By: Kimberly Ramkhalawan
September 2, 2022
Discussing how the global regulatory landscape has impacted access to financing in Africa and the Caribbean was the primary focus of session two of day one of the African Caribbean Trade and Investment forum.
Through the Afreximbank some US$250M will be used to facilitate projects and trading ventures between both regions. Setting into context just how much financing will be needed for such an ambitious venture, Ian Durant, Director of Economics at the Caribbean Development Bank, put into perspective what would be required by all parties involved. His comments came ahead of day one’s session two titled Unlocking Africa-Caribbean Trade and Investment Through Financing, where he shared that the “ambitious development for the region requires a substantial amount of finance, an estimated US$100B over the next three years. Redoubling its efforts to mobilise a quantum of its efforts for the region”. He noted while “economic theory always emphasizes the importance of trade for the growth of any economy, trade plays an important role in the achievement of many of the sustainable development goals outlined by the United Nations, including overcoming poverty, enhancing food security and bolstering economic growth”.
According to Durant, the Caribbean represents a market of about 19 million people, diverse investment opportunities and close geographic proximity to north, central and south America. For the Caribbean, the African continent provides a potentially large market and the opportunity to diversify regional exports. In quoting figures from UNCTAD Trade database, Durant said that “CARICOM merchandise straight to Africa amounted to US$422M in 2021 accounting for just over two percent of total CARICOM exports. In the same year, Africa’s merchandise exports to CARICOM totaled around US$237M, which accounted for less than one percent of their total exports”.
However, he said regions “must bear in mind while governments formulate trade agreements businesses are the ones that participate in trade. Therefore, fundamental to the creation of trade is the facilitation of trade. Creating an opportunity for exporters to get their goods or services across the Atlantic in a competitive price and adequate amount, and in a timely manner”. He noted “this will require an appropriate ecosystem in which business operators can exist, inclusive of good airports and seaports, storage and packing facilities, road networks and broadband capacity. This should of course have the appropriate regulatory and legislative framework that supports trade including those related to customs and border procedures”.
Cleviston Haynes Governor, Central Bank of Barbados shared this was not his view, in terms of the regulatory landscape, a lot of the changes that have occurred have relayed to capital, how, banks are supposed to set aside capital to manage the risks that they face and the other side of it, is access to it, and has to do with anti-money laundering procedures.
He says in the last two decades there has been a tremendous change in the measurement of capital against the Basel II and III frameworks adopted by banking institutions in smaller nations. And while many locally have had the tendency to adopt the standardized approach to regulation, the risk for loans for SMEs has fallen to 75 percent, whereas for larger corporates is 100 percent. That in itself, has become an incentive toward lending and provide more credit to SMEs, but the reality is that has not happened. As to how can Caribbean central banks can foster growth in its economies, he urges banks to take a little more risk than they have done over time. Speaking as a regulator, he admitted that in order to ensure there is greater access, governments will try to provide other funding activities through state agencies, but these businesses don’t have capacities to do the type of lending which is really required for these small businesses.
Durant says “at a more micro level, in the 15th study, the CDB estimated that in the Caribbean, MSMEs constitute between 70 percent and 85 percent of the number of enterprises that contribute to 60 and 70 percent of GDP and account for about 50 percent of employment. However, the study indicated challenges that MSMEs faced is inadequate access to financial resources. Consequently, if we were to take full advantage of the potential of a strengthened Africa-Caribbean trade relationship, adequate financing to MSMEs will be critical. In this regard he says, CDB is involved in creating flexible solutions that cater to the needs of the private sector while addressing the challenges that they continually face, primarily in terms of access to working capital, climate finance and collateral”.
But for trade and export to work, it will be fueled by many small business companies, solutions to be pursued in order to fulfill the financing for SMEs. Gabriel Edgal, Managing Partner, Oakwood Green Africa Limited sharing his two cents on the matter instead says it’s not about structures or governance, but about assessing risks according to local systems and not the settings local institutions have borrowed from societies different from ours, and rather look at ‘home grown solutions’.
He adds that SMEs have often become to accustomed to the traditional lending methods, but in Africa, they have utilized community-based lending, called ‘Ubuntu’, which in the Caribbean is called ‘Sou-sou’ or ‘gayap’. He says it is this type of cluster-based type of lending that often works for SMEs.
Engal says the truth about it, is how do countries get the SMEs to the level of becoming bankable, put into structure. Those in the private sector cannot lead this. He says his organization, Oakwood Green has an accelerator that works to build small companies and comes in where the national bank cannot lend, taking them through five stages of training, tool structure and governance structures, taking them to becoming export-oriented companies, leading them to access markets.
