Henry Oroh, CEO of Zenith Bank, which won Global Finance's 2017 award for Best Trade Finance Provider in Ghana, looks forward to increased trade and greater uptake of documentary finance instruments this year.
Global Finance: What are your predictions for trade finance in Africa in 2017?
Henry Oroh: Africa is one of the world’s fastest-growing regions. After a difficult 2016 with real GDP growth rates averaging 1.4%, real GDP is expected to grow 3.3% in 2017 and 4.1% in 2018—largely driven by strengthening commodity prices, especially oil, and by crucial economic reforms being pursued in several countries.
Historically, most of our trade finance transactions have been with other continents; but we hope for an uptake in trade between countries on the continent, especially in the West African subregion. Driving the subregional trade is movement of goods from coastal countries to landlocked countries such as Mali, Burkina Faso, Niger, etc, as well as subregional exports of various processed goods.
As businesses’ volumes grow, the need for more-formal trade instruments arises. As the continent becomes more comfortable with these instruments, we look forward to the adoption of bills of collection and letters of credit. In the past, we’ve seen customers’ reluctance to adopt these instruments. Their reasons include the complexity of the instruments and lack of familiarity with them.
GF: What is the best way to bring liquidity to small and medium-size businesses (SMEs) and farmers?
Oroh: Access to liquidity for SMEs and farmers has been quite difficult, because of a multitude of factors including poor financial management, illiteracy, bad bookkeeping and lack of collateral. But these challenges can be mitigated. SMEs operating in the same industry can come together to form cooperatives. The bigger cooperatives have more financial muscle and stronger collateral to present to financial institutions. Some SMEs, on their own, have linked up with nonbank financial institutions (NBFIs) who in turn have ties with some. The NBFI has the financial expertise to negotiate with banks and have letters of credit and other trade instruments issued on behalf of SMEs.
Another method to increase funding for farmers and SMEs may be purely transactional- and receivables-based lending. Tracking the flows of receivables due the SMEs is vital in ensuring that credit gets repaid. An important development in Ghana is a system using mobile money to disburse funds directly to farmers for farming purposes; subsequent repayments are also channeled through the same medium. This takes cash handling away from the various middlemen in the value chain and helps financial institutions to better track fund flows.
GF: How significant is private equity for the working capital strategies of larger corporates in West Africa?
Oroh: Traditionally, merchants and businesses in the subregion have preferred direct settlement of trade finance, such as direct transfers; advance payments; and to a lesser extent, open accounts. The culture remains mostly a cash economy. [However] we see more and more customers opting for documentary trade finance instruments. So although direct and cash-based trade instruments are still preferred, we are gradually seeing the adoption of other, more—complex and secure forms of trade finance. It is a slow process, but we are gradually making progress.