• Monday, December 11, 2023
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Why Africa must leverage innovative supply chain financing solutions to bridge access to finance

Alternative financing models to bridge MSMEs funding concerns – study

African economies and businesses still struggling from the post Covid-19 shocks can accelerate their recovery process and return to stability and profitability in many ways. SEYI JOHN SALAU looks at the supply chain funding model, one of such solutions that can be explored to afford buyers and suppliers the much-needed financial leeway to access financing by MSMEs and SMEs for their transactions and improve their operations.

The Covid-19 pandemic negatively impacted national economies and exacerbated the challenges faced by businesses across countries, including Africa with severe liquidity and cash flow crunch being top on the list of challenges faced by businesses.

The supply value chain suffered significant disruptions that resulted in huge shortfalls in the supply of daily essentials due to production shutdowns. There is also a high volume of unmoved inventory, death of businesses occurred, while the surviving entities are in continuous need of urgent cash and liquidity lifeline.

In Africa, weak infrastructure coupled with poor inventory management and lack of access to funding to scale up owing to no ownership of assets for collaterals and poor credit history is among the factors inhibiting business growth.

This is further exacerbated by the slow rate of technology adoption, lack of consistency in policies, and unfriendly regulations including taxation, instability in the forex system, and trade restrictions.

Africa is host to the world’s largest informal sector and has a dominant population of medium, small, and medium enterprises (MSMEs), with a significant part of the supply chain businesses operating in the informal sector.

Interestingly, Africa’s potential remains huge as a strategic consumer market owing to its large landmass and demographics (1.4bn people). The African consumer market is projected to reach $2.4trn by 2030, making it one of the fastest-growing consumer markets in the world.

An efficient supply chain network is, therefore, pivotal for goods and services to reach millions of people that need them as quickly as possible. According to Stears, a research company, supply breakages have been a key challenge for intra-African trade. It noted in a recent study that intra-African trade is 15.2 percent, against intra-continental trade for the US at 47 percent; Asia at 61percent, and Europe at 67 percent.

This is why supply chain financing can unlock new opportunities for African businesses. Supply chain financing is a business and financing process that enables suppliers to receive timely payment on their invoices through payments facilitated by a financial institution/partner authorised by the buyer to facilitate the transaction by making early payments to the supplier.

Business intelligence and data research firm Stears said that global trends driving supply chain financing (SCF) include the evolution of global supply chains with an increase in suppliers and transactions, scarcity of capital, and improvement in technology allowing for fintech disruptions.

Pakistan and Mexico are inspiring references for the great impact that supply chain financing can make on the economy. The local SCF market in Pakistan is about $18-$20bn; around 60 percent of this value is derived from reverse factoring, a form of SCF. In Africa, factoring grew by 28.1 percent between 2020 and 2021.

Read also: Chatham House pledges to support Nigeria attain universal health coverage

Mexico’s Nacional Financiera (NAFIN) development bank sought to solve financing gaps for businesses with a reverse factoring program. At the program’s inception, Mexican SMEs predominantly raised funding from personal savings (65%), family and friends (18%), and loans from banks (1%). But with supply chain financing, $9bn in distributed financing was accessed by 150,000 participating suppliers, and over 190 big corporates in over 1.2 million transactions.

In Africa, credit risk is a major hurdle for small and mid-sized businesses. Non-performing loans to total gross loans can be an indicator of credit risk across many markets – Ghana 15 percent, Kenya 13 percent, India seven percent, Nigeria four percent, Mexico percent percent, Brazil two percent, UK one percent, Australia, and US one percent.

Marketplace platforms such as Fiducia and others are pushing the tech frontiers to open Africa into the benefits of this emerging segment. Recently launched in Nigeria, Fiducia is an innovative supply chain financing platform that connects corporate buyers, suppliers, and financiers in a digital marketplace where invoices can be financed and traded.

The implication of this is that buyers and sellers will now have greater flexibility in the payment and financial settlements of goods; while suppliers will have the much-needed financial leeway to access finance for their transactions, which in turn brings stability by allowing suppliers timely access to the much-needed finance.

The financing model can also impact improved supply chain efficiency, innovation, trust, and confidence in relationships among parties. A crucial advantage that Fiducia brings at this time is that it can mitigate trade risks because the creditworthiness of the buyer is especially important.

“Fiducia is founded with the express purpose of levelling the playing field for business owners in Africa by unlocking the value of their supply chains. Today, Fiducia is successfully driving inclusive GDP growth by broadening financial inclusion – as a wider pool of small and mid-sized businesses enter Africa’s financial markets on the same terms and rates previously only available to large corporates,” Imohimi Aig-Imoukhuede, CEO, Fiducia said during the recent launch of the marketplace platform in Lagos.

Aig-Imoukhuede said further that the International Finance Corporation (IFC) currently estimates the value of Nigeria’s existing supply chain financing sector at around N 3 trillion. According to him, Nigeria can unlock an additional N 9 trillion into the economy if the currently excluded SME supply chains could be brought into play.

According to him, Fiducia will strengthen cash flow for both corporate buyers and suppliers without materially impacting client on-balance sheet loan profiles. “For financiers, Fiducia provides access to a greatly expanded pool of previously overlooked corporates and newly de-risked suppliers seeking financing”.

By eliminating paperwork, digital SCF ecosystem enhances convenience, speed, and cost-efficiency as parties would not need to deal with paper invoices and documentations. To this end, supply chain financing creates a digitalised marketplace for buyers, suppliers, and financial partners to collaborate and connect for seamless transactions, from the initiation stage to completion.

Buyer payment cycles that may take 30 to 60 days, or even stretch to 90 days or longer days up to 180 days, are now cut short because a digital marketplace provider, such as Fiducia, settles the payment. Those factors that threaten business continuity are removed.

A well-structured SCF has the capacity to inject billions of dollars of liquidity into African markets through upfront and early payments to suppliers while promoting financial inclusion and digitally connected economies on the continent.

The supply chain financing model can offer great solutions for suppliers, businesses in the logistics ecosystem, B2B/B2C e-commerce platforms and other collaboration platforms, connecting them with other buyers and suppliers globally.

As an alternative funding source, SCF helps business expansion by facilitating cash flow for operation, in contrast to the limiting reliance on personal savings and borrowing from family and friends to start or grow a business.

More importantly, both in the short and long term, SCF increases access to alternative funding sources and the availability of liquidity for businesses. It affords Africa, digital tools to advance global trade, while it also drives an increasing need for businesses to embrace digital transformation of their processes in line with global trends.

Thus, by creating opportunities for all parties through the availability of working capital, facilitating tech-enabled trade, and supply chain solutions for corporate buyers and suppliers, including importers and exporters, supply chain financing can accelerate a digitally connected economy for Africa.