k.w. mwangi - assistant gm, trade finance commercial bank of africa limited (cba) a trained trade...
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K.W. Mwangi - Assistant GM, Trade FinanceCommercial Bank of Africa Limited (CBA)
• A trained trade finance practitioner with over 15 years experience in commercial and financial aspects of international trade.
• His mandate at CBA is to grow the trade finance customer base and expand the product range.
•
• Previously worked in the same capacity and mandate for 7 years at the Kenya Commercial Bank Limited (KCB). Was instrumental in trade finance centralization and computerization and tremendous growth in trade finance business volumes and incomes.
• Involved in developing and rolling out new trade related structured finance products.
• Also worked with PTA Bank on various capacities for 12 years. PTA Bank is the financial wing of the Common Market for Eastern and Southern Africa (COMESA), comprising of approximately 21 African countries. He was the PTA Bank’s Director of Trade Finance for 6 years where he was responsible for product development, business growth and diversification.
• During the course of his banking career, Mr. Mwangi has attended several local and international trade and commodity finance seminars and workshops both as a participant as well as a speaker.
• He holds a BA (Honours), MA (Economics) from the University of Nairobi and a Diploma in Regional Industrial Development from the University of Delft, Netherlands.
3RD AFRACA AGRIBANKS FORUM ON AFRICA VALUE CHAIN FINANCING
“VALUE CHAIN FINANCING MODELS AND VISION FOR VALUE CHAIN
FINANCING IN AFRICA”
KW Mwangi16TH October 2007
Diversification & Value addition
• Value addition still remains a strange concept to many African producers, processors, exporters and even financiers
• Concept simply means improving the quality of your produce before selling it
• Primary products still account for 80-90% of total EA merchandise exports
• Lack of legal, legislative, strategy and even coordination is evident
Why Value Addition Is Necessary• Preservation; Extend life of Product• Add Value to the Product (Value Addition)• Protect the Product from the environment (harsh)
– Season crops going to waste due to lack of processing know-how
– Tea, Coffee etc (non-food) fetch more if Value Added– This can be said for other farm products
• Minimization of price fluctuations, climatic conditions and unfair trading practices
• General Economic Development; Employment, skills development, growth & development and economic competitiveness
Why along the Supply Chain
• Transaction risk could be better than corporate risk if proper controls are in place
• It also addresses the changing client environment where network alliances are being formed along the supply chain
• Scope foe entering into borrowing base financing ; Supply chain is for the long term and offers a REAL WIN-WIN situations
• STCF is in the supply chain but not along the Supply chain
Why along the Supply Chain
• Technical Value AdditionsCommodity processing (Vertical) e.g leather
products, preserved fruits, and fish productsShare of Manufactured merchadise (Horizontal);
apparels, accessories …Trade Support Services; general business services,
infrastructure (roads, air transport, railways, ports, telecoms, energy), Marketing agencies
New: ICT support Services, call centers, information processing centers
• Financial support to the entire Export Cluster
Challenges facing Supply chain solutions• Ability to genuinely capture the whole chain may
fall only to a few• Those with scope and presence of a Mega-bank and
not all will gear up• Administrative bottlenecks, transparency issues…
How formal /informal the supply chain is?• Whether it is an integrated network with all the
parties buying in to a collective approach or a miscellany of loosely connected providers that happen to form a common chain
• Absence of establish networks• Synergies; capability pool e.g. trade finance,
STCF, export finance, forfaiting, et al, all to deliver along the supply chain
OPPORTUNITIES FOR SUPPLY CHAIN FINANCING
• It’s no doubt that traditional business offers limited growth and supply chain approach is the best way forward
• Need to ensure that the bank’s own chain is harnessed to deliver on client’s needs (WIN-WIN)
• The bank has to be integrated within itself in order to take an integrated supply chain approach
• The following are, just a few models to consider;
FINANCIAL / ADVISORY SERVICES ALONG PRODUCT SUPPLY CHAIN
ADVICE
ADVICE R IR I S K SS K S
ContractNegotiation
DeliveryWarranty
