, not less. There’s more than enough unmet capacity.”

The potential for African trade finance lies in the need for companies to be paid promptly while avoiding currency and cross-border payments risks. According to a report from Afreximbank in April, Africa’s trade-financing gap may be worsened by the impact of Covid-19.

  • The report says that banks intermediate about 40% of African trade, compared with a global average of 80%.
  • Investec’s new unit is already able to participate in syndicated trade loans and will increase this capacity in the future, Wilson says. “If there is low-hanging fruit where we can participate, then we will.”
  • He plans for Investec to be offering letters of credit, the “fundamental instrument of trade,” by the end of the year.

Wilson joined Investec to lead the business from Absa, bringing three of his colleagues with him. Investec is also looking at extra steps that may be needed to tackle trade-finance risks such as money laundering and sanctions screening. This could involve using external technology.

The business is looking at “what is under the hood,” Wilson says. “If things are missing, we will bring them in.”

Covid-19 Impact

Afreximbank’s April report covers the first four months of 2020 and surveyed commercial banks about the impact of the pandemic on trade finance. The participating banks accounted for about 58% of the total assets held by commercial banks in Africa.

Trade finance was needed more than ever in the pandemic’s early stages.

Almost 37% of respondents reported an increase in demand from their export clients, with Southern and Western Africa showing the largest increases in demand.

In many cases, the financing simply was not there.

  • The survey shows 30% of respondents reporting an increase in letters of credit requests being rejected.
  • At the same time, major international banks cancelled and/or reduced their lines of credit limits for African banks, with European banks accounting for about half of the reduction.

That withdrawal by international banks could be the start of a long-term trend, Afreximbank says.

Local African banks need to enter correspondent-banking relationships to take advantage of the opportunities created by the exodus, Afreximbank says, especially as Africa’s trade-finance needs will increase further as the African Continental Free Trade Area is implemented.

African free trade, Wilson says, provides “very fertile ground” for Investec’s new venture.

Bottom line

Global risk aversion during Covid-19 shows that Africa needs its own trade-finance solutions.

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