Supply chain finance (SCF) has gained momentum in the region of Sub-Saharan Africa driven by the economic growth of several countries, and the economi
Supply chain finance (SCF) has gained momentum in the region of Sub-Saharan Africa driven by the economic growth of several countries, and the economic players` demand for optimizing their working capital, according to the World Supply Chain Finance Report 2017.
Commenting on the subject, Renaud Abonnel, International Factoring Development Manager at Societe Generale, wrote that they have seen tremendous growth in their main markets in the region: Ivory Coast, Ghana, Cameroon; with prospective approaches in Senegal and Burkina Faso.
As the report stated, demand for SCF has risen due to two main reasons: 1) facing difficulties in access to credit; 2) SME suppliers pushing their corporate buyers towards finance providers for support, whatever the solution provided.
SCF emerges as a solution because it allows suppliers to receive immediate funding for their supplies. Besides, it is also helping multinational companies to negotiate longer payments terms with selected suppliers.
The SMEs in Africa are reportedly facing difficulties when it comes to accessing conventional bank financing solutions. As Abonnel explained, the most significant reason for that is the risk/security ratio that limits the amount of financing that can be allocated to an SME.
“On the other hand, the need for working capital financing has never been this high; since the average days sales outstanding figure (DSO) in Africa is higher than the European average, and also higher than the world average.”, as he added.
Further, it is noted that SCF could help eliminate the obstacles to financing. SCF also allows a buyer to benefit from extended payment terms; and in exchange, the supplier will get access to additional financing.
If we consider the advantages, it is surprising that factoring/SCF products are not more widely used in the region. There are several main obstacles that can explain that:
“The main delay to the spread of these solutions is the lack of a homogeneous or at least a favourable regulatory framework in the region. The lack of awareness is another major obstacle.”, as the report explained on page 32.
In addition, the administrative burden within the payment procedure, as well as some operational aspects like KYC on suppliers can explain the delay to the spread of these solutions.
Finally, there is a need for training courses and communication campaigns that increase awareness with regard to the potential for supporting SMEs.
Assessing the Future of SCF in the region
It is expected that new players/technology/consumption models could soon appear. The latter are supposedly using the newest developments and standards.
Abonnel stated that financial institutions may not be the only players proposing such solutions going forward. For example, in addition to their mobile money offers, telecom companies could potentially jump in and propose digital, dematerialised approaches.
In addition, as distribution channels strengthen across Africa, we are likely to see large distributors expressing a desire to replicate proprietary SCF models that are running in Europe.
Africa is claimed to have many financial needs and limited financing solutions. Therefore, the features of SCF can be valuable for all institutions involved in the chain.
Today, it’s difficult to estimate the size of the potential market; we can only forecast further growth in the coming years, as the expert concluded in his commentary.