Leveraging receivable Financing: …The Way Forward for African Trade Financing in Post-COVID-19 Pandemic

by | Jun 7, 2020 | International Trade, Business and Finance, SME | 0 comments

Leveraging receivable financing: …the way forward for African trade financing in post-COVID-19 pandemic

The effects of the COVID-19 pandemic on trade and investment will not only manifest in the dwindling contribution of the sector to national and international aggregate gross domestic product (GDP), employment and economic growth but also on the financing avenues for trading and competitiveness of businesses of emerging markets in international economic dynamics.

There is an anticipation of capital flights from the financial and stocks markets in this situation. There is also a projection of a fundamental shift from investment to capital hoarding. Profit losses and stuck capitals will be reported and the world may be heading to another unprecedented recession and cause the quarantine of many economies, especially in the Global South.


In the anticipation of all these plausible projections, it is prudent to forecast an African economy driven by the business environment in such dispensation. It is also wiser in the same manner to project a sustainable way to prepare, forestall and mitigate any eventualities that may confront the commerce of the world in general and Africa in particular. The world’s biggest trading nations and blocs have seen the hardest hit with this catastrophic disease in this short period grinding almost all economic activities and commerce to a halt.

Countries which hold sway for Africa’s major trading bloc, the European Union (EU), has been painfully inflicted and that will eventually impact on the foundations of the pillars of African trade output. Major African member countries in the African Continental Free Trade Area (AfCFTA) that would serve as the strongholds of the continental trade arrangement like South Africa, Nigeria, Egypt, Ghana, Tunisia, Ivory Coast have been saddled with the debilitating effects of the pandemic.

But one would expect Africa to take advantage of the new eventual paradigm, albeit with huge costs to its development plan and budget, to launch an aggressive trade protocol and economic discourse to create a meaningful living for its citizens. Necessity is still the mother of all inventions. After the 2nd World War in 1944, the world was certain that it was not going to war again on matters surrounding trade and disputes on economic inequalities.

However one may consider it, even as an exaggeration, the trade rift for instance between the United States and China has taken centre stage in the international trade system. The trading spat between these countries and their allies have been uncompromising especially during the last attempt of the round of negotiations under the 2001 Doha Round (semi-officially called the Agenda for Development). Africa cannot be going forward pretending to be oblivious of the imminent hike in this tussle in post-COVID-19.

The war for the turf for economic supremacy is not ending with this. What needs to be done is for the structures and players of commerce in the Global South and Africa, in particular, to be positioned adequately to have a voice and the wherewithal to compete to anchor the continent’s overall economic development.

International trade relations, no doubt is going to be uttered significantly after this period; relations are going to be redefined; new partnerships eminent; readjustments have to be made to exiting continental agreements; trade focus and protocols will be redirected, and economies are going to be reengineered based on available social capitals. The theory of economies of scale will continue to be the order of the day, largely, to navigate economic planning.

Africa has the benefits of hindsight from the traces of World War II, which led to the General Agreement on Trade and Tariffs (GATT, 1947) negotiations; the predecessor of the World Trade Organisation (WTO). Africa’s net contribution to world trade under the multilateral trading system of the WTO has been nothing to write home about. Often, the markets of the continent have been at the receiving end with significant national budgets going into imports of finished goods and basic lifestyle products. Exports commodities have largely been raw and unfinished products to the Global North. Investment in manufacturing, research and development are woeful.

With the coming into force of the AfCFTA in July 2019, there was hope that the African trading platform and prowess were going to be felt more aggressively especially in trade in goods and services under its first phase. The business community in Africa which is expected to serve as the conduit for this agreement is predominantly led by Micro, Small and Medium Enterprises (MSMEs) with so little financial muscles to make a meaningful impact on the global arena of commerce.

This cements the previous point that the multinational dominated environment does not guarantee a conducive space for African businesses to compete on the international import and export market. Finance has always surfaced as the singular most essential element that serves as the livewire for the growth and survival of MSMEs.

In this vein, I propose Africa to leverage on factoring, which has not received the needed recognition, promotion and the milieu to operate in most African countries, as a key alternative but reliable and sustainable means of financing its economic wheels on the global economic market. It is simply a trade finance scheme by which an entity discounts its invoices and sells to a factor for upfront cash. Factoring has exited over a century as a financing model for businesses across the globe.

However, Africa’s share of the overall factoring business in the world is approximately 9% with South Africa as the leader. It is yet a very complex and sophisticated market involving multinationals but which can retain local investors and banks when properly regulated with the right legal environment. The advantages of invoice discounting stand out from other known traditional financing schemes such as loans and overdraft facilities.

Fortunately, Africa has a vehicle already in motion that has a special interest in promoting factoring activities. The African Export-Import Bank (Afreximbank) has since 1993 offered the expertise and financial injections to give technical, financial, legal and research support to countries that embrace and crave for the use of factoring to resource their MSMEs in particular. What is needed to maximise the merits of this enterprise is to rely on existing international and regional factoring legal framework to encourage African countries to enact laws purposely suited to regulate the factoring industry in tune with their socio-economic dynamics.

By way of conclusion, it is my conviction that many economies in the global south are going to experience the debilitating effects of the COVID-19 pandemic in an unprecedented way. International economics and power dynamics have ample theoretical and practical instances about how Africa, in this case, can leverage to come out of this successfully.

This will depend essentially on how the continent prepares its MSMEs through a reliable, sustainable and efficient system of trade financing to carry the objectives of the AfCFTA along. Factoring has proven over the years and across the globe as one surest means of achieving this objective.

References

https://www.who.int/emergencies/diseases/novel-coronavirus-2019 (accessed 29 March 2020)

https://au.int/en/cfta (accessed 29 March 2020).

https://www.bbc.com/news/business-45899310.

https://www.wto.org/english/tratop_e/dda_e/dda_e.htm.

Korankye-Sakyi, FK ‘Factoring as Means of Promoting Small and Medium Scale Enterprises: The Case for a Legal Framework for Credit Factoring in Ghana’ (Thesis, University of Pretoria, South Africa 2019).

M Bickers(ed) ‘World Factoring Year Book’ (2017) https://bcrpub.com/system/files/World_Factoring_Year_2017_O.pdf ( accessed 31 March 2020).

Ibid.

https://www.afreximbank.com (accessed 29 March 2020).

Afreximbank Model Law on Factoring (2016); International Factors Group model law (IFG) (2014); UNCITRAL Convention on the Assignment of Receivables in International Trade (2001); UNIDROIT Convention on International Factoring (Ottawa, 1988).

The writer is a Development and International Trade Finance Expert

First published on Business and Financial Times Online

Francis Korankye-Sakyi is a Development and International Trade Finance Expert: LL.M in International Trade and Investment Law (University of Pretoria, South Africa) M.A. in Governance and Sustainable Development, LL. B, B. Ed (University of Cape Coast, Ghana)

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