FINANCE & TECHNOLOGY: A MATCH MADE IN AFRICA

By Michael Awori, Subra Shankhar, and?Chris Sunderman

Introduction

Although not new, there is a concerted effort to pull trade finance into the digital age. There is a yearning to adapt and to keep pace with an increasingly digital economy and a demanding customer base. There is no place where this is felt more urgently than on the African continent, home to the world's youngest population, fastest-growing economies, and the ever-important African Continental Free Trade Agreement.Transaction partners cope with multiple supply chain issues, testament to the fact that the world of trade is more interconnected than ever. But this connectivity brings complexity – created over years of following habitual procedures and processes from warehousing to shipping, logistics and finance. This complexity includes reams of paper documents, stamping, requirements for wet-ink signatures, digital islands with many features except for not being standard and not able to share identical data. During transit transaction partners have multiple questions: ”has the cargo been loaded onto the ship?”, “Has my cargo gone through customs?”, “Have the necessary payments been made?” How can these be answered instantly? How can we increase trust and reliability by the availability of real time data in transactions? New technologies may be a solution and how could it help emerging markets to increase their role in global trade?

On top of that, in the past decade we have seen large, international correspondent banks reducing their correspondent-relationships. This has varied region to region, with countries with (perceived?) poor to moderate governance and controls hit hardest. The loss of correspondent banks has had a devastating impact on cross-border trade and led to friction in cross-border payments. Further digitalization with support of new technologies may help to reduce the frictions caused and can lead to enhanced re-inclusion, as was acknowledged by BIS in 2020[1].

New technologies often take root in emerging markets first. Emerging markets such as Africa can often leapfrog a generation of technology, whether that means skipping landlines or credit cards. But if we go a bit deeper, what major new technology could be on the cusp of gaining a foothold in emerging markets and providing an opportunity to easily connect transaction parties, unlock untraded volumes and grow economies? Where should we look for the next leapfrogging? Before we dive into the realms of emergent technologies, there is a need for introspection on what these advancements can potentially offer, their pitfalls and importantly, why they are yet to take off as predicted specifically from an African context.?First, a stab at untangling the taxonomy.

Blockchain

Blockchain has been embraced by the financial industry as a game changer for many product groups, including in trade finance. Still, real take off has yet to happen. The technology is based on a devolved register, and for that reason, is defined as distributed ledger technology (DLT). Simply explained, blockchain is a digital decentralized ledger, that renders central registers obsolete. What is special about blockchain is that although every involved stakeholder plays a different role in this decentralized system, a uniform approach is applied to arrive at a consensus on the correct information. Data sets, transactions for example, are entered as blocks of data into a digital register once the participants agree on the data. The blocks are timestamped, interlinked, and contain all the data which is important to the transactions.

Blockchain’s main use to date has been in the US$2.5tn cryptocurrencies’ sector. New currencies with enhanced blockchain functionality are being launched continuously and many emerging market consumers are enthusiastic converts. The recent frenzy over the digital token Shiba Inu or joke coin, which as at the beginning of?November 2021??had a market value of US$40bn[2], (the price has since come down to USD13.4bn on March 24th 2022) has been highlighted as a case study in speculation akin to the 17th?Century Tulip bubble. The similarities of irrational biases and group mentality based on limited market understanding have been pronounced as regulators have struggled on how to protect retail investors who are leading the charge. To draw a distinction, the second-largest digital currency by market cap, Ether, was created to enable a financial services marketplace free of downtime, fraud or interference from third parties.?

But cryptocurrencies apart, blockchain could conceivably have a much more profound impact in other areas. The use of this technology to reduce human error, increase transparency and speed up processing is just a small number of advantages that blockchain transactions could offer.?

TDB’s use of blockchain to do trade finance

A live example of the application of blockchain technology in trade finance on the African continent was conducted by TDB on trades from Asia to Africa as well as intra-African trades for the importation of sugar and fertilizers. With the parties performing their operations digitally in one single private blockchain, these transactions significantly shortened the typical trade processing cycle. It also made it possible to reduce all parties' risks by eliminating potential errors and ambiguities in the exchange and amendment of documents, given the real-time ability for the parties to view, verify and transact simultaneously[3].?TDB is now a market leader in Africa in the use of blockchain to execute trade finance transactions at this scale.

As observed, blockchain simplifies trade finance operations, for instance, by automating the process of matching positions against accounts.

1.?????It makes clearing and settlement faster and avoids reconciliations at late stages.?

2.?????The high level of transparency also helps banks to fulfil regulatory requirements more efficiently.?

3.?????The new technology also reduces the risk of a business partner, who is not, or not adequately, fulfilling its obligations; the conditions of any transaction are transparent and fixed, not to be changed.?

4.?????Reduces the risk of fraud, because the decentralized register stores the entire data pertaining to any transaction as well as the origins of the traded assets.?

5.?????Saves money as interim steps and bypasses become superfluous because all the parties use a common register. Optimal adoption of the new technology by all parties in the network, will make the current infrastructure or legacy obsolete.

6.?????Notably, reduces carbon footprint as the need for physical movement of printed documents between parties can be rendered redundant

Internet of Things

The Internet of Things?(“IoT”)?is closer to the day-to-day working of modern life, yet remains elusive in its general understanding, not least as a result of its nomenclature. To break it down to a simple illustration, imagine if you never had to go to the supermarket for your groceries? Through the use of smart devices, in this example, your fridge, being able to detect that you have run out of eggs, the fridge could 'speak' to the supermarket delivery partner, your credit card company, and before you know it, eggs are delivered.?

