How credit risk insurance drives Africa's rebound
30th October 2009
Interview with industry expert,Humphrey Mwangi, Acting Chief Underwriting Officer, AfricanTrade Insurance Agency.
From his office in Upperhill in Nairobi, Humphrey Mwangi has noticed a sea of change in the business climate both locally and in the region. The global financial crisis, originally thought to have had minimal effects on Africa, now appears to have hit our industries head on.
For exporters and importers, the aftershocks have been particularly challenging. Kenyan horticultural exporters, for instance, are now exploring prospects in the Middle East and turning away from low demand markets in Europe and North America.Regional markets have also emerged as fertile ground for Kenyan exports, with Uganda, Tanzania and Sudan importing the bulk of Kenya's merchandise.
"Africa is caught in the middle of a global shift where those who operate their business on a cash-basis will be left behind," Mr Mwangi says.
He notes that in an increasingly competitive global marketplace, companies that have goods or services to sell will only be able to compete if they can oer credit terms to their buyers.
"This is the crucial intersection between an exporter's potential success and failure - and the solution is much easier than many companies realise."
In an interview, Mr Mwangi has outlined how the global financial downturn impact on African trade, and why African banks, exporters, importers and foreign companies selling their goods on the continent need to make better use of "home-grown" African credit risk insurance solutions.
Why companies need credit risk insurance is not always easy to understand. What separates credit risk insurance from all the other products in the market?
Credit risk insurance in Africa is relatively a new concept where, as in Europe and North America, it has been around for over half a century.
I've spoken to many companies who are doing business either regionally or in markets in Europe and I'm always amazed that they know little or nothing about credit risk insurance. In many cases these companies are operating blindly because they often have no or little credit or financial information on their buyers. This is potentially one of the biggest blind spots that sellers have because buyers and their collective debt burden can represent as much as 40 per cent of their company's assets. What happens if one of these buyers decides not to pay, or if they go bankrupt? Credit risk insurance can protect sellers against buyer non-payment, resulting from insolvency, orprotracted payment default (when thebuyer drags out the payment process), among other risks.
A link has been made to credit risk insurance and a company's ability to compete globally. Can you expand on this?
African exporters selling products such as tea or coffee have historically traded their goods through auction houses. These mechanisms were useful Credit insurance allows a bank to freely conduct a line of business that they might otherwise shy away from at a time when credit wasn't readily available to these industries. Today, the reality is that these exporters are fetching sometimes as little as 50 per cent of what they could get if they were able to trade directly with their buyers on credit terms. The biggest exporting countries in the world provide their exporters with trade credit insurance (credit risk insurance). This insurance enables the seller to trade on open account with a buyer and have payment terms that are more flexible and that are not necessarily based on cash terms. The global credit crunch is moving the entire world to a system that will demand this type of trading mechanism. African companies that operate on a cash-only basis or rely only on auction houses will be ill-equipped to compete in this new global order.
Who is currently offering credit risk insurance and how can companies access these products?
My organisation, the African Trade Insurance Agency (ATI) was set up in 2001 to provide insurance against political and credit risks and to act as Africa's export credit agency. We are unique because we are an African institution and given our presence on the continent, we are able to judge and price fairly the business risks of operating in Africa unlike many global credit insurance companies based outside of the continent, who may rely largely on news reports for much of their political risk and credit information.
While political risk insurance was our flagship product, we rolled out a credit risk insurance product a few years ago, which has been well received. In 2008, agri-producers represented about 69 per cent of our clients in countries like Zambia and Kenya. This year, we've seen increased demand from manufacturers and service-based industries.
The Credit Guarantee Insurance Corporation of South Africa (CGIC) is one of only a few government-owned insurers that offer credit insurance in Africa, and they can only provide this insurance to South-African companies.
A company that has expanded into the Middle East, for example, may not have much money left for insurance. What case would you make to these companies?
In our line of business we are seeing a general trend towards increased demand for high value added goods and services in mass quantities. Markets like China, for example, are driving African growth precisely because they need vast amounts of natural resources. In order for African companies to compete successfully in these types of markets, they will need flexible trading terms that enable them to invoice clients on a 30 or 60 day cycle, for example.
In a practical sense, companies with credit risk insurance will have more leverage with banks to be able to negotiate favourable lending terms precisely because the bank's investment will be protected by insurance coverage. For the seller, this credit line can be used to provide pre-export finance for their business while they extend more flexible payment terms to the customer. This is the future of global trade.
Banks are increasingly turning to credit risk insurance to expand their business. How does this work in a practical sense?
Banks are realising that credit risk insurance is by far a better risk mitigation tool than conventional forms of collateral such as property, which has always been one of their core lending requirements. But, when banks obtain credit risk insurance as an addition to conventional security, they are able to lend more and to lower their interest rates.
We are seeing an increased demand from banks for credit insurance coverage against their clients' receivables, which banks normally use as lending collateral under what's known as Receivables Discounting. In the current economic climate, many banks now want their clients to take out a credit insurance policy before they can discount their receivables. Under this type of policy, the bank would be guaranteed payment if the invoices are not honoured at maturity. The net effect of credit insurance in this case, is that it allows the bank to freely conduct a line of business that they might otherwise shy away from. This gives banks with credit risk insurance a clear edge over their competitors.
In your long-term forecast, say in the next 10 years, what is the state of African trade and how willAfrican exports fare in the global market?
In the largest global economies that make up the Organisation for Economic Co-operation and Development (OECD), experts are predicting that the debt-ratio in these countries could grow to 140 per cent of their Gross Domestic Product(GDP) by 2014. With such a high debt burden most of Africa's traditional trading partners like the UK will be focused on paying back debt for many years to come. In this environment, Africa will have to create its own internal demand through increased regional integration - in the same way that China is now finding ways to boost domestic demand for its products. The continent will also need to explore less traditional markets outside of Western Europe and North America.
Our exporters can compete but they must remain alert to new opportunities and trends. The continent must also find ways to add value to its exports while developing regional markets through bodies like Comesa and EAC. This would help Africa become less reliant on global markets and on commodities, which tend to be vulnerable to the uncertainties of global fluctuations.
The last necessary ingredient that would ensure the continent's place on the global stage is access to trade finance. With a combination of trade finance, value-added exports, increased integration and credit risk insurance Africa would have greater control over its fortunes in the global arena.