Reflections on trade with an African rhythm

Ceremonial drums announced our arrival at the pre-conference seminar on trade digitisation and fintech on the top floor of the tallest building in Cape Town (Rand Merchant Bank). September’s 45^th annual International Trade and Forfaiting Association (ITFA) was going to be an event of contrasts, and while I mentioned this event in passing a couple of weeks ago, the themes warrant revisiting.

This was the first time in the organisation’s 19-year history that the event was being held in Africa, and Africa trade themes permeated the conference. ‘Against the tide’ was the keynote address by Barak Fund’s CEO Jean Craven (himself a ‘wild swimmer’) who discussed the challenges of his decade-long journey to  ‘unlock yield in Africa’ and establish an alternative fund which began when “banks were willing and able to lend and when Basel was just a big city” and has grown to become a structured trade fund with $1 billion assets under management.

Soon after launch, the financial crisis hit, and the buzzword for investors was ‘risk off’, putting many emerging market assets off limits for investors and trade finance was (and some argue, remains) an unknown as an asset class to many. Craven’s trick for Barak has been to be ”conventional in an unconventional space” for the Cayman Islands’ based fund. Keeping feet on the ground and really knowing the asset originators and the players has been important and it has been able to compete with banks on the first loss capital tranche of deals. This, for sure, is not a copy and paste business as Craven said, a theme that was reflected in the session on credit insurance in Africa and beyond.   

Wider implications of insurance regulation

The ‘and beyond’ element for credit insurance in Africa is certainly apposite as developments in London, and in particular the PRA (Prudential Regulatory Authority) consultation paper which rattled the credit and political risk insurance market in May, have wider implications, particularly on the eligibility of guarantees as unfunded protection under CRR (EU Capital Requirements Regulation). Carol Searle, General Counsel at Texel Finance, delivered an update on ITFA lobbying and pointed out that focus on PRA was important because of the concern of contagion of the PRA’s approach to other regulators, and the challenge that the regulator could have also included risks already distributed. She returned to these themes in TXF’s Political Risk & Trade Credit Insurance event I chaired in London two weeks later (while also discussing the potential outcomes for Brexit).

Encouragingly, one of the positive outcomes of the lobbying has been to motivate the industry – banks and insurance professionals and lawyers – to come together in an unprecedented way to educate the regulator and other participants about the importance of the sector (and indeed it’s very existence in some cases)  to the functioning of financing international trade. This singularity of purpose may also still be needed if ‘Basel IV’ is not to hit the sector too.

Trade credit insurance in Africa remains very linked to the nature of individual countries, though there has been an east/west split as was noted, when oil and gas prices are up, many west African countries are spot lit. Besides commodity prices, EU countries have been looking at business in west and east sub-Saharan Africa  as, as one panellist noted, “they don’t want to leave the field alone for the Chinese.”

As Robert Besseling from EXX Africa and Celeste Fauconnier, Africa analyst from RMB mentioned in their economic outlook for the region that less than 3% of world trade finance (around $1bn a year) is in Africa, against a gap estimated to be as much as $300 billion. The biggest risk in Africa remains access to financing, the second is corruption, the third is infrastructure. The session pointed to volatile growth rates and informal economies that are to a large extent unaccounted for. Myths and realities of investing in Africa were highlighted in several sessions.

Sharing out risks

Delving deep into documentation is one thing ITFA does best. The BAFT (Bankers Association for Finance and Trade) Master Participation Agreement (MPA) has been rebooted with an aim to simplify the way banks can trade assets.

The differences between US and English law have made transactions difficult to define and enforce. Sullivan & Worcester’s partner Geoffrey Wynne has had the tricky job of presenting a more logical approach and a practical way forward to update the decade old English law MPA (for a full rundown in Wynne’s own words click here).

Transferring assets by way of true sale (rather than acting as ‘grantor’) is one key change. That means there is no longer the language of ‘debtor’ or ‘creditor’, rather of buyer and seller. Participants will have an underlying interest in the underlying transaction. This should help fintechs as it is more important they have the asset on their books not a loan on the underlying transaction to the seller.

Another key change is the fact that there is no optionality in the document (so it becomes a template ‘take it or leave it’), which will help with standardisation and digitisation going forward.

