As the world strives to kickstart economic activity in the wake of the COVID-19 pandemic, the concept of partnership could not be more critical. The words Africa and partnership are synonymous. The concept of ubuntu runs deep in our DNA. Yet, what does this mean from a business perspective?
Authentic, broad-based economic recovery relies on a thread of partnership through all business and banking engagements on the continent, pulling together financial institutions, corporations, governments and communities to co-create a sustainable future. This requires concerted effort in understanding what African economies require to thrive, and interrogating the role of the African bank in this process. COVID-19, and its resulting disruption, has brought this issue into the spotlight. Fraying economies need urgent stimulus, and banks need to act, fast. At RMB we have internalised the concept of partnership, and are continually investigating how African banks and global institutions can partner in innovative ways. This has already shaped and has gained significant traction in the way we have partnered and funded our domestic economy and the wider ecosystem, but also in the way we have partnered with banks and development financial institutions, large and small, across Africa through funding, solutioning and keeping the wheels of trade turning to ensure continuity of business.
Finding the COVID-19 silver lining
COVID-19 has had a devastating impact across the globe, with no country left unscathed. Businesses, SMEs, and corporates have all had their capacity decimated by the pandemic. The impact of low economic growth is felt everywhere from government challenges, stunted capacity development and budgetary constraints. Many African countries are largely commodity dependent, which has been understandably frozen by COVID-19, leading to negative GDP growth and job losses. As a continent, we are at a crossroads. Governments and the private sector have an urgent responsibility to create employment. With World Bank data estimating that SMEs contribute up to 60% of all employment and as much as 40% of the GDP in emerging economies, it is clear that budgetary spend should be channeled to stimulate this sector.
Trade (and the facilitation thereof) therefore plays a critical role in emerging markets. When regional confirming banks such as RMB foster trade in emerging markets, it assists thousands of underlying businesses that would not usually be large enough to access the global trading system. This role has become even more significant in today’s global economic climate, in which some global banks have begun to reduce their support for trade finance due to de-risking.
In addition to global trade opportunities, COVID-19 has also introduced a huge opportunity for Africa to transform financial services, bringing about massive, impactful digitisation of the sector. Redefining economies post-pandemic gives banking institutions the opportunity to reduce cost in doing banking through digital measures, and promote greater financial inclusion. COVID-19 forced many unbanked or digitally illiterate consumers to move to digital, and empowered the vulnerable to bank online. Countries such as Nigeria, Ghana, Kenya, Tanzania, Burundi and Mozambique all boast high digital adoption levels that continue to grow. Wherever each African country is in its digitisation journey, banks have a responsibility to serve each territory with innovative online solutions.
Rebuilding frayed economies – the role of the bank
Digital banking and increased opportunities to trade for SMEs do not constitute a panacea for the number of issues facing African economies. Rebuilding the damage is going to take time. Banks operating in Africa can contribute to rebuilding economies by listening carefully to the markets and devising truly African solutions. Development finance institution (DFI) financing has been explored by both governments and companies in several countries as a good source for low- and middle-income countries where the commercial, political or regulatory risks are too high for private capital investment. However, proving that investments will have a positive developmental impact remains difficult for private businesses. A significant factor limiting access to support from global DFIs is that they have specific rules and regulations that some developing countries cannot yet adhere to.
Both DFIs and commercial banks have the ability to assist in rebuilding economies, even though both their terms of measurement and contribution are completely different. As a sector, development finance will focus on keeping people in their jobs, which means keeping SMEs running and in business as an integral part of sustaining the economy. DFIs also need to focus on keeping critical institutions going that have an intrinsic socio-economic impact during the pandemic, such as healthcare. In the spirit of true partnership, this means not just channeling investment into the issues faced by developing economies, but becoming part of the ecosystem and an active participant in solving complex challenges.
How banks can partner for good
Commercial banks can take great strides in assisting economies by building mechanisms that develop debt capital markets in Africa. RMB’s partnership with African Development Bank and CDC has enabled us to mitigate risk and assist African countries and companies with trade financing. This allows an individual SME to scale his business from USD 100 million to USD 300 million, achieving scale and creating jobs they wouldn’t have otherwise. Another challenge we have identified is that of derisking. RMB has taken the lead, working with African bank on fulfilling the derisking role for African SMEs that may not have fit an acceptable risk profile in traditional financing models. RMB is also working with Citi and Lloyds on the Africa Gateway initiative in order to create more financial inclusion. This captures the essence of what partnership means on the continent – industry peers working together with economies towards a common objective.
Supporting sustainability through with IFC
When two parties join forces, partnership can operate on a large scale. In its partnership with IFC Global Trade Finance Program (GTFP) in Africa, RMB has facilitated trade and commodity transactions in the region to the value of $450 million. Through the GTFP, IFC actively pursues partnerships in support of its growth objectives around the world, in this case Sub-Saharan Africa.
Partnering with a development financier in this manner, RMB can follow its mandate to invest responsibly and enrich emerging economies. The deals facilitated by RMB relate directly to infrastructural or commodities-based development, and create much-needed employment in local economies and communities. For example, RMB has assisted businesses across Sub Saharan Africa with import of capital goods to help with the development of infrastructure, medicine and food.
Another partnerships that really makes sense is the First (Facility for the Investment in Renewable Small Transactions), led by KfW development bank and supported by RMB. Under this banner, our team has been able to achieve significant commercial successes by aggregating clean energy projects that would not usually qualify for financing owing to their risk profiles, and share risk significantly within these projects. This created the capacity to fund smaller projects and empowered entrepreneurs to contribute meaningfully and sustainably to the South African economy.
At RMB’s inception, our founders placed an emphasis on trust and endearing partnerships. This age-old concept stood us well over the years and continues to evolve alongside the current economic context. It is up to us, our banking peers and our network of relationships.
We will not rest, we take our role as economic partners seriously, and must consistently interrogate what that means in the African economies in which we operate.
By Suresh Chaytoo, Sector Head for Banks and DFIs at Rand Merchant Bank