The African market has typically had a muted response to supply chain finance compared to the far wider take-up in Europe – but there have been some landmark deals in the last couple of years that suggest companies are starting to recognise the benefits of SCF.
Fintech firms such as Addendum in South Africa have been leading the way, as have many of the banks operating on the continent. Last January, Addendum – which was formerly the fintech arm of Propell – worked with the large South African pharmacy chain Dis-Chem to set up what has become one of the largest SCF programmes in Africa.
Governments and government-backed entities have also looked at the use of SCF as a means of maintaining their supply chains and keeping their key suppliers in business – particularly those firms that have limited access to other forms of affordable funding. Interest in the product has grown to the extent that the African Export-Import Bank (Afrexim) is exploring how it can support it as a way of plugging the well-publicised gap in financing for small and medium-sized businesses (SMEs) in Africa.
“The pronounced shortage of short-term lending on the continent has driven sophisticated firms to partner with their banks to implement strategies that reduce the need to borrow and increase the utilisation of existing assets, including supply chain financing,” Stewart Makura, supply chain finance head and trade commodity finance for Sub-Saharan Africa at Citi tells SCF Briefing.
“More buyers are also establishing these programmes as a means to meet their corporate social responsibility goals especially centred around SMEs. The combination of limited access to finance for smaller suppliers and the rising awareness of the product has contributed significantly to the growth of the product which is centred around the buyer,” he says.
While interest is increasing across the continent, there are many companies and suppliers that remain unconvinced that SCF programmes are worth the effort and time to arrange.
“What’s in it for me?” is a common response banks and vendors might hear when approaching local corporates, says Steven van der Hooft, CEO at the consultancy Capital Chains, fresh from a research trip to Africa, including visits to Kenya, Nigeria, Zambia and South Africa. Building awareness about the SCF product and its benefits remains of utmost importance to win over the more reluctant potential customers, he says.
Success Stories So Far
Dis-chem’s SCF programme, set up last year, signalled an emerging shift in attitudes towards supply chain finance. Uptake of the programme was fast and enthusiastic, with 70 suppliers registered within the first 30 days and more than 100 live on the platform within the first 90 days. Nine months later, more than 200 suppliers had joined, making it what Addendum says is the largest SCF programme in Africa and a category winner in the SCF Awards last year. The programme was set up by Addendum in conjunction with US firm PrimeRevenue and used the company’s OpenSCi trade finance platform.
Dis-chem wanted to use the platform to free up funding to support its expansion plans throughout Southern Africa, while ensuring its suppliers were financially looked after.
“The SCF programme gave us the leverage to enter into negotiations with suppliers with whom we could discuss term extensions without threatening their cashflow,” says Adam Marcus, chief financial controller at Dischem. “It has been extremely successful. Since we implemented it, we have improved our DPO by over 25 percent. We have freed up significant resources. More than 100 vendors joined the program in the first 6 months and to date we have over 200 vendors on the programme, which equates to over 20% of our monthly trade vendor base.
“We see it growing and are currently pushing vendors to take up the option,” he says.
The programme has encouraged greater interest in the product, says Emuel Schoeman, managing director of Addendum. “Our success in the African market has generated a lot of interest. We now have many examples of successful programmes across all sectors in Africa, which we can share with potential customers and banks,” he tells SCF Briefing.
“We have a very healthy pipeline of customers in South Africa, funded by all four of the biggest South African banks and a number of non-bank funders. In addition to that we have expanded in east and west Africa with existing bank partners as well as new banks over the last 18 months,” he says.
The Dis-chem deal builds on the earlier success of Addendum’s work with steel group ArcelorMittal South Africa. The programme – which won an SCF Briefing award in its category in 2016 – allowed the company’s suppliers to receive much earlier payment by taking advantage of ArcelorMittal’s credit rating to secure better rates than they may have secured from local financing sources.
Last year also saw Cameroon’s national electricity company ENEO use SCF as a means of ensuring the sustainability of its supply chain. ENEO – which has a minority state ownership after a partial takeover by Actis in 2014 – was struggling financially and needed to make large-scale investments to widen the provision of electricity in the country.
As Brigitte Konso Epse Yanda, ENEO’s finance director, and William Bayemi, responsible loan compliance & debt reporting, explained to delegates at last November’s SCF Forum in Amsterdam, the company’s suppliers were also under pressure and faced difficulties in raising long-term financing. They needed to obtain quicker payments from ENEO.
US bank Citi approached the company proposing the use of SCF to provide cheaper financing to their suppliers in order to keep them in business – while not putting further strain on the electricity company to reduce their payment terms.
Once set up, suppliers on the programme were able to be paid within 48 hours of uploading their invoices, rather than wait for 90 days as per their payment terms, Bayemi and Yanda said. As of the end of 2018, 83 suppliers were enrolled on the programme out of 4,000 active suppliers.