But is there a role international and national development financial institutions play and how can African and Caribbean institutions collaborate to lock trade and investment opportunities in the region. Kanayo Awani, Executive Vice President, Intra African Trade Bank explained that critical to this was the kind of financing offered which was dependent on the sector. She notes because of the unstructured nature of the creatives, they are referred to her organization which also lends to banks looking to have an investment guarantee facility and finance facility, while those looking to set up in the Caribbean have also benefited from the Afreximbank and have gone and set up in neighbouring African countries.
Investment guarantees, she says, helps to protect investments from government actions that normally inhibit operations. She adds that a report suggests that 70 percent or the absence of a free trade area between the Caribbean and Africa means that tariffs can get as high as 28 percent in some sectors, requiring things to correct this, while non-tariff barriers which exist in certain parts of Africa.
However, the session’s moderator for the event, Robert Le Hunte, who also holds the role as Executive Director IDB (Caribbean Constituency) questioned how much bureaucracy plays in these financial products reaching the businesses that need them, moving it from action to money on the ground.
To this Awani says, most of its firms while charged with assisting SMEs, try to operate as similar to the private sector ensuring checks and balances.
CDB’s Ian Durant shared that “these efforts require finance that is adequate and affordable. It is crucial as financial institutions such as his both multilateral and private, to explore ways they can be innovative in meeting these financing needs”.
He added that a “range of financing instruments such as SDG themed bonds, private equity, contingent debt, and derivative based instruments can be explored to build out infrastructure and support reforms. Additionally while the investment needs are large, given the vulnerabilities of the region to natural hazard events, additional expenditure is needed to ensure that infrastructure is resilient in the face of these events”.
In this regard, he says the CDB is developing a framework that would base the availability of financial resources on an adjusted measure of gross national income that recognizes both vulnerability and resilience.
And while the world gravitates away from tangible money to more e-commerce and fintech style of banking, Andrew Takyi-Appiah, Managing Director, Zee Pay answered questions surrounding what are the innovative instruments currently in place to ensure access to finance.
Takyi-Appiah says while present in the Caribbean, he intends to showcase a single market corridor and make payments for it. This however hinges on three core items, including policy, regulations, and product diversity.
From a policy perspective, where a deliberate attempt is made to bring issues into and enshrine it, or where a tariff arrangement is in place so that markets have an equitable play, and is not disenfranchised by the bigger markets, there is a push for a policy arrangement where there are quotas, and measures in place to ensure that the models used are home grown and most suitable for both regional markets, and whether the banking models and policies in place will factor in the growth both regions are looking for through the creation of US$3TR market. He says if they are about creating this new wealth, there will be the need for payment banks, correspondent banks and specialized banks that are just for trade, and once these are in place from a regulatory perspective, then the product will be available. He speaks about specialized credit lines that all pull from the same pool, where the risks are taken cared of.
In his opinion he sees technology as simply taking the funds and repackaging it for use. From this he suggests working groups during the three-day forum set up that will discuss what can form the regulatory frameworks for all central banks, with the relevant compliance that will make it work ensuring that de-risking is in controlled.
Le Hunte describes this as carving out a space, and questions whether correspondence banking ought to be established solely between the two regions, outside of other corridors as described by Takyi-Appiah.
Simon Tiemtore, Group Chairman, Vista Bank Group and Founder and CEO, Simba says banking models are now becoming outdated, as it falls short in addressing market failure, where there is a shift in regulations. He adds that even as bigger banks leave the region, as seen in the Caribbean as well, the approach now being taken by local financial institutions is to buy them out.
He says correspondence banking in Africa has taken on a model of its own through the Afreximbank and the Africa Trade Fund (AfTra).
Talking about experience already had in trading between the two regions, Caribbean indigenous bank Republic, which has set up shop in Ghana for some years now, Anthony Clerk, Managing Director and Chief Executive Officer of the Barbados market shared that it hired a consultant to find where was most suitable in the globe for setting up business, and with the similarities between Trinidad and Tobago and Ghana, much research had to be done, something he recommends to any business looking to find a market with the right fit to their business portfolio.
And while he spoke of the challenges faced with the backlash of a foreign entity entering the market, which even resulted in them going to court, working with regulators to ensure they were on the right track assisted in building their equity within the Ghana market. He says even when more trouble came in 2017 with several banks failing, he believes the expertise and guidance coming from its headquarters in Trinidad and Tobago, allowed them to be bailed out. Since then he says the bank has doubled in size and profitability despite a number of devaluation of its dollar.
Clerk added that the bank they bought over was actually a home mortgage bank, which resulted in them acquiring some 40 branches. Today he says corporate and commercial loans are now the largest part of the bank’s assets in Ghana.
Currently Republic Bank is number 16 out of 23, and remains a relatively small bank in comparison.
The CDB director of Economics shared that “financial instruments can be tailored to their firms, and has already begun to work with the African Development Bank, as an MOU was signed earlier this year for the development of innovative financial instruments among other initiatives”.