SME Trade Finance: Review of facilities available in - FSD Kenya

28 • SME TRADE FINANCE – REVIEW OF FACILITIES AVAILABLE IN KENYA
Develop the banks’ awareness of the intrinsically secure and selfliquidating
nature of trade finance
The Central Bank of Kenya should obtain the co-operation of the banks to
segment Non-Performing Loan recordings. They would thus be able to offer
a more precise analysis of the difficulties faced by the banks, according to the
type of borrowers, the sectors, or – as far as this report is concerned – the
type of financing. Trade finance operations should appear less risky than other
financing instruments such as a secured overdraft. The Central Bank of Kenya is
already working on this issue with the collaboration of the banks.
4.2 Raising the banks’ financial capacity to deliver trade
finance support to their clients
Increased bank equity
As already initiated by the Ministry of Finance, banks are required to increase
their core capital substantially, from KSH 250 million at present to KSH 1 billion
by 2010. This is a step in the right direction towards strengthening the banks.
It will help increase appreciation of the correspondent banks involved in the
confirmation of their trade finance operations.
IFC’s Global Trade Finance Facility
It is also recommended that the IFC continue to promote its Global Trade
Finance Facility with issuing banks in Kenya. This will increase these banks’
capacity to issue import LCs at a reasonable cost.
Such a facility should not be offered only to smaller banks. The larger banks
should realise the impact of this facility on enlarging their counterparts’
country risk limits.
Eventually, if Kenya wants to promote its status as a financial hub for the region,
the local banks with spare capacity in their confirming lines could even consider
relaying regional banks’ LCs in favour of international suppliers. The MoF, with
the support of the IFC, should be the promoter of this development.
4.3 Improve the efficiency and reliability of collateral and
collateral management
Computerise the registries involved with companies and security
Trade finance relies heavily on securities based on the goods traded and various
receivables of a short term nature. Therefore, the efficiency, reliability and cost
of securing chattels are of primary importance.
It is therefore recommended that computerisation of the various registrars
be made a priority. The Ministry of Finance and the Ministry of Justice
and Constitutional Affairs, with the support of the Financial and Legal
Sector Technical Assistance Project, are aware and are spearheading such
developments.
Simplification and clarification of the legality of pledges
Due to the rapid turnaround of trade finance transactions taking pledges on
moveable assets should be simplified as much as possible to reduce delays
and costs. This is especially important for the smaller amounts typical of SME
finance.Issues related to stamp duty, the need for attorney involvement in
pledges, status of a pledged invoice all need to be clarified in this simplification
process.
What is the status of invoice discounting and factoring as far as a pledge
is concerned? Should it be considered a pledge on an invoice, a sale or an
assignment of a contract? These questions should be clarified and resolved in
a manner beneficial to SMEs.
A study should be commissioned to review the existing ‘security’ legal
framework. This framework appears comprehensive, but it is fragmented and
in need of modernisation, updating and regrouping under one single legal act.
The Ministry of Finance and the Ministry of Justice and Constitutional Affairs,
with the support of FALSTAP, should initiate such reviews.
4.4 Improve the availability of commercial export insurance
The African Trade Insurance Agency’s export commercial risk
insurance
While the African Trade Insurance Agency has been in existence for a number
of years, its capacity to issue commercial risk insurance appears limited by its
available manpower. It is recommended that this organisation actively research
the possibility of forming some sort of association with private insurance
companies or Credit rating companies 23 involved in the region. Together they
could explore possible co-operation/sub-contracting arrangements which
would expand its capacity.
The private insurance sector’s involvement with export insurance
The FSD should also encourage the insurance companies in the region to
examine the feasibility of organising export commercial risk cover. As well, the
companies should be encouraged to open the market to healthy competition
alongside the ATI.
A description of such services granted in developed markets, as well as the
names of the major companies involved in this specific area, can be reviewed
on a major insurance broker’s website: http://www.exportinsurance.com/
23 One such company met by the team of consultants was Metropol East Africa Ltd, a member of GCR, the Global Credit Rating Co. See the web site: http://www.globalratings.net/default.php