Pitfalls and limitations
While these examples hold promise for the future of the market, there are still limitations to SCF’s growth in Africa.
SCF is “still a relatively new concept for many clients, banks and suppliers”, notes Schoeman, explaining how Addendum must create more awareness around the product.
“It often requires being an educator first and then a solutions provider. Companies still require convincing. It is very important, especially in Africa, to quantify the potential benefit for customers, top-down and also bottom up. More importantly, clients want to understand how we have created value for their peers and/or competitors in Africa,” he says.
“Despite some large companies using it, it is so far a relatively new and growing industry. Most companies need some introduction on how it works but once they understand it they see the benefits and are willing to take it up,” notes Marcus, talking specifically about South Africa.
Currently cash-strapped small suppliers will often will find it easier to go to a local non-bank funder they know for financing, says Van der Hooft.
“One of the comments I heard over the course of meetings is that people will choose the easiest way to secure funding,” he says. “Often suppliers will go to a lender outside of the banking industry rather than sign up to an SCF programme, even if in the long-term that option will give you cheaper finance rates – it is often easier in the short term to set up an arrangement with someone locally today. A SCF programme could take weeks, months or even a year,” says Van der Hooft.
At Citi, Makura agrees that communicating the benefits of SCF compared to other financing solutions on the market can be tricky. “One of the biggest challenges for suppliers is to understand the benefits of the solution as it is with no recourse to the supplier. Our experience in markets such as Cameroon shows that suppliers tend to stick to the factoring solutions as they have the assurance there is a line on them for which they are paying cost to enable then to discount invoices.
“The fact that the solution is relying on the creditworthiness of the buyer is sometimes confusing. Suppliers and the market in general must be further educated on the solution and the benefits for the company and the business,” he says, adding that SCF is often just not high enough on companies’ agendas.
“Given other pressing business needs such as foreign exchange shortages recently experienced in Nigeria, supply chain finance is often not a priority for most treasurers which leads to slow decision-making delaying the rate of uptake,” he adds.
Currently the African SCF market is heavily concentrated on South Africa, with some tentative signs that its appeal is spreading, Van def Hooft says.
“The numbers and the programme sizes are still relatively small – maybe just five to 20-million-dollar programmes,” he adds. “In Nigeria, there were some interested players and some which are about to set up SCF programmes, and the same for corporates in Kenya, but some of their feedback is that they want to know what is in it for them,” he says.
In Nigeria, where the oil industry typically dominates, companies in that industry tended to express more interest in contract financing where they can finance a person or company in advance to ensure they fulfil their order, Van der Hooft says. In both Nigeria and Kenya, companies were also interested in distributor financing. Financing suppliers after invoices were issued by suppliers seemed less appealing.
“Banks and fintechs want to move in. But if you look at the feedback we got from corporates, they believe it is up to the suppliers themselves to ensure they have adequate funding in place,” says Van der Hooft.
He adds that SCF providers need to more effectively explain “what this product would do for them and how it could strengthen their supply chain and make it more resilient”.
The next steps
One way SCF could improve supply chain resilience in Africa is by providing access to cheaper financing for smaller suppliers, allowing them to fulfil orders which in turn supports the larger buyers.
It is this line of argument that needs to be more effectively communicated in order to create more demand for SCF in the continent, where the financing gap for SMEs is particularly acute.
The World Bank’s IFC said that as many as half of African micro, small and medium-sized businesses cannot or can only partly fulfil their credit requirements. The multilateral estimates the SME finance gap in Africa stands at more than $421 billion, according to its 2017 report.
“The general feedback is that there is a massive gap and everything [lending] is based on collateral and SMEs don’t have collateral, so SCF could really help,” van der Hooft says.
Interest rates have been historically high in many African countries and even attempts to cap rates – such as in Kenya in 2016 where rates were capped at four percentage points above the central bank rate – have not helped increase access to finance. In Kenya many argue that the ceiling on interest rates means there is no incentive to lend to smaller and potentially riskier entities when you can get similar returns doing business with the larger corporate.
“In Africa even for the small to medium tier companies that can access funding it is often at double-digit interest rates which erodes their margins and reduces their competitiveness and sustainability hence supply chain finance is considered a good enhancement,” says Makura.
“One of the main advantages of supply chain finance programmes is that they enable non-investment grade suppliers to benefit from investment grade financing interest rates of their buyers, whilst it offers buyers an opportunity to support and stabilize their supply chains,” he says.
This argument is gaining traction. Van der Hooft currently working with Afrexim on how the development bank could help support SCF programmes that channel financing to SMEs.
Similarly Addendum’s Schoeman says it is the company’s “duty” to offer SCF to SMEs. “We fundamentally believe that supply chain finance can be an engine for economic growth, create opportunities and lead to the reduction of unemployment in Africa,” he says.