Supply chain finance refers to a syndicated financing model in which a supplying party receives early payment on its invoice from a third-party financial institution contracted by the buying party to make payment on its behalf.
Also commonly referred to as reverse factoring, supply chain financing allows suppliers to receive timely payment on their invoices through payments facilitated by a financial institution authorized by the buyer to facilitate the transaction by making early payments to the supplier.
The advantages of supply chain financing are numerous: not only can supply chain financing afford buyers and sellers greater flexibility regarding the payment and financial settlements of goods, but supply chain financing can also bring much-needed stability to international trade by allowing suppliers timely access to much-needed finance.
Improved supply chain efficiency, innovation, and ingenuity are some gains gleaned from supply chain financing since the financial model will enable suppliers much-needed financial leeway to access finance for their transactions and improve their operational products.
For Nigeria, supply chain financing can fast-track the Nigerian economic diversification plan in no small measure. The International Finance Corporation (IFC) estimates that the market opportunities for supply chain financing in Nigeria stand at about ₦2.7 trillion and that supply chain financing could catalyze the growth of many Micro, Small, and Medium Enterprises (MSMEs) in Nigeria through a robust financing mechanism. This can accelerate trade and open the seismic shift for much sought after economic diversification in Nigeria.
By guaranteeing payment to the selling party rather than directly financing the buying party, financial institutions in Nigeria can reduce the risks associated with trade in Nigeria
For supply chain financing to emerge as a pillar of trade in Nigeria, IFC advises a “multi-stakeholder” that is tasked with the drive of promoting the knowledge of supply-chain financing in Nigeria, increasing access to supply chain financing, engaging in various complementary efforts with the Nigerian economic environment, amongst many other tangential initiatives.
The rest of this essay examines how supply chain financing can enhance Nigeria’s economic diversification plan and boost the Nigerian economy:
Supply chain financing can improve the balance sheet of MSMEs
The Small and Medium Enterprises Agency of Nigeria (SMEDAN) confirms that about 39 million MSMEs exist in Nigeria. Meanwhile, IFC estimates that Nigerian MSMEs account for more than half of the economic opportunity in supply chain financing within the Nigerian trade sector, estimated at ₦1.4 trillion.
IFC notes that the potential financial benefit for Nigerian MSMEs through supply chain financing is likely more considerable. However, the informality of many Nigerian MSMEs has set the economic opportunity of supply chain financing to Nigerian MSMEs at a lower figure.
However, regardless of the inability of the IFC to accurately predict the economic benefits of supply chain financing to Nigerian MSMEs, the reality remains that MSMEs are the lifeblood of the Nigerian economy, and a ₦1.4 trillion economic opportunity through supply chain financing will be immensely beneficial to the revenue base of Nigeria’s business environment.
Latent Nigerian MSME sub-sectors like the manufacturing, mining, and retail sectors can hugely benefit from the intricate workings of supply chain financing if the model is well implemented across the country.
Standard Bank, a prominent investment bank across Africa, notes that “effectively integrated and delivered supply chain finance techniques” can provide preferential financial trading rates for Nigerian MSMEs while helping them reduce risk in a secure and healthy supply chain ecosystem.
Some of the supply chain financing techniques that Standard Bank seeks to promote include purchase and lending-based supply chains finance techniques such as receivables discounting and payables finance, affordable risk-managed balance sheet optimization solutions.
Invoice financing and pre-shipment financing, simple and easy-to-use digital financing solutions; and digitally integrated financial solutions amongst others.
2. Supply chain financing can improve the prospects of Nigerian entrepreneurs
As of 2020, there were 46.4 million entrepreneurs in Nigeria, 13% compared to Nigeria’s 41 million entrepreneurs in 2020. This means that more than one in every five Nigerians is an entrepreneur.
Notably, the World Bank concludes that seamless supply chain financing products in Nigeria can improve the economic prospects of Nigerian entrepreneurs who are constrained by a lack of fixed collateral and limited credit options by many financial institutions.
To unlock the economic prospects of many Nigerian entrepreneurs, the World Bank advises development banks like the Africa Finance Corporation (AFC) and the African Development Bank (AfDB) to step up and spur economic growth in Nigeria through supply chain financing.
By supporting entrepreneurs through policy, and regulatory frameworks, providing entrepreneurs with much-needed technological platforms to conduct international trade, providing advisory services to MSMEs, and building awareness for supply chain financing, development banks can improve the deployment of supply chain financing in Nigeria.
By reiterating that there are “trillions” of dollars in late payments and trillions more in missed opportunities for many MSMEs across supply and distribution chains, the World Bank advises development banks to develop the supply chain financing market by organizing sectoral funds from many financial institutions who cannot individually set up their supply chain financing systems.
3. Supply chain financing can mitigate trade risks in Nigeria
A crucial part of supply chain financing relates to the creditworthiness of the buying party. A buying party’s irrevocable commitment to meet its financial obligation upon maturity is essential for thriving supply chain financing.
Read also: Strategic Sourcing: A key nexus in supply chain management
Thus, financial institutions that serve as the middlemen in supply chain financing rely on the assurances given by the buying party to meet up with the principal amount owed to them at the due date. This arrangement could not be more critical in mitigating trade risks for supply chain transactions in Nigeria.
Across Africa, many SMEs need help to access traditional banking facilities because of the need for more creditworthiness, leading to missed economic opportunities arising from fear of trade risks.
Supply chain financing can mitigate trade risks in Nigeria by allowing greater access to the financial books of buying parties through Know-Your-Customer (KYC) requirements and other open banking initiatives.
Once financial institutions can be assured of the creditworthiness of a buying party, guaranteeing payment to a selling party becomes easier. In a nutshell, supply chain financing can be help to lessen the risks surrounding trade in Nigeria.
Conclusion
Supply chain financing can smoothen out many financial challenges associated with Nigeria’s supply chain industry. By guaranteeing payment to the selling party rather than directly financing the buying party, financial institutions in Nigeria can reduce the risks associated with trade in Nigeria and allow economic activities to go on freely.
This financial framework is especially suited to development finance institutions that can properly build the supply chain financing value chain by integrating the model with relevant stakeholders in the Nigerian trade industry.
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