The volume of trade between countries in Africa currently accounts for only 15 per cent of total world trade. But, the Executive Vice President (Business Development & Corporate Banking), AFREXIMBANK, Amr Kamel, says the target is to grow the volume to about 21 per cent between now and 2021.
In an interview with journalists on the sidelines of the 18th AFREXIMBANK’s Annual Seminar on Structured Trade Finance in the port city of Casablanca, Morocco, Mr Kamel said African countries must rise above the wrong perceptions hindering trade among fellow African countries and take their destiny in their own hands. BUSINESS EDITOR, BASSEY UDO, was there. Excerpts:
PT: Intra-African trade is considered abysmally low against total world trade. What would you say accounts for this?
KAMEL: Africa is perceived a high risk destination to do business. Compliance is one of the main problems Africa is facing. A lot of international banks that were financing trade and providing correspondence banking services have pulled out of Africa, due to the perception of high compliance risks with regulations. This has reduced total intra-African trade to about $150 billion.
PT: How has AFREXIMBANK been able to mitigate these issues and expand intra-African trade?
KAMEL: Our key strategies to expand and promote intra-African trade are through a number of programmes and facilities.
For instance, the structured trade finance workshop is one of the tools to provide information to mitigate considerably the wrong notion of high risk about Africa.
We hope to be able to expand intra-African trade from the current level of 15 per cent of total world trade to about 21 per cent between now and 2021.
The recent signing of the African Continental Free Trade Agreement (AfCFTA) presented a unique opportunity for improving trade among African countries, with strong expectations of substantial economic growth.
The agreement breaks down the many barriers making it difficult for Africans to trade with each other.
Also, we are hosting the first intra-African trade in collaboration with the African Union in Egypt in December this year. Over 1000 exhibitors and 70,000 visitors would participate, apart from discussions on topical issues bordering on intra-African trade.
Although Africa is considered a high risk investment destination, the issue of compliance is what is making a lot of international banks to withdraw from the continent.
In this regard, we are undertaking two major initiatives. First, we are launching the intra-African trade due diligence repository, called MANSA.
This repository will draw information from all major trusted trade counterparts in Africa. MANSA will provide a data base of reliable, credible information from proper sources on trade opportunities.
This will provide a medium to track back on international banks where they can get reliable information from trusted entities like Afeximbank, to considerably reduce the compliance risk, or cost of doing business in Africa.
Why these international banks withdrew in the first place was because when the cost of compliance in Africa was weighed against the kind of income they were making, what they saw was not to their benefit.
But, with the repository, once reliable data are easily available, it will considerably reduce the risk or cost of compliance in their operations.
The other initiative we are undertaking to bridge the stop gap is the launching of the AFREXIMBANK’s trade facilitation facility programme, basically targeting about 500 local banks in different African countries.
Through that arrangement, we will be able to create correspondence banking platforms for intra-African trade within the continent.
With it AFREXIMBANK will be able to receive support and letter of credit (LC) confirmations and guarantees through available correspondence banking services.
Most countries in Africa are almost totally out of correspondence banking relationship. So, it is difficult for them to handle trade finance and other business relationships beyond their immediate environment.
Most of them cannot even make some of the most basic payments. That obviously is a huge problem for any country. That’s why AFREXIMBANK is trying to fill in the gap.
Beyond these initiatives to take care of the emerging problem of compliance, AFREXIMBANK is also doing a lot to remove other normal risk elements in providing guarantees and funding of intra-African trade operations.
PT: Apart from high risk and compliance issues, the other major challenge to intra-African trade is transportation or connectivity. What is AFREXIMBANK doing to tidy up connectivity?
KAMEL: Obviously, this is one of the key problems. A lot of people are debating about the challenges intra-African trade is facing at the moment. Connectivity infrastructure, in terms of roads, rails and all those kinds of facilities are very important.
