Try trade financing
Aug 11, 2010
UGANDAN businessmen may find it easier financing their operations today than in the past, with banks introducing new loan products.
By David Ssempijja
UGANDAN businessmen may find it easier financing their operations today than in the past, with banks introducing new loan products.
Trade finance, which uses the clients’ goods as collateral rather than fixed assets like land and buildings, is taking hold.
Joseph Magala, a dealer in second hand clothes in Kikubo lost a sh200m business deal in December 2007. He was one of the victims of Kenya’s post-election violence that paralysed cross-border trade in the region.
No sooner had the ship containing his consignment docked at Mombasa Port from Dubai, than the region’s transport system was rendered inactive.
Magala’s woes were precipitated by the fact that he was investing money borrowed from individual money lenders.
“I spent months out of business because I had sold out more of the stock I had in Kampala on credit. Business generally dwindled because of lack of stock and more of my customers could not pay promptly.
The loan interest was being calculated at 10% per week. By the time the consignment arrived after four months, I couldn’t afford paying taxes forcing me into signing an agreement with the money lender that he pays the taxes and owns the merchandise as well as the security,†he laments.
Trade financing experts say traders resort to money lenders because of the short time spent in loan processing. However, a bank offers more friendly repayment terms.
According to Christian Baine, the executive director of Coronet Group, a credit support and collateral management firm, trade hindrances were common in both local and international trade.
“Our banking industry is getting more aligned to the modern ways of financing trade. Current assets traded by the customers under collateral management arrangements are considered as the best alternative to fixed assets as security,†he said.
How it is done
The buyer (client) avails the bank with information regarding the profitability of the business in question, and the bank arranges to pay the supplier and secure the goods.
The goods are consigned in the name of the bank. The supplier will then ship the goods together with the necessary import documents to the order of the bank.
The bank will then entrust the handling and processing of the consignment and documentation with the collateral management company until they are secured in certified customs warehouses, as collateral security under warehouse receipt schemes.
Upon agreement, the bank may also cover other import costs like freight, marine risk, insurance and taxes.
Collateral managers are charged with providing the banks with all the necessary information about the market situation of the product dealt in as well as advising bankers about the storage risks, market, pricing, quality and others that may compromise the profitability of the deal.
Whenever the client completes a sale, the buyer will be required to deposit the funds onto a collection account with the bank.
On confirmation of receipt of the funds, the bank instructs the collateral managers to release an equivalent portion of goods to the client. This continues until the loan and interest are recovered. The balance or profit is credited onto the client’s account. The profits are shared between the client and bank.
“In some cases, when the loan is covered and the client still has more goods in the warehouse, the collateral manager is relieved of the management duties and the client can take charge,†says Baine.
Trade financing can also be used to structure businesses for SMEs operating locally.
“We envisage designing more desirable trade financing products for banks and equip them with the latest technical knowledge on how to avert risks,†he says
Baine, whose firm helps financial institutions in tailoring appropriate trade financing products for their SME clients, says institutions have various other convenient ways of facilitating trade, but there were gaps in information flow about the same.
“Bank systems of providing letters of credit are also serving as an ultimate remedy to the current trading challenges,†he adds.
A Letter of Credit is a binding document that a buyer can request from his bank. It gives the seller reassurance that he will receive the payment for the goods after presenting the necessary documents.
Where are the services offered?
Local banks that have adopted similar financing systems include Housing Finance, dfcu, Uganda Development Bank, Bank of Africa, Stanbic and Kenya Commercial Bank.
Whereas some other banks can finance the deal 100%, at UDB, a client is required to finance 30% of the deal.
“This type of financing comes with many economic advantages. That is why on a monthly basis we lend to at least five corporate clients dealing in local and international business,†said Stephen Opeitum, the bank’s operations director.
He said the client or the trade consultants must convince the bank that the business in question will be profitable. UDB also wants the client’s business audited accounts for three years.
“We only need to inform people about the changing trends in the finance industry so that they quickly derive benefits from the available flexible services,†he said.
Opeitum says this type of financing may at times slightly be constrained by price fluctuations, a challenge too small to overshadow its benefits in facilitating trade.
How does URA fit in the equation?
The Uganda Revenue Authority’s Richard Kamajugo says many have benefited from the current asset collateral system.
“Tax clearance was made easier with this system. Customers contact their banks to intervene by paying taxes on their behalf. For example, they can pay taxes for quarter of the whole consignmement and goods are partially released to the customers from the customs bonded warehouses.
After selling, he/she pays the bank, and secures more money until the whole consignment is fully cleared,†he said.
“However, most traders are ignorant of the existence of these services. But if well publicised, we shall cease to auction goods as a result of failure to clear taxes,†he added.
He was, however, dismayed that though the system was doing wonders for other traders, car importers, despite leading in tax defaulting, are not taken care of in this system because banks are still skeptical about them.
