NAIROBI, 21 March, 2013 – At a recent workshop in Nairobi a leading manufacturer stood up and expressed his frustrations. They weren’t the usual sort regarding government inefficiencies. Instead, this textile manufacturer was recollecting a large – and in retrospect, an avoidable loss, he experienced a number of years ago.
In five minutes, he summarised what so many African companies go through at some stage in their existence. His story begins in the still heady days leading up to the start of the global financial crisis. It was 2007 and then, a majority of his customers were in North America. Not in a million years could he have foreseen what would happen just a few months later when the bubble began to burst in the financial markets. During this period, one particular American buyer, who was among the largest retailers at that time and who has since declared bankruptcy, began holding payment on a $50,000 order.
“The alarm bells went off when he stopped returning my calls,” he notes. In the end, the manufacturer was left holding the bag for a majority of a $50,000 invoice as he, like many other debtors, was only able to get pennies on the dollar following a lengthy settlement process with the retailer.
As a remedy, the manufacturer shifted his strategy to one that saw his exposure to North America and Europe reduced by more than half within one year. “After this experience I was convinced that I needed to build my balance sheet in Africa, where there is less risk. I decided to only focus on big and safe clients like Walmart in these markets” he added.
This is not the kind of statement one would expect to hear when referring to an American customer – let alone a giant retailer. This may indicate that a change is in the air.
While the days of African exporters and manufacturers scrambling to secure contracts from American or European firms may not be gone, what we are witnessing is a shift in the global business dynamics. This shift is leaving an increasingly well-worn trail of investors to regions such as Africa.
With a population of over 1 billion largely young consumers, a combined GDP of close to $2 trillion and home to 7 of the 10 fastest growing economies in the world. Africa is the place to be. And now, more than ever, African companies are also starting to change course to focus on expansion within their own markets.
Given the current global financial turmoil, the business solution for many African companies interested in expanding beyond their borders may seem simple – but the reality is anything but.
The international manufacturer, who expressed his challenges in the forum also touched upon the difficulties in finding financial protection in Africa. In fact, he was one of the first clients to approach the African Trade Insurance Agency (ATI), which was then just rolling out a new product for companies to protect themselves against the risk of payment default similar to the situation he had just encountered.
“At that time, it was a slow process because ATI was still ironing out details of the product and not a lot of companies knew about it.” In fact, this manufacturer emerged as an “early adopter” of products that have since created a level of comfort in his business expansion strategy that he is quick to encourage others to use.
“No business person wants to expose themselves to a risk that could easily be managed,” he explains. “These days I am doing quite a bit of business with neighbouring governments in East Africa. With the ATI policy, it works quite well. If the government drags its feet in paying me, I can take my policy to the bank and recoup up to 80% of my invoices on the spot. I then turn around and repay the bank when I receive full payment. This has saved me a lot of money on bank interest charges, which I would have otherwise had to pay while waiting for the government to pay my invoices.”
The biggest benefit of this product is that it allows companies to move from a cash-based business to one in which they can purchase goods, sell exports and perform a host of other business transactions without the need for up-front cash. This benefit also extends to bank financing. With this kind of protection in place, companies can actually secure bank loans without having to put up other collateral.
“For many companies, this is a liberating experience. It gives them an advantage over their competitors who may still be tied to the old ways of doing business,” explains Jef Vincent, ATI’s Chief Underwriting Officer and mastermind behind a new three-year strategy to boost the spread of this product to companies in Africa.
The good news is that such a product does exist. ATI now has a firmly entrenched track record in Central, East and Southern African countries with plans to roll out this and other products in West Africa this year. In order for companies to benefit from these products their home countries must first become members. To date, Benin is the first West African country to join but Ghana is also expected to follow suit within months.
In addition to these two countries, plans are also underway to partner with ECOWAS to launch ATI in all West African countries under the ECOWAS umbrella.
Although the potential is enormous, ATI still runs up against quite a few obstacles. Chief among them is an ideology and a culture of mistrust, which prevents companies from giving freely their financial information. This is a key ingredient to ensuring that financial protections – in the form of Trade Credit Insurance, function effectively.
“Other European and North American companies interested in protecting exporters to Africa are encountering the same challenge. African companies are not in the habit of giving information. ATI is in a good position because we are an African institution and being closer to the company it is easier to collect information.”
Even with this advantage, the fact remains that there are very few credit information agencies that can provide reliable information on national companies. Kenya stands out. Credit reference bureaus as they exist in Kenya, Uganda and Rwanda have information about the experience of banks, but this information is currently only available to banks.
Current statistics indicate that 85% of world transactions are done on credit. In contrast, only about 10% of business transactions in Africa are conducted on a credit basis.
Without a shift in culture, Africa will continue to lag behind other regions in the world in terms of its competitiveness. According to a recent report by credit rating company Fitch, rising credit to GDP figures tend to mirror the development of an economy’s financial sector. For instance, the Sub-Saharan Africa median credit to GDP is 21.6% compared to the global median of 27.7%.
In order for Africa to fully benefit from the opportunities within its borders, it must also let go of the stranglehold of colonial trading ideologies. For instance, a shift in mindset would enable East Africa to see West Africa as a viable trading bloc regardless of language, culture or history. While this culture of regional mistrust still exists in some quarters, fortunately, there are encouraging signs that it is slowly breaking down. In the lead is Kenya Airways, one of the largest African carriers, who have recently announced a new strategy that will see them shut down loss-making European routes in favour of expanding African routes – with a particular emphasis on West Africa. Increasing transportation options between countries will go a long way to increasing Africa’s meagre rates of trade among themselves which stands at a global low of 10-12% compared to Asia which trades with regional partners 52% of the time.
Alongside companies, banks and financiers are also big winners with this increased use of trade credit. In recent years, the high cost of funding has hampered banks’ ability to lend, which is a crucial aspect of their business. To compensate, banks have had to put in place stringent lending criteria, leaving many companies in the cold with no chance to qualify for loans. However, with the types of financial protections that ATI offers , banks are now able to lend confidently and often at lower rates.
“Banks currently account for a majority of our clients. The products fit quite easily within their financial framework and credit management policies. Even more importantly, they help them to do their job – which is to lend, more effectively,” notes Mr. Vincent.
With increasing access to such instruments, African companies may well be on their way to achieving global competitiveness. Although nobody argues that a lot more needs to be done to change hearts and minds, Mr. Vincent and other experts in the field are convinced that once critical mass is achieved, Africa may be permanently transformed.
“I’m banking on this happening in my lifetime.” he adds.
Note to editors:
About The African Trade Insurance Agency
ATI was founded in 2001 by African States to cover the trade and investment risks of companies doing business in Africa. ATI provides Political Risk, Surety Bonds, Trade Credit Insurance and Political Violence and Terrorism & Sabotage cover. To date, ATI has supported over US$7.5 billion in trade and investments across Africa in sectors such as agribusiness, energy, exports, housing, infrastructure manufacturing, mining and telecommunications. ATI is the highest rated insurer in Africa with the 2012 renewal of its Long Term ‘A/Stable’ rating for Financial Strength and Counterparty Credit by Standard & Poor’s.
