DEMAND SIDE Users of Trade Finance in Africa By Eliud Okemwa
Objectives 1. Brief introduction to Trade 2. Trade Finance and the 4 methods of payment 3. Users of Trade Finance in Africa 4. Barclays and International Trade in Africa
INTRODUCTION TO TRADE MONEY MAKES THE WORLD GO ROUND; TRADE MAKES MONEY GO ROUND
Trade can broadly be divided into two: International Involving cross border exchange of goods and services Local Involving in-country exchange of goods and services Today our focus will be on International Trade
International Trade Finance That element of cross border exchange of goods and services that involves the use of financial instruments and structures by importers, exporters and financial institutions to facilitate the initiation and completion of those cross border transactions
Typically, Trade Finance solutions are: Transaction based As opposed to traditional financing e.g. loans/overdrafts Short term in nature Typically not more than 1 year Self liquidating Distinct source of repayment Lower risk In comparison to loans and overdrafts
The Sale Agreement Most basic contract between a seller (exporter) and buyer (importer) to exchange goods/or services for a specific amount of money. In any sale agreement is the element of risk Buyer (importer) encounters PERFORMANCE risk Seller (exporter) encounters PAYMENT risk There must be compromise Our role is defined in trying to cater for the interests of both
TRADE FINANCE AND THE 4 METHODS OF PAYMENT
1. OPEN ACCOUNT Exporter ships consignment to importer and sends documents Importer obtains consignment and pays at a predetermined future date Most risky for the exporter
2. DOCUMENTARY COLLECTIONS Exporter ships consignment Exporter forwards shipping and commercial documents to bank with instructions to release documents to buyer against payment or acceptance Importer s s bank releases documents to buyer either against payment or acceptance (of the drafts) Importer s s bank remits payment to seller s bank
3. LETTER OF CREDIT A conditional and irrevocable undertaking by a commercial bank to pay the exporter upon presentation of conforming documents Importer applies through their bank and LC advised to exporter through their bank Exporter ships consignment and presents documents to their bank and is paid
4. PAYMENT IN ADVANCE Exporter is paid by importer before shipment takes place Safest for exporter but most risky for the importer No credit risk Focuses on timing rather than payment process
PREFERENCE DIAGRAM IMPORTER/BUYER High Risk EXPORTER/SELLER Low Risk Performance risk Open Account Documentary collections Letters of credit Payment in advance Payment risk Low Risk High Risk
Characteristics 1. Open account Minimal complexity, greatest risk for exporter, risk mitigation needs are high 2. Documentary collections Medium complexity, more risky, moderate cost, degree of bank involvement varies, available but limited payment, financing and risk mitigation options available 3. Letters of Credit More complex, low risk for, more cost, more bank involvement, widest range of payment, financing and risk mitigation options available 4. Payment in advance Minimal complexity, least risk for exporter, low cost, minimal bank involvement
Trade Finance solutions typically assist in: Credit Enhancement If the customer does not pay, or perform, the bank will Payment guarantees, bonds, import LCs etc. Risk Protection If the customer is not paid, their Bank will Export LC confirmation, forfaiting, non-recourse factoring Financing The bank can provide funds to facilitate purchases and sales Forfaiting, bills discounting, factoring, pre-export export finance, Document Handling Technical expertise and paperwork LCs and documentary collections, payment tracking
USERS OF TRADE FINANCE IN AFRICA
Major Importing countries in Africa 1. South Africa - 27% 2. Algeria 8.6% 3. Morocco 8.3% 4. Nigeria 6.7% 5. Egypt 6.1% 6. Tunisia 6.0% 7. Angola 3.1% 8. Libya 2.7% 9. Kenya 2.2% 10. Ghana 2.0% 11. Sudan 1.9% 12. Ivory Coast 1.8% 13. Botswana 1.6% 14. Ethiopia 1.5% 15. Mauritius 1.3% 16. Others 19.2% WTO 2004 statistics www.wto.org
Major Exporting countries in Africa 1. South Africa 19.9% 2. Algeria 13.9% 3. Nigeria 13.4% 4. Libya 9% 5. Angola 6% 6. Morocco 4.2% 7. Tunisia 4.2% 8. Egypt 3.3% 9. Ivory Coast 2.8% 10. Eq. Guinea 2.2% 11. Congo 1.7% 12. Sudan 1.6% 13. Gabon 1.5% 14. Botswana 1.5% 15. Cameroon 1.2% 16. Others 13.6% WTO 2004 statistics www.wto.org
Africa Trade by region: Imports Exports North America 7.2% 18.7% South and Central America 3.4% 2.9% Europe 47.7% 42.8% Comm. of Indep. 2% 0.3% States Africa 11.3% 10% Middle East 6.5% 1.4% Asia 21.9% 16.8%
Primary sectors involved Imports Exports Fuels and Mining 12.3% 59.1% Agriculture 14.5% 12.1% Manufacturing 71% 25.1% Others 2.2% 3.7%
The Basic Trading Cycle Collection Procurement Step 1 Delivery Step 2 Step 5 Sales Step 4 Production Step 3
User requirments Credit enhancement Finance Credit enhancement Documents Collection Procurement Delivery Sales Production Finance Credit enhancement Risk protection, Finance Documents
BARCLAYS AND INTERNATIONAL TRADE IN AFRICA
BARCLAYS FACTFILE One of the leading financial services provider in the world Rated AA by S&P Operating directly in 12 countries across Africa, the Indian Ocean and Middle East and in several others through extended coverage and correspondent arrangements Directly represented in over 60 countries worldwide and in 38 non-presence countries
Voted 2005 Bank of the year in Africa by The Banker magazine Recently acquired ABSA Group aiming to become the pre-eminent eminent bank in Africa 7,000 employees in Africa and Middle East serving over 1.5million customers with 230 branches worldwide
BARCLAYS AFRICA AT A GLANCE AFRICA 1. SOUTH AFRICA 9 2. BOTSWANA 3. ZIMBABWE 4. ZAMBIA 5. TANZANIA 6. KENYA 8 7. UGANDA 7 6 8. GHANA 9. EGYPT 5 11 10. MAURITIUS 11. SEYCHELLES 4 3 10 2 12. UNITED ARAB EMIRATES 1
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