A cross-border supply chain finance platform reinventing supply chain finance: Finverity

Finverity aims to close the $1.7 tn funding gap in global Trade Finance by making Supply Chain Financing of mid-market companies economically viable around the world. Finverity will achieve this through the use of technology and a new approach, providing a more efficient allocation of resources and fair access to capital worldwide. The company believes that the current gap in the market is the result of a sub-par offering to Payers, who are the enablers of trade, a lack of user-friendly solutions for Sellers and a culture of low transparency towards Funders.

For the people at Finverity fairness is not just an abstract liberal term, but an everyday choice. Finverity works with countries that were deemed as the 3rd world and market segments that were largely neglected by financial incumbents. Yet, they are filled with great opportunities if one is prepared to analyze them fairly and objectively.

The media’s overwhelming focus on climate change, as important as it is, risks undermining attention to other pressing world needs. It’s, therefore, timely to note that only four of the 17 UN SDGs (sustainable development goals) directly address climate change. When formulating ESG frameworks, the focus of western economies has been on the environment but should that also be Africa’s primary focus? Remember that Africa only contributes 2% of global carbon emissions. Or, to put it differently, should Africa be paying more attention to caring for the environment over and above ending poverty and hunger, which is an immediate need not necessarily relevant for western economies?

Sustainability impact of African trade finance

African trade finance represents a unique opportunity for investors seeking an asset class that comprehensively supports the SDGs. International trade finance plays a crucial role in stimulating job creation and is estimated to contribute up to 30% of GDP growth in Africa, a continent in which SMEs are a key driver of growth and employ as much as 85% of the population in some African countries. Nevertheless, and despite the supporting evidence, we are far from fully appreciating the huge sustainable impact that African trade finance brings about in the SME sector.

Facilitating access to ESG-linked financing

In recent years, a significant amount of ESG-linked liquidity has been earmarked globally for SME lending. The challenges in accessing this liquidity are two-fold: the impractical requirements from development financial institutions (DFIs) to verify the trade finance nature of the lending; and the newer ESG compliance requirements (and by this, we mean the requirement to prove the “E” part of ESG, seemingly to the exclusion of the “S” and the “G”).

The evident solution to proving that the relevant financing is for trade and is in line with ESG standards is to go digital. The beauty of good digitalization is that a much wider range of ESG metrics can be monitored and measured at the borrower level, directly at the source, and in a more granular manner, especially for the S and the G. Good examples could include capturing data on the percentage of profits being reinvested locally by a company, educational targets, improvements in living and working conditions, and many others, depending on the borrower’s context. However, in Africa at present digital sophistication and data granularity lags far behind western markets in this area of trade finance. The collaboration between Finverity’s technology and Investec’s onward lending provides a solution to these two challenges.

The obstacles to SME financing

The fundamental obstacle to SMEs’ growth lies in the difficulties they face in obtaining trade finance and foreign exchange from financial institutions. This has many causes, including:

1. the hugely unprofitable nature of trade finance for SME banks as a result of global banking regulation, which will likely get worse in 2023 when Basel 3.5/4 comes into effect;
2. the lack of availability of cheap US dollar liquidity;
3. SMEs often have a limited financial track record and often cannot provide collateral for their funding requirements;
4. SMEs lack the kind of sophisticated data reporting that is required by developed market lenders; and
5. Financing is now also subject to a developed market’s understanding of ESG requirements, regardless of their social and sustainable impact on African economies on the ground.

It is only through the digitalization of trade and fintech disruption that access to funding for African SMEs can improve. This will provide real-time digital processes and granular criteria against which funding can be drawn down. Achieving this will be a game changer, enabling DFIs and impact funds to support the lower-tier banks and NBFIs who actually service these SMEs. By effectively tracing the flow of capital in real-time rather than relying on contractual obligations that are back-dated, high-level digital reporting will open the doors to larger amounts of trade finance becoming available to African SMEs.

Conclusion

To tackle sustainability and truly grow the African SMEs of tomorrow, we must begin to break the barriers to SME trade finance and nurture the SMEs of today. The vast majority of suppliers in the African supply chains are SMEs, and the trade finance gap will simply not be filled through traditional banking methods. Over the years, potential solutions to this problem have been the subject of much debate.

Through an innovative collaboration, Investec and Finverity have decided to get the ball rolling by piloting SME-focused onward lending programmes using digital solutions that capture key sustainability metrics. This collaboration builds on the earlier success of Finverity’s ELP.

This collaboration will identify and provide key SME lenders across Africa with onward lending facilities, further digitalize their trade finance operations and improve crucial data-gathering processes. We believe that this will stimulate not only economic growth but also increase intra-African trade and allow young but vital value chains to mature. More notably, this is the first step towards a verifiable avenue for tracking key ESG metrics and truly addressing the ‘S’ and the ‘G’.

It is clear that the future of delivering inclusive, sustainable and scalable funding programmes for Africa’s SMEs will be driven by digital transformation. It will only truly scale, however, once liquidity providers, guarantee providers, SME-focused lenders and technology providers all work together. It is time for the development finance institutions, impact-focused funds and other trade finance players in the market to play their part.

Viacheslav (Slava) Oganezov CEO, FOUNDER

“Sharing information openly and honestly not only enables trusting collaboration but also allows us to quickly identify and fix issues.”