BANKING is changing on a daily basis and the latest product on board is trade finance which African banks should follow. Trade finance as an asset class is not new but it is becoming a more interesting proposition for corporate investors.
Trade finance as a short-term asset class is not traditional territory for most bankers and corporate investors. However, it is becoming more interesting as an investment opportunity as the nature of trade and the finance that supports it changes.
In April this year, 14 leading global financial institutions came together to create the Trade Finance Distribution Initiative in an effort to establish the US$25 trillion trade finance industry as a more appealing asset class for institutional investors. Recently, they have been joined by other five leading banks to make them 19. The key to success here is the Trade Finance Distribution’s initial focus on creating common data standards and definitions. This will enhance operational efficiency and improve risk management.
The new additions include ABN Amro, Commonwealth Bank of Australia, Crown Agents Bank, London Forfaiting Company and Natixis. They join some of the world’s largest trade finance banks, including ANZ, Crédit Agricole, Deutsche Bank, HSBC, ING, Lloyds Bank, Rabobank, Standard Bank, Standard Chartered and SMBC, as well as four other banks that have not been named, who have been part of the project since it was formed.
Its goal is based on the understanding that trade is the lifeblood of the world’s economies. It recognises that even with current market protectionism as well as economic slowdowns in geographies such as China and the Eurozone, there are openings for participants the world over and that trade as an asset class has great potential.
In Africa, the move by the leaders to create a continental free trade area augurs well with the trade finance asset class. Leading pan-African banks such as Ecobank and Standard Bank are well positioned to take advantage of the development and emulate global banks to create standards meant for Africa.
The world over, investors are leveraging on the power of the internet. The internet is democratising trade, giving very small businesses the same level of access to global markets as multinationals. As digitisation and automation are making trade cheaper, safer and faster, data flows are likely to increase at a much faster rate.
E-commerce merchants are being financed against inventory stocked and receivables due from online sales. More intangible goods are being financed, such as software downloads and media content purchases. There is also increasing monetisation of offerings such as annual maintenance contracts and cloud services, products that are yet to reach Africa.
Investors in trade assets are typically banks and the ‘alternative’ investor grouping that includes fund and wealth managers. However, apart from banks, the Trade Finance Distribution target insurance and pension companies and, potentially, large corporate investors. Although institutional investors in particular have become very interested in this asset class, many banks have in recent years become less active in trade finance as most banks are increasingly paying more attention to their capital efficiency.
However, there have been some major changes in the trade distribution space in the last couple of years. HSBC as “the world’s largest trade finance bank” (US$740 billion trade facilitated annually), has shifted its stance from a “book and hold” operator of trade finance assets to one of “originate and distribute”, and its distribution volumes have expanded from US$2 billion to US$20 billion in just 36 months.
The bank is now highlighting its commitment to trade by rolling out the final piece of its global trade asset distribution network, highlighting the potential of this asset class which African banks should emulate.
Tinashe Kaduwo is a researcher and economist. — firstname.lastname@example.org