Digitalisation in African trade finance is entering a critical new phase
Technology will transform the way the continent conducts business, says Absa CIB
As a leading pan-African banking group, Absa is uniquely positioned to identify trends on the continent.
Those of us in Absa's Corporate & Investment Banking (CIB) division are particularly excited about developments in the digitalisation space. However, it is imperative that the regulatory environment keeps pace with technology and does not hinder innovation.
In short, we have never seen a more focused debate about digitalisation and automation, and its interaction with fintech solution providers in the trade finance space. We believe this is going to be transformative for the way the continent conducts business.
Such discussions no longer centre on the exciting technologies that are out there, but about how they can help solve specific problems and future-proof businesses.
As a bank, we are identifying digitalisation trends that are of interest to us. We can broadly break these down into a couple of main areas:
- Data to make better decisions;
- Technology that drives efficiencies;
- Risk management and mitigation tools; and
- Viewed holistically, solutions that will allow us to future-proof our business.
A perfect example of how digitalisation has transformed the way Absa does business is the bank's technology partnership for optical correction recognition (OCR).
If you are importing or exporting goods, you'll be aware of the amount of paperwork that is generated and the time it takes to assess this paperwork at various points in the process. OCR technology has allowed us not only to streamline and build more resilience in our processes, but to process more documents under letters of credit than we would have been able to manually. This frees us up to better understand and service our clients’ needs.
Taking this a step further, Africa is becoming increasingly important in the global economy, from both an import and export perspective.
While Africa has enjoyed long-standing relationships with the EU and US, some of our biggest growth markets are in the Asian economies and we're looking to identify technology solutions that help our efforts — and our clients — to plug in to these corridors. As access-to-market opportunities increase, so will the demand for funding.
There's always natural tension between the regulatory requirements faced by the banking sector and the flexibility enjoyed by many fintech disrupters
However, to take advantage of such opportunities, it’s important that the regulatory framework keeps pace with the new technology.
There is always a natural tension between the regulatory requirements faced by the banking sector and the flexibility enjoyed by many of the fintech disrupters.
On one hand, you have an annual trade finance gap of about $100bn each year. On the other, the banking sector is busy rolling out Basel IV regulations. Given the more stringent capital requirements of these regulations, unless something drastically changes, they may restrict the ability of banks to lend to small and medium-sized businesses.
One of the main concerns with Basel IV regulations is the effective tenor of trade finance transactions. Trade finance is short-term in nature, and capital regulations should be based on three- to six-month maturity profiles instead of insisting on any tenor that is one year or above.
Such regulations mean that it may cost lenders more to be innovative. Instead, businesses and financial institutions should be rewarded for unlocking financing that empowers youth and women-owned small businesses.
Technology provides us with the chance to inject agility into the process of financing trade, but also to start incorporating aspects such as environmental, social & governance (ESG) considerations.
Banks have the chance to lean on technology to help us unlock funding to empower the next generation of entrepreneurs
While technology has always been a natural fit for ticking the “governance” element in ESG, we are seeking ways that it can similarly be used to tick the “E” and the “S” boxes, while being supported by a variety of sustainable finance instruments such as green bonds.
Africa is going through a unique period of economic growth as it starts to adjust to a changing world order and the associated economic events. Events in Ukraine, Russia and China have materially disrupted global supply chains, and this is forcing Africa to fast-track many of its infrastructure projects.
With the narrowing of both the infrastructure and trade finance gaps, we have the chance to lean on technology to help us unlock funding to empower the next generation of entrepreneurs.
This article was paid for by Absa CIB.