Innovative products like distributor finance will drive growth across Africa, but only if banks and NBFIs embrace the infrastructure to support sophisticated working capital products.

Key takeaways:

• Africa’s corporate landscape presents a clear opening for sophisticated working capital financing to thrive.

• Experts agree that distributor finance is a big growth driver for banks, but many lack the infrastructure to run a compelling programme.

• Fintech partnerships have given some banks additional capacity to offer more products and drive more revenue, quickly.

The so-called trade finance “gap” – the amount of money available to businesses versus the amount they need – is a source of frustration for millions. The numbers don’t tell the full story, but they give an idea of the scale.

One report by the World Bank estimated that in 2020 the gap in developing markets was $1.5tn. Another estimate put it at $6.5tn in 2021. That’s a colossal amount stuck in the system. And it’s especially frustrating considering the many companies that go bust because of it. 

Across Africa, access to capital remains the number one reason businesses fail. According to MEDA, small and growing businesses account for 80% of East Africa’s employment, but  80% cannot fulfill their growth potential due to a lack of working capital. In Kenya alone, there are 1.5 million formally registered MSMEs and over 5 million informal MSMEs. 

In Nigeria, SMEs account for over 80% of jobs, yet a recent World Bank survey shows that only 15% have a bank loan or line of credit. 

Might facilities like distributor finance turn the tables? It was discussed in some depth at the recent GTR East Africa conference – in particular at Finverity’s event on “the future of supply chain finance in Kenya”. But while the benefits are well understood, there’s widespread confusion around how banks can implement this SME-focused product.

Unlocking working capital, unleashing growth

Distributor finance is a funding facility for distributors in the form of direct financing. Typically, these facilities are used for funding inventory and receivables on a short-term basis.

It means small and local distributors can access financing, even if they’ve limited access to other funding sources based on hard collateral. It’s also useful where there’s a gap between the credit terms of the manufacturer selling to them and the date by which the goods are sold and receivables converted to cash. 

“Distributor finance helps strengthen the supply chain. It provides distributors with funds to purchase goods from manufacturers and suppliers, and ensure  a steady flow of products to consumers,” says Joseph Oballah, CEO at Meridian Acceptances Limited, which offers a range of innovative financial products and services, including distributor finance.

For the distributor, benefits include: 

• Working capital optimisation to bridge the liquidity gap between the inventory purchases and customer payments. 

• Increased credit, especially for distributors with limited credit availability, based on actual financial or commercial support from the manufacturer.

• Low-cost credit compared to what would typically be available from traditional banking.

• Sales growth without additional credit risk by offering 3rd party financing to distributors or buyers. 

“In the face of evolving market conditions, supply chain financing is a beacon of financial stability,” says Oballah. “With a focus on flexibility and adaptability, innovative financing solutions like distributor finance bridge the gap between suppliers and buyers, fostering a mutually beneficial ecosystem of growth and success.”

But while the opportunity is vast, questions remain over the infrastructure to support sophisticated products like distributor finance. Because it is needed, and because, historically, financial institutions have been slow to adapt.

The technology hurdle

Worldwide, deep-rooted conservatism and an inertia to new ideas have stalled progress. Even today, the technology at many financial institutions is a messy patchwork of outdated and overlapping systems affecting everything from recruitment to critical infrastructure. 

In distributor finance, anchor clients value the flexibility of their banking partners highly. This is a problem when most banks are badly equipped to address changes in funding strategy around working capital. 

Fortunately, trade finance specialists like Finverity give banks additional capacity to implement alternatives to collateral-based structures. The results so far are impressive. Within 30 days, I&M Bank deployed Finverity’s end-to-end operating system, Finverity OS, so it could seamlessly manage all working capital products, including distributor finance, on one system.

For I&M Bank CEO, Gul Khan, the decision to adopt a future-proof platform like FinverityOS is so that “working capital is more accessible to distributors who need efficient processing and services. Particularly so at a time when financial supply chains have been disrupted by a range of macro-economic factors.” 

It’s a refreshing change from what’s come before, where trade finance operations rely heavily on manual paperwork and leave banks dangerously exposed to delays, errors, and inefficiencies. The absence of a centralised platform has always made it difficult to track and verify transactions across multiple parties involved in the supply chain. Today, things are different.

“There’s a need for a distributor platform to support distributors of these companies,” says Dennis Rimita, director of trade finance advisory and consultancy, Terden. “Local banks lack the one-stop solution, and distributors are fragmented into different banks offering traditional loan solutions.” 

If indeed local and regional banks do embrace a “one-stop solution”, perhaps then – and only then – we will see a massive slice of the region’s capital-starved SMEs lifted to a new phase of growth. 

“A multitude of individuals are actively involved in small-scale enterprises and trade,” says Oballah. “Distributor finance solutions are aptly suited to cater to ambitious entrepreneurs, offering essential working capital that fuels business expansion and contributes to overall economic progress.”

Looking at the business and lending landscape, the case for banks and NBFIs to support a product like distributor finance is overwhelming. Less clear is whether those same regional and local players can support them with outdated, disconnected systems. 

The next step surely is to focus on infrastructure. Then – and only then – we can have a conversation about the continent’s many small and growing businesses realising their true growth potential.