BY VICTOR ADAR
They say that trade finance is all of domestic and international trade transactions, and that such a transaction requires not only a seller of goods and services but also a buyer. As always the case, agents such as banks can facilitate these transactions by way of financing the trade.
Credit Bank PLC is one financial institution that has for the last two years focused on creating trade finance solutions for businesses and especially Small and Medium Enterprises (SMEs).
Stating variously that its vision is “to be the most respected financial institution in our target market”, the Bank’s 2015-2020 strategy emphasized on focusing more on SME’s landscape, as niche market. This was informed after the bank conducted extensive research on understanding more the SME’s banking needs – which was more like understanding the potential and impact of tiny players to the bank while putting into consideration their contribution to the country’s GDP and employment.
“We discovered immense potential on the SME’s in creating wealth but their main limitation is working capital and liquidity management. Yet, most financial institutions had placed a lot of emphasis on collateral and balance sheet lending even as most SME’s have limitation on collateral and weak balance sheet,” says Kevin Kahuthu, a trade finance senior manager at Credit Bank PLC.
To address this gap, Mr Kahuthu says that Credit Bank customized trade finance products that would be ideal to address working capital needs since most of trade finance solutions are structured to address the same solutions without necessarily issuing vanilla loans, which attract interest.
“We have addressed this through products like bank guarantees and Stand-by letters of credit which enable the SME’s access supplier credit. We also do collateral management where the commodity being traded becomes the collateral in itself,” he said
The uniqueness and value preposition of trade finance is the ecosystem or value addition, which is acting as a link on Micro enterprises, SME’s and large enterprises as well as corporates. Solutions cover entire spectrum of downstream, mid steam and upstream banking solutions. The model emphasizes on counterparty aspect where the small players can leverage on big players risk profile rating. Credit Bank then intermediates to offer banking solutions that address the unique needs of the SME’s through end-to-end approach.
“The impact is the synergy in all parties involved in the transaction thus unlocking working capital, and liquidity management since trade finance solutions strive for cash flow optimization,” says Kahuthu, noting that trade finance solutions to suppliers and contractors contributes heavily towards the country’s GDP.
Data from Kenya National Bureau of Statistics (KNBS) indicate that SMEs form the bulk of Kenya’s companies with over 1.5 million registered SMEs. In its 2016 Medium and Small Medium Enterprises Basic Survey Report, KNBS found that; 75% of Kenyan companies are SMEs, accounting for 18% of national GDP. At the same time, there are 1.7 million Micro-Small and Medium Enterprises in Kenya, and therefore it is a concern since this is where job creation is and the output for economic growth will take place. Manufacturing, agri-business and trade have a large number of SMEs that are key drivers of job creation.
KNBS found that over 40% of SMEs fail within their first year of operations due to a combination of economic factors, an indication that SME’s are not cash rich as their key limitation is capital. One of the key causes of failure is access to finance – SMEs are by their nature unable to provide the required collateral that large firms have in obtaining formal banking sector loans and at the same time are too large to benefit from micro-finance institutions. Large corporates depend on small companies to supply them with raw materials and also use the same companies to sell their products hence by nature SMEs fill a gap.
To support business continuity, SME’s also invest on what bankers call Capital Expenditures that are capital intensive. To avoid strain on cash flows and working capital, most financial institutions would structure bank undertakings like bank guarantees and letters of credit where the buyer of various equipment release the goods and extends a moratorium or grace period on repayment in relation to outright purchase. The client is then able to utilize the imported equipment to generate cash flows and build up cash over time that shall ultimately be utilized to retire and settle the letters of credit. In case of shortfall in cash build at the end of credit period, Credit Bank avails a post import facility, which is structured to match SME’s cash conversion cycle.
In case of international trade especially exports on open credit, Credit Bank for example, has partnered with trade credit guarantees agencies to cover non-payment or delayed payment by private, sovereign or sub-sovereign buyer, political risks insurance covering unfair action or inaction by a government that would negatively affect its clients’ businesses or investments.
“We also offer various surety like customs bonds, warehousing and shipping guarantees as well as training and advisory on hedging instruments, financial management and international trade landscape,” says Kahuthu, the man who is in a department where, incase of funded products, it is all of customized trade finance products that match cash flows or cash conversion cycle, ring-fencing receivables, and off-balance sheet financing.
Example of products he mentions include exporters finance, importers finance, import duty finance, contract financing, LPO financing and supply chain financing covering invoice discounting, reverse factoring and distributors finance. These facilities are short term in nature, self-securing and self-liquidating hence minimizing credit risk as the cash flows are ring-fenced to avoid diversion of loan advanced or payments/receivables to settle the loans. But how is the market like in terms of clients? What are customers saying?
“In any business transaction, goods or services, we have two or more contracting parties for a financial consideration as the purpose of any business is to make a profit. For payment settlement, parties engage in various modes including offering credit but subject to a guarantee of performance or payment. This is where financial institutions come in to offer various instruments and solutions to offer the needed comfort. The scope is broad and entails Retail, Micro, Small and Medium Enterprises, large enterprises and corporates,” he says.
To him, trade finance market in Kenya is immense thanks to the fact that the country is a heavy importer of goods and machineries involved in creating wealth hence contributing to employment in various sectors in the value chain. Trade finance is also critical on financing exports especially tea, coffee and horticulture. Emphasizing more on the critical role of trade finance in Kenyan economy, Kahuthu points at strategic partners like trade credit guarantee agencies, which he says, have partnered with financial institutions to address collateral shortfall on SME’s.
Apart from sponsoring various trade stake holders forums where potential clients sign up as it creates awareness on trade finance solutions and their value preposition vis a vis blanket and vanilla products, Credit Bank have leveraged on trade value chain synergy to mobilize SME’s through referrals. As at July this year, the financial institution had increased lending to SMEs at 20% year on year, reflecting bullish convictions about the sector.
“SME’s require a financial institution that understands their business model to advise on appropriate banking solution hence the need for relationship management approach. Credit Bank has entrenched relationship management approach which make us the best bet in efficiency, quick decision making and advisory on best business practices,” says Kahuthu.
Although scaling down on lending to the SME’s is not sustainable and has the potential of stifling growth and financial mediation in the economy, there are other financial institutions that are keen to tap in on this market as they are flexible on traditional collateral requirement where they consider unconventional security such as business stock, and chattels to lend to SME’s. The National Treasury also has a proposal where it shall guarantee commercial bank loans to small and medium size enterprises (SMEs) as part of the effort to reduce their risk profile, keep loan prices low and ease access to credit.
In the course of the bank’s service to SME’s, a business club was born. Entrepreneurs Hub, which offers a platform for SME’s to learn from other experienced businesses and visionary leaders, is expected to bridge the knowledge gap that exists between emerging SME’s and the already established industry leaders.
“The Bank’s medium term strategy is to have branches across all counties. Besides, we have in place robust alternative banking Channels with broader geographical reach vis a vis ‘brick and mortar’ expansion. Internet, mobile and agency banking has shown significant traction for the last three years,” says Kahuthu.