UK: Focus On Trade Finance - An Update And Liquidity Options For Tanzanian Banks

Tanzania has historically been a country highly dependent on trade finance. With a natural deep sea port in Dar es Salaam, Tanzania is the entry point not only for its own market but for several other land locked countries in the East and Southern African region.

Several international banks operate in the trade finance market in east Africa. Local banks also participate. Given recent global economic uncertainty, local banks have been affected by a lack of liquidity in the market to enable them to carry out their trade finance operations and to effectively service borrower clients. What solutions are there for local banks? What practical steps can be taken by local banks to access funds to on-lend? It is first important to look at the recent history of the trade finance market.

The financial crisis

The financial crisis and ensuing recession in 2008-09 prompted an unprecedented decline in global trade According to the World Bank, trade declined at an even faster pace than during the early years of the 1930s Great Depression. Hopes that Africa's low level of financial development and integration might offer protection from the fallout proved optimistic as did hopes that structured trade finance might prove more resilient than other forms of lending.

The collapse of structured trade finance

Since the financial crisis, the structured trade finance market has shrunk to a fraction of its former size. An estimated 85% of the world's commodity trade is now conducted on an "open account" basis - where the seller bears the full risk of non-payment by the buyer. The second phase of the European banking crisis in late 2011 has exacerbated this issue further.

This situation has developed largely because structured trade finance has proved as vulnerable to the crisis-induced breakdown in trust between bank counterparties as other parts of the financial system. Few trade finance banks have the global scale and network to act on both sides of a transaction, using different branches of their own organisation. The situation has also been made worse by the withdrawal of many banks from the market following bad experiences regarding the security of goods - often as a result of insufficient on-the-ground due diligence in emerging market countries.

African exporters are particularly vulnerable to retrenchment by foreign lenders. In a 2011 World Bank report, Trade finance during the Great Trade Collapse, Nicolas Berman and Phillippe Martin suggest that the higher dependence of African exports on trade finance may explain African exporters' particular fragility to financial crises in importer countries. During a crisis banks tend to reduce lending to countries they view as particularly risky as part of a "renationalization" of their operations, in which exposure to foreign banks and firms is reduced.

Solutions

But four years on, the picture in Africa is not all doom and gloom. In response to the crisis, international initiatives have been set up to support trade in developing regions such as the Global Trade Liquidity Program (GTLP) which was launched in May 2009.

This global initiative is aimed at bringing together governments, development finance institutions and private sector financial institutions to support trade in developing countries. The GTLP is sponsored by the International Finance Corporation, which has invested USD 1 billion in the program. It is a global platform for trade finance, but Africa Development Bank, which as a major participant of the scheme, will invest up to USD 500 million to finance eligible pools of trade operations exclusively in Africa. Also, of the IFC's contribution, at least 25% is earmarked for Africa.

In the IFC's own words "since its launch in July 2009, GTLP has been acknowledged in the financial industry as an innovative structure to help infuse much needed liquidity into the trade finance market, thereby catalyzing global trade growth" Globally, as of June 30, 2011 a total of USD 1.773 billion of funding had been disbursed to eight program banks.

The difficulty, however, is discovering what has gone on beyond the level of disbursement to participating program banks, which tend to be tight-lipped about their onward lending on the grounds of client confidentiality. But there is a sense that the original idea that funds should trickle down to smaller banks and be directed to SMEs has yet to be realised. Disbursements have been directed towards larger regional banks, rather than local ones. The larger regional banks such as The Eastern and Southern African Trade and Development Bank and the East African Development Bank then on-lend to local banks.

Lines of credit - DFIs

As a local bank, in order to benefit from the flow through of programs such as GTLP, the bank needs to maintain contact with relevant development finance institutions (DFI) and at the appropriate time apply for lines of credit (LoC). Such LoCs are generally unsecured and come at concessional rates in order to improve liquidity in the market.

Alternative providers of funding

In addition to healthy private sector participation in some countries, direct funding by overseas governments - particularly the Chinese - offers a further alternative source of finance. Turkey, too, is taking a growing interest in Africa and currently opens more embassies on the Continent than any other country. African countries with political systems that do not find favour with western developed nations are often tend to bypass programs such as the GTLP and establish financial relationships with the Chinese instead. It is worth local banks remaining updated on the various funding programs of these external emerging countries as several focus on Tanzania. The recent visit of the Chinese President to Tanzania brought with it the signing of several such programs between the two countries.

While the availability of trade finance is a crucial part of the equation, it is worth noting that macroeconomic and political factors are equally important in providing a stable backdrop for trade growth. Inflation, for example, continues to be a problem in some countries, such as Tanzania.

Overall, however, there are grounds for optimism that between global initiatives, private sector participation and direct foreign government support, growth in trade in Tanzania can flourish.

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