Author: Bohani Hlungwane, Managing Principal, Head: Trade and Working Capital (Pan-Africa) Absa CIB
As a leading pan-African banking group, we are uniquely positioned to identify trends on the continent. We are particularly excited around developments in the digitisation space. However, it is imperative that the regulatory environment keeps pace and does not hinder innovation.
In short, we have never seen a more focused debate around digitisation and automation, and its interaction with Fintech solution providers in the Trade Finance space. We believe this is going to be transformative for the way the continent conducts business. The discussions are no longer about the excitement on the various technologies out there, but more about what are the digital and technology solutions that can help us solve specific problems today and help future proof our business.
As a bank, we are identifying digitisation trends that are of interest to us and we can broadly break these down into a couple of key areas: Data to make better decisions, Technology that drives efficiencies, Risk Management, and mitigation tools, and viewed holistically, solutions that will allow us to future-proof our business.
A perfect example of how technology changes the way we do business is a technology partnership for Optical Correction Recognition (OCR). If you are importing or exporting goods, you will be aware of the amount of paperwork that is generated and the time it takes to assess this paperwork at various points in the process. This technology has allowed us to not only streamline our processes, but also enabled us to process more documents under letters of credit than we would have been able to manually, whist at the same time building more resilience in our processes. This frees us up to better understand and service our clients’ needs.
Taking this a step further, Africa is becoming increasingly important in the global economy, from both an import and export perspective. While Africa has enjoyed long-standing relationships with the European Union and United States, some of our biggest growth markets are in the Asian economies and we are looking to identify technology solutions that help our efforts – and our clients – plug in to these corridors. As access-to-market opportunities increase, so will the demand for funding.
While these all represent exciting opportunities, it is important that the regulatory framework keeps pace with the new technology. There is always a natural tension between the regulatory requirements faced by the banking sector and the flexibility enjoyed by many of the fintech disruptors.
On one hand, you have an annual Trade Finance gap of around $100bn each year and at the same time, the banking sector are busy rolling out Basel IV regulations which, unless something drastically changes, may restrict the ability of banks to lend to small and medium-sized businesses, given the more stringent capital requirements that are part of Basel IV regulations.
One of the key concerns with Basel IV regulations is the effective tenor of trade finance transactions. Trade Finance is short-term in nature, and capital regulations should be based on three to six month maturity profiles instead of insisting on any tenor that is 1 year or above.
It is costing more to be innovative.
Technology provides us with the chance to inject agility into this process but also start to incorporate aspects like Environmental, Social and Governance (ESG) considerations. Businesses and financial institutions should be rewarded for unlocking financing that empowers youth and women-owned small businesses.
While technology has always been a natural fit for ticking the “Governance” element in ESG, we are seeking ways that it can similarly be used to the “E” and the “S” while being supported by a variety of Sustainable Finance instruments such as Green Bonds.
Africa is going through a unique period of economic growth as it starts to adjust to a changing world order and the associated economic events. Events in Ukraine, Russia and China have materially disrupted global supply-chains, and this is forcing Africa to fast-track many of its infrastructure projects. With the narrowing of both the infrastructure and Trade Finance gaps, we have the chance to lean on technology to help us unlock funding to empower the next generation of entrepreneurs.