Investec and Frontclear launch a groundbreaking trade finance solution for African SMEs, addressing a critical funding gap. Innovative facility unlocks liquidity from local banks’ government bonds to support African small businesses.
Banking and wealth management group, Investec and Frontclear, a development finance institution, have joined forces to launch a novel trade finance facility specifically designed to bolster access to financing for African small and medium-sized enterprises (SMEs). This pioneering initiative tackles a significant hurdle to economic growth across the continent: the substantial trade finance gap.
Unlocking liquidity for local banks
Many African SMEs struggle to secure trade finance from local banks, which traditionally invest heavily in government bonds. This new product leverages Investec’s expertise as a wealth manager and international bank to provide a financing facility to Frontclear. Frontclear, in turn, utilizes a repo structure to provide funds to local African banks, using their existing government bond holdings as collateral. These banks are then obligated to channel the unlocked liquidity towards supporting SME trade and supply chain finance.
Boosting sustainable trade finance in Africa
“By combining our respective legal, product and market expertise in trade finance and capital markets, we’re able to directly benefit SME traders in Africa, by providing viable liquidity solutions to the local banks that are best placed to service the SME sector,” says Hugh Friel, senior vice-president for Africa structuring at Frontclear. “We are excited by the impact these efforts will have in reducing the trade finance funding gap on the African continent,” he said.
Key considerations for a workable solution
George Wilson, Investec’s head of institutional trade finance, said, “Recognizing that only lower tier African banks can provide trade finance to deep level SME transactions in the real economy was key in the design of a workable solution that tackled these challenges. This product structure is the first of its kind to ultimately reach SME traders in Africa by providing liquidity to them and consequently promoting sustainable trade finance on the continent.”
A pressing challenge
Africa’s trade finance gap exceeded USD 81 billion in 2019, according to a number of finance houses involved in African trade. While the numbers may fluctuate, the gap is vast. SMEs and domestic companies often face the most significant challenges in accessing financing. Regulatory developments may further exacerbate the issue, with African banks potentially struggling to comply with sustainability-related requirements that could render their trade portfolios ineligible for international investment, warns Wilson.
This innovative product from Investec and Frontclear addresses the “on-the-ground realities” of African markets by not relying on extensive digitization for implementation.
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