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