At AFREXIMBANK, one of the things, we are strongly supporting is the provision of trade enabling infrastructure. AFREXIMBANK considers itself one of the biggest aircraft financiers in Africa.
We have done the biggest syndicated loans for Guinean Airways, for example, about $2billion. We have also done for several others. We are helping with construction of roads that can open up and connect trade centres in different African countries.
We have done both expansion and new construction projects targeted at trade enabling infrastructure as part of the bank’s strategic plan.
Apart from that, AFREXIMBANK believes there is a fundamental flaw in just pin-pointing infrastructure as the main problem to intra-African trade.
This is why I say so. Total African trade with the rest of the world was close to $1trillion. That means Africa has infrastructure within the continent that can support $1 trillion worth of trade. Yet, we have only been able to utilize only 15 per cent of that volume.
Therefore, AFREXIMBANK does not believe the only impediment to intra-African trade is infrastructure. Another major impediment is actually the dearth of trade and business information across borders.
There are countries importing some mineral products or raw materials from outside the continent which may be available within the continent in the country next door just because they simply do not have the information or because of lack of trust, or so.
Besides, because of their past colonial experiences, most African countries are still strongly linked to their former colonial masters in terms of trade.
Consequently, when a business man in a country thinks about export or import trade, his first thoughts go towards the former colonizing country.
This is true even when the item to be purchased can be bought less expensively from a nearby African country.
Thus, the challenge is to address this mind set by making trade information about African countries readily available to the business community.
That is basically one of the reasons Afeximbank is organizing the intra-African trade fair coming up in December in Cairo, Egypt; to specifically address this kind of problem; to get people together and see the different financial products and opportunities available in different countries.
AFREXIMBANK has done several studies and there are empirical evidence that shows intra-African trade will considerably improve our individual countries’ economies and gross domestic products.
PT: There is also the concern that African trade is facing the risk of same products across regions. Is AFREXIMBANK doing anything about this concern through value addition across nations and regions?
KAMEL: Again, that is another wrong perception a lot of people are having that because so many of our countries are exporting same products, it would be difficult for them to trade with each other.
But, like I said AFREXIMBANK has actually commissioned studies to look at how other regions are expanding their regional trade. Asia is a very good example. Asia was almost at the same level as Africa.
But, they managed to trade among themselves by creating value chains and specializations, with each sub-region concentrating on the development of areas they have comparative advantages and then become part of the value chain that produces something that would be able to export out of the continent.
So, as Africa is developing intra-African trade, there will be those kinds of linkages and economies of scale that would assist those value chains in automatically leading to something that makes it possible to produce as a continent.
For instance, Morrocco has been able to develop very strong capacity in aeronautics and car manufacturing. There is no doubt these industries would require certain inputs from certain countries close by.
That way, they would be importing raw materials from those countries and exporting some finished products. I think there is still a lot of opportunity to trade together, despite the fact that they produce the same products.
PT: The African Continental Free Trade Agreement presents one of the surest ways to promote intra-African trade. But, there are countries still dragging their feet towards signing the agreement. What do you say to them?
KAMEL: Well, what I will tell all the countries that have not joined the African Trade agreement is that the train has left the station. They will either have to join or will be left behind.
I was present during the signing of the agreement in March in Kigali, at the end of the meeting where 54 countries were expected to sign three agreements, while we were in the session, heads of states, or their representatives were flying in. At the end of the day, 44 countries had signed.
So, one can imagine the kind of attraction to the agreement. I think everybody is beginning to realize the importance of intra-African trade.
We have been talking about the significance of regional and intra-African trade, but the message is becoming clearer now and everybody is now realizing their significance.
Agreed, some countries still have some political issues to deal with in the different countries. What is clear is they will come on board sooner than later. Ratification too, which is very critical, I believe will be up very quickly.
South Africa was one of the countries that did not join from the beginning. But, they have signed now.
But, the South African President later visited countries like Nigeria that have not signed to promote the need for them to do so.
