The first part of this article explained the concept of trade finance and some instruments and products used in facilitating trade either domestically or internationally. The second part will delve into some more instruments, particularly within the supply chain framework and discuss who needs trade finance.
Supply finance trade or supply chain finance, as the name suggests, is the financing of the entire supply chain of an entity. Let’s take a manufacturing company for example. Such a company will procure, input, manufacture, stock and then distribute. This makes up the typical supply chain of a manufacturing company. There could be instances where the company may not have enough funds to procure raw materials and will need a facility from a bank to do so. The bank therefore issues a supply finance or what we call receivable discounting or an invoice financing, which is used to support working capital of manufacturing entities.
As nuanced as the concept of trade finance may be, it is needed by anybody buying or selling. Trade finance is required by multiple people: by the trader, the contractor, legal people, the exporter, etc. As a matter of fact, even private individuals need trade finance. So, we have instances where let’s say an individual wants to buy a land and he/she is not sure if the land is genuine and can be transferred in the person’s name. That individual can use a payment guarantee as a safety net in the case of any fraudulent activity on the part of the seller.
The payment guarantee is a guarantee that can be given to the seller of the land to assure him/her that the bank will pay after the land is secured and registered in the name of the buyer. Also, a lawyer supporting a client on a case, can use a payment guarantee as a surety that once he/she represents the client in court, he/she will get paid.
In Ghana, there is a gravitation towards open account trade (i.e., pay before I ship goods or ship goods and pay later). This is mainly because the country’s main trading corridor is China, who prefer payment before goods are shipped. Since Ghana is an import driven economy and deals mostly in consumer goods, there is a lot of trade along the Africa/China corridor. In sectors which deal in machinery and heavy industry or high precision type equipment, letters of credit are used to ensure that the risks of product specification, transportation, and payment are mitigated.
We also see a shift to supply chain financing mostly among the multinationals. This is a strategy to ensure that working capital is released into the business earlier than will normally be the case. Companies are looking at either discounting their receivables, financing their invoices or offering supplier finance options all in a bit to improve their supply chain and working capital needs. The advent of technology has also introduced another sphere to the conversation on the adoption of AI and cryptocurrency in international trade. This is the new frontier that companies are exploring all to reduce the risk and cost of trade finance.
For decades, trade finance has served as a risk mitigating factor for traders using the guarantees and documents provided by banks. However, it is critical that people look out for experts when looking for trade finance advice. There are not many trade finance experts in Ghana’s banking sector because it is a very technical area of expertise. The analogy I like to use is that of a goalkeeper. The more you stay in the post the better you become hence the need to do some research to ascertain what trade finance expert can help you with the right instrument for your situation.
In Ghana, Stanbic Bank has over the years exhibited expertise in the area of trade finance. The bank, for example, has unique trade products that help mitigate risks of both buyers and sellers across the globe. Stanbic Bank has branches in over 20 countries on the African continent and has strategically partnered with banks such as ICBC, China, etc., making the facilitation and support of trade across the globe easier.
Stanbic Bank also provides most of these trade finance instruments/products to help entities. We offer Letters of Credit, all types of guarantees, documentary credit solutions, supply finance solutions, and discount to invoices among others. So, if you get a project/contract and you don’t have money to finance it, come to Stanbic bank and we can give you a product to pre-finance that project and help you execute it.
By Kodwo Arizie
The writer is the Head of Transactional Products at Stanbic Bank Ghana