Term.SettlementProduction
ContractSigning
PRODUCTS
PRODUCTS
CLIENT
CLIENT
Operational&Documentary
Credits(UCP 500/600)
Commodity quantity, quality and price
ForeignExchange/ INCOTERMS
InterestRate
Counterparty Country & Transactional risks Settlement
Bid Bond
Export Financing
Pre payments
Commodity hedge
FX options
FX forward
Advance payment guarantee
LC advice
Confirmation
FX cash
LC discounting
Forfaiting
Innovative, VA
TRSF Products
LC settlement
Deferred payment
Collection
Structured Export Financing
Trade payment
FX cash
Post Import
Limited/ without Recourse
Return of bonds and Guarantees
& other security Instruments (if any)
FARMERS/ PRIMARYPRODUCERS
COOPERATIVES / SOCIETIES/ RAW
MATERIAL SUPPLIERS
MILLERS/ GINNERSPROCESSORS/
MANUFACTURERS
COLLATERAL MANAGEMENT/WAREHOUSE
InternationalCorrespondent
Banks
LOCALBANK
OFF-TAKERS ( International/ Local) BUYERS
I nformal Trade; Retailers; Distribution/ Wholesale Trade; I nternational Trade; e-
Commerce; Trade in Services
E F
C D
O
G
BA
J
K
L
MNP
Q
LCs in favour of the BankPayment of proceeds
Release Goods Againts Documents
H
Sales Contracts,Firm orders Against LCs
Credit Facilities
Non- Negotiable WH Receipt
Deposit Goods
Forward Non-Negotiable WH Receipts / Pledge of
Bill of Landing
Reports / Submit Documents/ Warehouse Receipts
LCsDocs
ReimbursementsACs
Analysis/Feed BackApprovals
Release Documents against payments
DeliverPayments
Deliver/Payments
Documents
Fish, Cotton, CashewnutsRice, Sugar, Wheat, Hides & Skins, Pyrethrum, Sesame, Coffee, Tea, Groundnuts,
Macandamia nuts, Tropical Fruits, Milk products, Metal
AND Steel products.
Input Providers
Credit
Supply Inputs
I
Distribution
Financial (cross cutting)
Financial (cross cutting)
Sector-specific providers
Sector-specific providers
Cross-cutting providers
Cross-cutting providers
ProducersProducers
National RetailersNational Retailers
Processors/TradersProcessors/Traders
Global Distributors/ Retailers / VALUE ADDITION
Global Distributors/ Retailers / VALUE ADDITION
Input SuppliersInput Suppliers
BUSINESS MODEL FOR VALUE CHAIN COMMODITY FINANCE
WholesalersWholesalersExportersExporters
Dynamics that exist within a value chain, Small producers and Enterprises linkingInto healthy markets opportunities toReduce costs, improve their product
Or expand their market. THEY ALL UNDERSTAND THE RISKS
AND MARKET REALITIES
MULTIPLE FINANCING ALONG THE VALUE CHAINS VIA FINANCIAL INSTITUTIONS
ProducersProducers
National RetailersNational Retailers
Global Distributors/ Retailers / VALUE ADDITION
Global Distributors/ Retailers / VALUE ADDITION
Input SuppliersInput Suppliers
BANKSPre-Export, pre-payments,
Export LCs, Receivable Finance…)
BANKS(Red/ Green Clause LCs)
BANKSNon-Bank Financial Inst.(Stock/ Export Finance, Other Corporate Finance)
BANKS,Non-Bank Financial Inst.
MicroFinance, PRODUCERS
WholesalersWholesalersExportersExporters
Processors/TradersProcessors/Traders
COMPETITIVE ADVANTAGE
Efficiency
New MarketsProduct Differentiation
The ability to exploit some combination of:
through upgrading – changes made by firms in product development or improvements in production techniques or processes
JOH-KYA001-20070528-JvW-P1
Kenya’s Development Agenda, Vision 2030 Context
• Create an effective and trusted legal system
• Continue improving security and safety
• Streamline the taxation system• Eliminate corruption
National Business Environment• Improve telecom infrastructure• Upgrade logistical links internally
and with neighboring countries through better infrastructure
• Improve electricity supply• Enhance public education• Improve business regulatory
processes• Reduce trade and investment
barriers• Maintain focus on opening
competition
Cluster Development• Initiate a formal cluster
development program that covers all established and emerging clusters
• Organize business support programs and government agencies around clusters
Company Capabilities• Continue enhancing quality
certification • Assist companies in upgrading
production methods
Geographic Levels• Play a leadership role in economic
integration with neighbors• Push responsibility for economic
development to provinces
Economic Development Process• Continue engaging the private
sector in development
FINANCIAL MODELING BASED ON VALUE CHAIN
IDENTIFY key value chain actors and service providers (farmers, processors, buyers, input and equipment suppliers, banks, finance companies)
1. Map product and service/finance flows (production process, VC finance, commercial bank lending, lease financing)
2. Identify enabling environment issues (macroeconomic policy, legal and regulatory framework, donor and government interventions)
