Banks are beginning to lean more towards structured commodity finance solutions, as they look to tap into the country’s trade finance gap estimated by the Africa Development Bank at $3 billion or just about Sh387 billion annually.
Whereas Kenya’s trade finance space has so far been dominated by letters of credit and supply chain financing, experts contend that there is evidence of growing uptake of structured commodity finance, positioning it as a key growth driver in the days ahead.
Structured commodity finance refers to debt that is extended to exclusively facilitate the purchase of commodities across borders and is dedicated to exclusively finance transactions involving import and export.
A letter of credit refers to a bank guaranteeing that a buyer’s payment to a seller will be received on time and in the correct amount.
Supply chain finance is a trade finance solution that enables suppliers to receive payment on their invoices earlier than the due date with the goal of optimising cash flows.
“Several sectors are now emerging as significant drivers of this new demand for structured commodity finance. The agriculture sector, for instance, has seen a rise in financing needs for commodities such as grain, pulses, tea and coffee,” Lydia Karanja, director in charge of transactional banking at Absa Kenya, said.
“This is driven by increasing global food demand and the need for efficient supply chain management through initiatives such as Vendor Managed Inventory.”
According to the Kenya Association of Manufacturers (KAM), the entry of the Democratic Republic of Congo into the East African Community has been one key factor in the recalibration of the trade finance landscape to lean more towards structured commodity finance.
“Financing that is linked to collateral, does not really meet the needs of small and medium size businesses because not all such businesses have collateral. Financing that is linked to their market opportunity, for example the Africa Continental Free Trade Area, is much better”, KAM’s acting Chief Executive Tobias Alando, said.
“Aggregation is the way to go with small and medium size businesses and we are doing it for example in DRC, where you have a huge market but small quantities because of the nature of the players. We are working with logistics partners allowing containerisation of produce by such businesses to leverage scale and lower cost in unlocking the opportunity in that market.”
The Africa Development Bank reports that every year, one out of every four exporters in Kenya fail to meet some sales due to inability to access trade finance. The bank estimates the average annual loss per firm due to inability to access trade finance stands at $80,107 or Sh10.3 million.