The IoT helps people live and work smarter. From a trade finance perspective: having real-time accounts across the supply chain without human intervention could be revolutionary. From the emerging market's perspective, this could give rise to new business models that could alter the way business is run. In building systems in which technologies could speak to each other (interoperability), this would radically reduce the risk of fraud which is one of the main impediments in cost of risk, which in turn increases the overall cost of funding.?

Further, IoT enables companies to automate processes and reduce labor costs. In so doing, the technology reduces time wasted and improves overall customer/user experience hence significantly lowering the cost of manufacturing and delivery offering unrivalled transparency into the transaction process. As such, IoT has the power to be one of the most important and critical connectors for business and as more businesses realize the potential of connected devices to keep them competitive.

Artificial Intelligence

The term?Artificial Intelligence?(“AI”) was coined in 1956 by John McCarthy. The Oxford English Dictionary?defines AI as "The theory and development of computer systems able to perform tasks normally?requiring human intelligence”. AI feeds on data and uses it to learn and adapt hence computers, mobile phones and generally all devices we typically use in our daily lives have this capacity.?

Africa lacks quality data – that is, data that is refined, reliable, processable and usable to drive business. This lack of usable data can be detrimental to deploying accurate AI solutions. Data quality improvement and its digitization is a requirement for the development of a sustainable AI environment and of a digital infrastructure which can be used to help unlock African countries’ ability to grow their economies, retain technological talent which is so dearly required to make the latter happen, and maintain Africa’s value in global trade.

There is already a proliferation of AI-backed fintech solutions in Africa. In Mozambique for instance, the app Hello Tractor, which lets farmers share equipment, is leveraging machine learning to predict crop yields. And in Kenya, banking service M-Shwari relies on AI to review online loan applications, helping it to field requests from customers, who live far from bank branches. In Zimbabwe Econet Group is utilising a computer software programmed to simulate human behaviour – which is designed to carry out some of its customer services support work, including assisting customers to install Internet and data settings on their devices, reset EcoCash PIN requests and carry out EcoCash transaction reversals enhancing customer experience by drastically reducing turn-around time.

Transcending Oceans?

TOTTA – a think tank head quartered out of Singapore has brought together some of the best minds in global trade and trade tech from across the world with one purpose. To advance and accelerate the digitization of trade and financing and thus amplifying trade-based global growth, inclusion, & sustainable development. TOTTA has begun publishing thought leadership papers and has Africa as a top priority.

This paper will be followed by detailed guidance document to serve as a blueprint for various stake holders in their digitization roadmap.

The future of Africa is in technology adoption

A recent report by Google and the International Finance Corporation estimated that Africa’s digital economy has the potential to contribute US$180 billion to the broader global economy by 2025[4]. Some of the leading players in the global tech sector are already positioning themselves to tap into that potential.?

For an industry that has been based on paper for centuries, the embrace of technology in trade finance hasn’t been instigated by COVID-19, but it has been accelerated. To fully reap the benefits of new technologies in this multi-trillion-dollar sector, the entire trade ecosystem—banks, regulators, border agencies, trade bodies, and corporates—must work together to apply digital innovation and drive efficiencies[5].

However, with home grown knowledge and boots on the ground, African DFIs such as TDB could leverage on the technological wave to elevate its developmental agenda to new heights. We believe DFI and national governments can work with independent initiatives such as TOTTA to uplift Africa’s share in global economy.

An in-depth review and understanding of both the incentives required to mainstream technology for business and financial intermediaries as well as its risks, not the least of which is the evolving regulatory landscape, is a prerequisite for the growth of the ecosystem, especially if it is to achieve scale across national borders.?

Digitization is an essential topic for Africa’s future and the wellbeing of African peoples. In order to avoid further brain drain as far as technology talent is concerned, it is key to underline the importance of directing capital through foreign direct investments and/or public private partnerships for example, but also with support with knowledge on the ground from global thought leaders and African digital champions, to collaborate and jointly work on a sustainable and digital infrastructure that re-connects the continent with the rest of the world and opens new markets.

[1]?On the global retreat of correspondent banks https://www.bis.org/publ/qtrpdf/r_qt2003g.htm

[2]?Meme Coins Madness Published 2nd?November. Available at:?https://www.thisismoney.co.uk/money/crypto/article-10145237/Meme-coins-Doge-vs-Shiba-Inu-joke-cryptos.html https://coinmarketcap.com/currencies/shiba-inu/

[3]TDB Becomes the First African DFI to Close a Live End-to-end Trade Finance Transaction Using dltledgers Blockchain Technology. November 2019. Available at:?https://markets.businessinsider.com/news/stocks/tdb-becomes-the-first-african-dfi-to-close-a-live-end-to-end-trade-finance-transaction-using-dltledgers-blockchain-technology-1028687935

[4]?e-Conomy Africa 2020- Africa’s $180 Billion Internet Economy Future. Available at:?https://www.ifc.org/wps/wcm/connect/6a940ebd-86c6-4a38-8cac-5eab2cad271a/e-Conomy-Africa-2020-Exe-Summary.pdf?MOD=AJPERES&CVID=nmPYAEV

[5]?World Bank: The digital transformation of trade finance. Available at?https://blogs.worldbank.org/trade/digital-transformation-trade-finance-urgent-present-and-bright-future