K.W. Mwangi - Assistant GM, Trade Finance
Commercial 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 Mwangi
16TH 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 knowhow
– 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 Additions
Commodity processing (Vertical) e.g leather
products, preserved fruits, and fish products
Share 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 (WINWIN)
• 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
C
L
I
E
N
T
P
R
O
D
U
C
T
S
A
D
V
I
C
E
Contract
Negotiation

Bid Bond

Export
Financing

Pre
payments
Contract
Signing

Commodity
hedge
Production

LC advice

Confirmation
Delivery
Settlement

LC settlement


Deferred
payment
Trade
payment

FX cash

Post Import

Limited/
without
Recourse

FX options

FX cash

FX forward

LC discounting Collection

Advance
payment
guarantee

Forfaiting

Innovative, VA

TRSF Products

Structured
Export
Financing
Operational&
Commodity
Foreign
Documentary
quantity, quality and price Exchange/ INCOTERMS
Credits
(UCP 500/600) Counterparty
Country & Transactional risks
Settlement
R I S K S
Warranty
Term.

Return of
bonds and
Guarantees

& other
security
Instruments
(if any)
Interest
Rate
FARMERS/ PRIMARY
PRODUCERS
A
Deliver/
Payments
Fish, Cotton, Cashewnuts
Rice, Sugar, Wheat, Hides &
Skins, Pyrethrum, Sesame,
Coffee, Tea, Groundnuts,
Macandamia nuts, Tropical
Fruits, Milk products, Metal
AND Steel products.
B
COOPERATIVES /
SOCIETIES/ RAW
MATERIAL SUPPLIERS
C
Deliver
Payments
D
Credit Facilities
International
Correspondent
Banks
N
P
LCs
Docs
M
ACs
Reimbursements
MILLERS/ GINNERS
PROCESSORS/
MANUFACTURERS
Q
Forward Non-Negotiable
WH Receipts / Pledge of
Bill of Landing
LOCAL
BANK
O
Analysis/
Feed Back
Approvals
Non- Negotiable WH
Receipt
Distribution
Sales Contracts,
Firm orders
Against LCs
E
G
Deposit Goods
F
COLLATERAL
MANAGEMENT/
WAREHOUSE
H
Release Goods
Againts Documents
L
Reports / Submit Documents/
Warehouse Receipts
Supply
Inputs
Documents
Input Providers
I
OFF-TAKERS ( International/
Local) BUYERS
Credit
Informal Trade; Retailers; Distribution/
Wholesale Trade; International Trade; eCommerce; Trade in Services
LCs in favour of the Bank
Payment of proceeds
J
K
Release Documents
against payments
BUSINESS MODEL FOR VALUE CHAIN
COMMODITY FINANCE
Dynamics that exist within a value chain,
Small producers and Enterprises linking
Into healthy markets opportunities to
Reduce costs, improve their product
Or expand their market.
THEY ALL UNDERSTAND THE RISKS
AND MARKET REALITIES
Global Distributors/ Retailers /
VALUE ADDITION
National
Retailers
Sector-specific
providers
Cross-cutting
providers
Exporters
Wholesalers
Processors/Traders
Producers
Financial
(cross cutting)
Input Suppliers
MULTIPLE FINANCING ALONG THE VALUE CHAINS
VIA FINANCIAL INSTITUTIONS
BANKS
(Red/ Green Clause LCs)
BANKS
Pre-Export, pre-payments,
Export LCs, Receivable
Finance…)
BANKS
Non-Bank Financial Inst.
(Stock/ Export Finance,
Other Corporate Finance)
BANKS,
Global Distributors/
Retailers / VALUE ADDITION
National
Retailers
Exporters
Wholesalers
Processors/Traders
Producers
Non-Bank Financial Inst.
MicroFinance, PRODUCERS
Input Suppliers
COMPETITIVE ADVANTAGE
The ability to exploit some combination of:
Efficiency
Product
Differentiation
New Markets
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
Enhance sectoral productivity, capacity
utilization and investment opportunities for
increased industrial growth & trade
opportunities
Vision
Strategy
CREDIT &
FINANCIAL
INTERMEDIATIONS
PRIVATE SECTOR
PARICIPATION
GOVERNMENT’S
ENABLING
ENVIRONMENT
Plans and
implementation
BUILDING BLOCKS ON ACCELERATING SUPPLY CHAIN FINANCING
Source: NESC Vision workshop, January 13–14 2006; Naivasha, Kenya
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 offBalance 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.
2.
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.
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 contract
Sales Contact/ Payment Risks
Warehouse 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 MESSAGES
1. 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 offbalance sheet.
5. The success and limits of Value Chain Finance are tied
to the quality of cooperation between actors