Fraud is no longer treated as a separate risk with its own clause, as fraud risk is provided for elsewhere (for instance, the seller has an obligation to examine documents and administer the transaction with proper care and attention).

Moreover there will only be two master parties in the agreement, so each player will have to choose its master party, which should also aid simplification and standardisation.

Wynne told the delegates: “We hope that this is easier to use. It meets modern day requirements and facilitates the wide variety of transactions that you may want to use participation agreements for. It looks forward to the fintech world.”

He pointed out that players do not need to move onto it immediately as both versions will run in parallel. However, the advantages in using the new one should be manifest.

Accounting for it all

The second day of the event started with the weighty topic of accounting. One issue highlighted in an informative session on IFRS 9 was that as the new model is an expected credit loss model, which looks to the future and accounts for it now, the whole sector is without precedent and case law. Like MPA, the topic deals with the concept of what is a sale, but unlike MPA, accountants also get tied up with issues of  ‘derecognition’ of assets. Complicated times lie ahead.

Levelling the playing field was the name of the session on ‘Basel IV’ by HSBC’s Felix Prevost. Basel IV, which is in reality a series of revisions to Basel III, is a work in progress. It remains an international accord that needs to be implemented locally. It will affect trade finance in several different ways. Prevost pointed out that Basel IV gives, and Basel IV takes away. The accord will tend to encourage bank lending to (rated) SMEs and take some incentives away from unrated larger corporates (and, indeed, larger rated corporates).

Corporate ratings will remain a knotty issue too, and as one audience participant mentioned, it is something of an irony that ratings are being encouraged when ratings agencies were in the firing line in the crisis that accelerated the whole Basel regulation process.

All of the proposed changes tilt the playing field between different asset classes, so it will be a question of degree. Matters still arise about what the impact will be on the unfunded side of master participation agreements and insurance, and there appears to be an incentive for insurance companies also to get rated.

Banks will still want to offload their trade finance assets to get them off balance sheet as ‘Basel IV’ appears to stand. But who wants to buy banks’ trade assets other than banks?

Returning to Africa: A call to action

The issue of trade as an investible asset class was also touched on in the ambitiously titled ‘the 2020 trade finance landscape – how fintech will help us transform and grow African and cross-border business’. Again, trade finance remains ‘at the cusp’ of taking off as an investible asset class, but reality still bites, and developments are still slower than many hope.

A reality check on fintech in Africa led to a call to action. Marilyn Blattner-Hoyle from AIG said that banks and insurance companies should pull together to drive more widescale adoption of digitisation as many innovations have been bilateral with a proliferation of platforms. Interoperability will be key to avoid silos. There remains a very wide range of important technology that is not DLT. For sure, technology should help execution in the insurance market.

As one panellist said, digitisation is going to have to happen to sustain the unstructured paper trade finance market as it is so cost intensive. Fintechs could help banks to understand, visualise and ultimately manage and regulatory capital on banks’ balance sheet. This is particularly important in the Basel III/IV environment. Banks need to cooperate to improve the ecosystem so it is bank agnostic on origination. 

CCRManager, a digital platform for the secondary trading of trade finance obligations, now has 67 members from 23 countries on its platform. CEO Ka-Kit Man pointed out that the adoption of new technology often happens in baby steps for things that aren’t in house to banks. The risk is that parallel running of several systems means that users can get frustrated and get double the amount of work. Without correct adoption, efficiencies become inefficiencies. Senior management support is important, but there’s greater engagement when it’s part of key performance indicators.

In Africa, the biggest opportunities may lie in open account with supply chain finance. As one panellist said: “Trade finance has been confined to banks forever, but by creating a more tradeable asset class, there needs to be more standardisation in LCs, guarantees, supply chain finance. Capital markets investors can’t understand [the asset class] and at best they can understand IPUs (irrevocable payment undertakings) in SCF.” The hope is that fintechs can help build standardisation. “We are at the cusp of the ‘box’ moment like when containerisation happened, but that moment will  be enabled through collaboration with fintechs.”

Bringing back the music

This collaboration is very much a dance, like a conga, the willing co-opting the sometimes less willing. And talking of dancing (!), one of the great traditions of ITFA, one highlight was a fantastic Cape Town band whose lead singers performed in Xhosa, along with other great dance songs that climaxed in an ITFA conga that snaked around the whole venue. Collaboration at its most entertaining.

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