RISK MANAGEMENT | 20 OCTOBER 2021

Absa leads the pack in
support for SMEs

Absa-CIB-Author

Doreen Fick

Head of Funded Wholesale
Trade Finance Products

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Small and medium-size enterprises (SMEs) are crucial to an economy such as SA’s no less so than the rest of Africa’s. The SME sector urgently requires optimal bank funding support to ensure its recovery from the pandemic and to adequately exploit the new growth opportunities presented by the African Continental Free Trade Area (AfCFTA), launched on January 1 2021.

“The AfCFTA is a new frontier and a potential game change for the continent, and one that stands to benefit entrepreneurs as much as the corporate sector,” says Doreen Fick, Head of Funded Wholesale Trade Finance products at Absa. “It is therefore vital that it in practice benefits SMEs and entrepreneurs across the continent, and does not become simply the domain of big businesses. This is a massive opportunity for SMEs to grow their intra-Africa trade with the potential only limited by their access to trade finance.”

So what is the way forward?

Fick points out there is no getting round the need for lending institutions to gain an understanding of how individual SMEs run their businesses, thereby facilitating a match between clients’ supplier and buyer payment terms and their cash flow requirements. “For instance, Absa’s funded wholesale trade finance uses pre- and post-shipment trade loans rather than general overdraft facilities, given the latter is difficult for a bank to control. An invoice or purchase order underpins each trade loan thereby providing the necessary visibility concerning the purpose of the loan. Consequently, they are easier to manage from a risk perspective. In most instances, the bank will directly pay the foreign suppliers or ultimate buyers as a way to monitor the use of the funds,” she explains.

In the absence of a new credit lens, the high collateral requirements imposed by the regulatory rules of Basel III make loans to SMEs unaffordable for them because of their relatively high-risk weightings.

Chuene Setati, Regional Sales Head for Trade and Working Capital at Absa says “Absa has retooled three areas of its trade finance business:

“Firstly, we spend a lot of time with our SMEs to understand their needs in developing various collaborative relationships. What is vital to the support of SMEs is to have financial products tailored to their core needs. One of their main challenges is collateral. Lack of collateral is the major reason SME’s are comparatively excluded from international trade therefore, we offer products that are self-liquidating in nature, with the ultimate source of their repayments based on receivables. This has a major impact on reducing the requirement for collateral normally required for funding.

“Secondly, on behalf of this sector Absa collaborates with government and corporates under our Enterprise Supply Development and Value Chain funding programmes. These form part of our strategy to help SMEs manage their performance risk through products such as Letters of Credit and mitigating their credit risk profile with bigger corporates.

Thirdly, Chuene says, “We have invested heavily in our Trade Management Online (TMO) platform. This has really perfected the ease of doing business for our SME clients and given them access to the world from their offices and also from their homes during pandemic restrictions. TMO automates our processes for clients as much as possible, and also enables Absa to link into centralised systems which share client data. This in turn relieves busy entrepreneurs of distractions and enables them to remain focused on their business.”

This model acknowledges the difference between large corporate and SME clients by applying a different credit lens when assessing SME clients. Vast amounts of economic growth and job creation will continue to be lost to society until banks find new innovative ways to make lending decisions that suit SMEs.

However, while many changes are still required, progress is being made: many banks are recognising the need to grow this critical sector and future collaborations between banks; trade institutions and fintechs will provide future promising results to the much-needed SME sector.

Whether these SMEs are importers needing pre-shipment financing or smaller exporters struggling to commit to new orders because of disadvantageous payment terms – Africa-wide, the traditional banking system tends to favour corporate business over SMEs. At Absa, that at least is changing.

Absa-CIB-Author
Doreen Fick

Head of Funded Wholesale Trade Finance Products

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