So, one can see the energy that it is going to happen ultimately, whether the people like it or not. And those who do not join are really going to be left behind. Am sure at some point they will realize the significance of their decision to join.
PT: There are others who talk about the impact of terrorism, conflicts and crises in most parts of Africa on intra-African trade? How do you react to this?
KAMEL: If we are not going to be able to help ourselves, who will be helping us? Again, the issue of terrorism is another wrong perception.
I remember when the revolution happened in Egypt in 2011, the media was showing something very close to a war zone happening very close to the office we were (Shell). They said we should get out and get back home.
On my way back from work one of those days, I looked at the road leading to the presidential palace the media said was supposed to be the war zone, I could not see anything of the sort.
That’s the case in many of our countries in Africa. That is why I say there is a big issue of perception we have to manage. I don’t think the matter is as bad as it is being portrayed.
Again, if we are talking about terrorism, it is happening all over the world today. It is not restricted to one country or another. I think we really need to take our destiny in our own hands.
We are the only ones who will know our continent best. We are the ones who will know how best to resolve our problems using our own home-grown ideas and initiatives. We have to rally round ourselves.
And AFREXIMBANK is pioneering this process of relying on our own efforts in doing so many things that would allow us rely on Africa for solutions.
PT: The economies of most countries in Africa are driven by the activities of small and medium enterprises. How does AFREXIMBANK hope to support them grow when it is not physically present in all these countries?
KAMEL: That is why we are adopting the correspondence banking initiative with local banks. This is because international banks that were rendering trade services for their local banks were pulling out of Africa. We are bringing a lot of the local banks to fill in that gap by providing a correspondence banking network within Africa.
Generally, AFREXIMBANK is more a wholesale bank. We are not present in all the countries. Therefore, as a wholesale bank, we are not able to satisfy some of the smaller clients some times. So, we have to go through financial intermediaries called trade finance intermediaries (TFIs) and local administrative agents (LAAs) in 50 member countries.
Under our 5th strategic plan unveiled in December 2016, tagged: “Impact 2021: Africa transformed”, our focus was on promoting intra-Africa trade, facilitating industrialization and export development in the continent.
So, we give credits to those banks for them to be able to on-lend to those smaller clients we are not able to give loans directly in their locality.
PT: What are the criteria for appointing a correspondence bank?
KAMEL: The criteria for appointing the correspondence banks depends on our different lines of credits, which requires the financial institution to be financially sound, has proper systems and procedures and other basic requirements any bank will do before any lending.
But, apart from ratifying our establishment agreement, the correspondence banks must either be central banks, commercial/merchant Banks, export trading companies or export houses, national export credit agencies, export-import banks, national/regional development financial institutions, and factoring companies.
Besides, other minimum criteria for selection of rated entities include an “investment grade” rating from a reputable rating agency (such as a minimum of “BBB-” rating from Standard and Poor’s; “Baa3” rating from Moody’s for international ratings; a minimum local rating of “BBB+” from African-based rating agencies.
In addition, the selected entities must possess a minimum 3.5 per cent net profit and equity funds; 15 per cent liquidity ration; debt service ratio of not greater than 200 per cent and a maximum 63 per cent of overhead ratio.
Also included are a minimum 4 per cent net interest revenue margin; minimum 40 per cent quick cash assets; minimum 10 per cent capital adequacy; maximum 10 per cent non-performing loans; total assets base of about $5 million as well as three years consistent profitability.
The most important thing is for all the trade finance intermediaries to have the capacity to play certain roles to promote trade be creditworthy and seen to identify with our strategy and passion for Africa’s development.
For instance, if we are lending to an entity in Uganda, AFREXIMBANK is not physically there in that country. There must be some representative to monitor the trade activities we are providing financing. That is where the trade finance intermediaries can assist as our agents.
We already have a team doing roadshows across Africa to get this going. We are already have on board over 200 banks, in addition to what we already have.