Trade and technology have fundamentally changed Africa’s economic fortunes and its profile as an investment destination for global businesses.
In recent years, the continent’s commercial relationships with the rest of the world have evolved away from a reliance on Europe and the US, towards a more balanced arrangement, where emerging economies in Asia and the Middle East feature more prominently.
“Advances in technology have allowed Africa to leapfrog development steps and break new ground”
Over the last decade, Africa-China trade has increased by 25 per cent, Africa-India trade by 32 per cent and Africa-Indonesia trade by 29 per cent.
Advances in technology have also allowed Africa to leapfrog development steps and break new ground in critical areas, such as mobile wallets where African innovators are leading the world.
A similar, game-changing experience is now possible in Africa’s trade finance sector, with the emergence of Bank Payments Obligation (BPO), a new way of settling trade digitally.
BPO is an undertaking between banks that a payment will be made on a specified date after electronic matching of data on SWIFT’s Trade Services Utility (TSU) or any other acceptable transaction matching application.
Faster and more reliable transactions
Fully automated, BPO increases the speed, reliability and convenience of trade transactions, while mitigating risks and reducing costs for both buyer and seller. The technology offers the best of both worlds for corporates: the security of paper-based letter of credit transactions with the flexibility of open account trade.
Currently, a large proportion of export trade is conducted on ‘open account’ basis, meaning that goods are shipped and delivered before payment is due – an attractive option for importers, but less so for exporters, who carry a lot of the risk in the transaction.
Letters of credit (bank documents guaranteeing payments to exporters on delivery) reduce the risk, but can be costly and inflexible, entailing at least five separate documents which need to be manually evaluated and reviewed for compliance.
“Africa stands to benefit from developments in the BPO space, but must make bold and swift commitments to adopt the technology”
This is often worse for commodity exporters, who are crucial to Africa’s trade. The procedures for a single cargo by sea may require 36 original documents, 240 copies and as many as 27 parties, placing an enormous burden on commodity companies to seek out more cost-effective ways of trade.
BPO could transform this process, removing the need for manually checking documents, improving verification and reducing the time taken from days to minutes.
The concept is still relatively new internationally, with the first fully automated BPO deal only going live in 2012. To transact on BPO terms, both trading parties need their respective banks to be signed up with SWIFT’s TSU.
Africa stands to benefit from developments in the BPO space, but must make bold and swift commitments to adopt the technology and build the necessary infrastructure. Much depends on how governments and business collaborate to establish clear rules and institutional frameworks to facilitate adoption.
Reducing fraud and boosting cross-border trade
We have already seen great progress in some countries. In 2012, Nigeria established a single window portal for trade – an online electronic trade platform connecting public and private sector entities – with the objective of positioning the country as a leading nation in Africa for electronic trade.
Nigeria and other African countries can use recent developments in the BPO space to enhance such trade-platform propositions, and improve the transparency and integrity of trade documents flowing to and from their trading partners. This could help reduce fraud and boost cross border-trade significantly.
“Finance can be made available for larger trade flows, boosting trade partnerships and ultimately feeding through to much-needed economic growth and job creation”
The upside of BPO for African businesses could be significant, in particular for small and medium-sized enterprises (SMEs). These tend to focus their efforts on obtaining post-shipment finance, as securing adequate security for pre-shipment finance can be a challenge.
With BPO, pre-shipment finance will be more accessible for SMEs, given the greater visibility of transactions, electronic verification of data and third-party authentication. This means finance can be made available for larger trade flows, boosting trade partnerships and ultimately feeding through to much-needed economic growth and job creation for the continent as a whole.