Mombasa Road in Nairobi, is fast becoming the hub of East African manufacturing and exports-based businesses. It is also the headquarters for the region’s largest individually owned freight forwarding and storage company – an integral part of the African export market.
Since 1994, this company has been shipping perishables such as flowers, vegetables and textiles internationally. During this period, they have perfected a cool-chain technique that carefully determined and regulated the temperature of perishable goods ensuring that an ideal temperature is maintained from the time they receive the goods to the time they are packed and shipped. Stringent adherence to these types of details are one of the reasons the company continues to be successful.
With success however, some hurdles naturally follow. For this company, one such hurdle came in early 2011 from a European customer whose flowers they had been handling from Kenya to Europe, without incident, for four years.
“This was an established client. We had a very good relationship and had never had any problems in the past – but once I realized it was going to escalate into a claim, I contacted ATI and fortunately they were able to pay us what was owed within a few months,” recalls the Company’s Finance Manager, Fazul Jamal.
In situations where companies are not insured against non-payment risks, the company has two options – resolve the issue or absorb the loss, which in some instances can be devastating.
The perception by uninsured African companies is that a good rapport with their clients neutralizes the possibility that a client will not pay for services or goods received. However, claims such as these prove that non-payment risks, no matter the length of the relationship with the client, remain a threat to any business.
Unfortunately, this story is not rare, particularly in Africa. It stands out only because the MD of this company – a veteran with 45 years of experience in the freight forwarding business – is one of a handful who took out Export Credit Risk Insurance (otherwise known as Trade Credit Insurance) early.
According to Jamal, his MD is a rare breed – someone who practices the philosophy ‘better safe than sorry’. “In the early days, before ATI, no one offered this type of cover. Our MD spent many years looking for someone to issue us insurance on overseas buyers. At that time, ATI was the only one offering this in the market and we’ve been insuring with them now for nearly seven years.”
Much is known about Trade Credit Insurance globally but in Africa knowledge is nearly non-existent. In short, this type of insurance helps facilitate trade by enabling suppliers to sell goods and services on credit terms – with a mitigation instrument in place should the client delay to pay, refuse to pay or become insolvent before payments is due. The credit insurer charges a premium for indemnifying the seller against the possibility that one or all of his buyers may default on payment for goods or services they have received. International exports are also subject to a host of other risks, which could prevent a buyer from paying, such as political risks.
The 2008 global financial crisis was the turning point – it changed the way companies manage their risks. According to the Berne Union – the global membership body of credit and political risk insurers – Short Term claims (refers to Trade Credit claims) paid by its members to insured exporters in 2009 more than doubled from $1.1 billion in 2008 to $2.4 billion in 2009. In the global Trade Credit Insurance market, Europe as a destination maintains the largest percentage of insurance – in other words, companies shipping to Europe are more likely to take out insurance than those shipping goods to other regions.
While goods destined to Africa are more likely to be insured against a range of political risks, Trade Credit Insurance should be as important for African exports and suppliers with goods or services destined outside the continent.
With the Eurozone crisis heating up it’s difficult to predict what the full global financial fallout might be. The experts aren’t able to give a definitive answer, but while we wait, the reality is that Europe continues to be the largest destination for most African exporters – placing them at considerable risk in the event one of their buyers defaults.
“In the case of our client, they probably would have been able to bounce back from a loss that was close to $20,000 but I don’t believe many smaller companies could say the same. Exporters generally tend to operate on small margins so a loss of even a few thousand could throw operations into a tail spin,” notes Benjamin Mugisha, the ATI underwriter who manages the freight forwarders’ account.
One of ATI’s core objectives is to educate companies about the advantages of Trade Credit and Political Risk Insurance products. Although Political Risk Insurance is easier to grasp, African companies often find it difficult to justify an added cost when they may be accustomed to trading on a cash-basis or selling their goods at auction.
“The advantages are simple. Any African company that wants to sell their goods or services abroad should understand this basic principle – to compete globally we must do business the way the world does it – on a credit basis. Better to spend less than 1% of your turnover to protect yourself than what could be tens of thousands of dollars down the drain,” comments Mugisha.