3. Analyze business dynamics and opportunities and constraints for firm upgrading, including supply/demand for finance
4. Identify and prioritize potential solutions and make recommendations
VISION FOR VALUE CHAIN FINANCING IF IT’S TO REMAIN RELEVANT
Source:NESC Vision workshop, January 13–14 2006; Naivasha, Kenya
Plans and implementation
Vision
Strategy
Enhance sectoral productivity, capacity utilization and investment opportunities for
increased industrial growth & trade opportunities
BUILDING BLOCKS ON ACCELERATING SUPPLY CHAIN FINANCING
CREDIT & FINANCIALINTERMEDIATIONS
PRIVATE SECTORPARICIPATION
GOVERNMENT’SENABLINGENVIRONMENT
CREDIT & FINANCIAL INTERMEDIATIONS• Facilitation of trading in goods and services between parties
internationally and locally through RISK MINIMIZATION;• Financing against trade DOCUMENTS or goods (on and off-
Balance Sheet Lending).• Risk Assessment
– Macro Risks (Country and bank’s risks)– Transaction Risks (Customer, the goods, counter-party etc)
• The Importance of the bank’s Role – Advising the Creditworthiness of buyers/ suppliers– Providing information on various financing tools– Arranging financial instruments and transferring funds– Providing guidance in the preparation of Doc– Arranging Foreign Exchange transactions
• Customer Advisor Services though the Supply Chain Finance
PRIVATE SECTOR PARICIPATION
• Informal Sector, Retail Trade• Distribution & Whole sale business• E-Commerce• Trade In Services• Value Addition thru’ Manufacturing,
Processing and Diversification• Public Private Sector Partnerships• Business Process Outsourcing
GOVERNMENT’S ENABLING ENVIRONMENT
• Legal, Legislative and Institutional Framework• Fiscal and Monetary Stability• Policies and Strategies to support the growth of the
following sub-sectors Enhance sectoral productivity, capacity utilization and
investment opportunities for increased industrial growth Quality Standards and Environmental Mobilization Research & Development, Infrastructure Development
CONCLUSION
1. Basic Concerns in Value Chain Financing should boarder on the following key elements
• What commodity / goods?• How is it sold? Where is it sold? When is it sold?• Who is the Borrower?• Who is buying it?
Once the above questions are answered, it is possible to look at possible financing structures.
2. However, in a liberalized and globalized environment we are operation in, financing along the supply chain will squarely border on the financiers capacity and capability to manage inherent risks associated with the business both vertically and horizontally
INHERENT RISKS IN VALUE CHAIN FINANCING
Some of these risks include, inter alia; Credit risks: Past Performance records / KYC issues Production Risks: Will the customer produce the goods
that will enable repayment; Diversion Risks: Will the customer deliver the goods to the
selected buyers? Country / Political Risks : Could country problems or
government intervention lead to non-payment? Price Risks: Will the value of the goods delivered be
enough to reimburse the facility? Payment Risks: Terms & conditions; and Currency Risks: Foreign/ Local Currency convertibility.
OTHER ASSOCIATED RISKS
Non Compliance/Client Integrity (Lack of sincerity in the transaction; moral and financial standing.
Customer Performance Risks: quality assurances, delivery time, quantity, logistics, insurance, legal;
Transactional Risks: physical movement of goods and documents
Buyers Risks : failure to honour contractSales Contact/ Payment RisksWarehouse Merchandise Risks on value, quality..
Exposure by not adding value• International price shocks / Poor returns• Reality: Most LDCs have the KEY out of their
problems; resources and a lot of resources• Learning from Asian Tigers: Value addition• Value addition has the KEY TO UNLOCKING
the true potential of our exports, penetrating new and emerging markets
• Question: Do we see this KEY that is right in our hands?
KEY MESSAGES1. The Value Chain Framework is useful for expanding
rural finance and for developing enterprises.2. Value Chain Finance builds on business relationships
and transactions to screen & monitor borrowers, enforce contracts and manage risks & costs
3. Value Chain Finance is rooted in buyers' and suppliers' desire to expand markets, and to secure or increase product quality and quantity.
4. Value Chain Finance takes a variety of forms in addition to cash lending, such as advances and off-balance sheet.
5. The success and limits of Value Chain Finance are tied to the quality of cooperation between actors