“We request banks to seek services of consultants about the possibility of tailoring flexible loan products that suit the dynamics of car dealing so that they also start being considered as collateral just as is the case in other goods,†said Kamajugo.
Central Bank’s appeal
Juma Walusimbi the Bank of Uganda was impressed the system was gaining ground in Uganda, a step towards boosting trade.
He advised banks to always ask the beneficiaries of such financial products to produce Credit Reference Bureau (CRB) cards in order to avoid risks associated with securing loans from different banks using the same securities.
A CRB card contains individual, institutional or company financial information across all banks in Uganda.
The cards are backed by high level technology with particulars about the borrowers’ debt profiles and repayment history, enabling lenders to make more informed lending decisions. It also allows inter- bank exchange of information in the process of accessing credit.
“For institutions like banks, each signatory must be availed with a CRB card which is produced to the bank to verify the credit worthiness of a given entity.
We encourage all companies and individuals to come to Bank of Uganda and we process these cards for them at no cost,†Walusimbi said in an interview.
UGANDAN businessmen may find it easier financing their operations today than in the past, with banks introducing new loan products.
Trade finance, which uses the clients’ goods as collateral rather than fixed assets like land and buildings, is taking hold.
Joseph Magala, a dealer in second hand clothes in Kikubo lost a sh200m business deal in December 2007. He was one of the victims of Kenya’s post-election violence that paralysed cross-border trade in the region.
No sooner had the ship containing his consignment docked at Mombasa Port from Dubai, than the region’s transport system was rendered inactive.
Magala’s woes were precipitated by the fact that he was investing money borrowed from individual money lenders.
“I spent months out of business because I had sold out more of the stock I had in Kampala on credit. Business generally dwindled because of lack of stock and more of my customers could not pay promptly.
The loan interest was being calculated at 10% per week. By the time the consignment arrived after four months, I couldn’t afford paying taxes forcing me into signing an agreement with the money lender that he pays the taxes and owns the merchandise as well as the security,†he laments.
Trade financing experts say traders resort to money lenders because of the short time spent in loan processing. However, a bank offers more friendly repayment terms.
According to Christian Baine, the executive director of Coronet Group, a credit support and collateral management firm, trade hindrances were common in both local and international trade.
“Our banking industry is getting more aligned to the modern ways of financing trade. Current assets traded by the customers under collateral management arrangements are considered as the best alternative to fixed assets as security,†he said.
How it is done
The buyer (client) avails the bank with information regarding the profitability of the business in question, and the bank arranges to pay the supplier and secure the goods.
The goods are consigned in the name of the bank. The supplier will then ship the goods together with the necessary import documents to the order of the bank.
The bank will then entrust the handling and processing of the consignment and documentation with the collateral management company until they are secured in certified customs warehouses, as collateral security under warehouse receipt schemes.
Upon agreement, the bank may also cover other import costs like freight, marine risk, insurance and taxes.
Collateral managers are charged with providing the banks with all the necessary information about the market situation of the product dealt in as well as advising bankers about the storage risks, market, pricing, quality and others that may compromise the profitability of the deal.
Whenever the client completes a sale, the buyer will be required to deposit the funds onto a collection account with the bank.
On confirmation of receipt of the funds, the bank instructs the collateral managers to release an equivalent portion of goods to the client. This continues until the loan and interest are recovered. The balance or profit is credited onto the client’s account. The profits are shared between the client and bank.
“In some cases, when the loan is covered and the client still has more goods in the warehouse, the collateral manager is relieved of the management duties and the client can take charge,†says Baine.
Trade financing can also be used to structure businesses for SMEs operating locally.
“We envisage designing more desirable trade financing products for banks and equip them with the latest technical knowledge on how to avert risks,†he says
Baine, whose firm helps financial institutions in tailoring appropriate trade financing products for their SME clients, says institutions have various other convenient ways of facilitating trade, but there were gaps in information flow about the same.
“Bank systems of providing letters of credit are also serving as an ultimate remedy to the current trading challenges,†he adds.
A Letter of Credit is a binding document that a buyer can request from his bank. It gives the seller reassurance that he will receive the payment for the goods after presenting the necessary documents.
Where are the services offered?
Local banks that have adopted similar financing systems include Housing Finance, dfcu, Uganda Development Bank, Bank of Africa, Stanbic and Kenya Commercial Bank.
Whereas some other banks can finance the deal 100%, at UDB, a client is required to finance 30% of the deal.
“This type of financing comes with many economic advantages. That is why on a monthly basis we lend to at least five corporate clients dealing in local and international business,†said Stephen Opeitum, the bank’s operations director.
He said the client or the trade consultants must convince the bank that the business in question will be profitable. UDB also wants the client’s business audited accounts for three years.
“We only need to inform people about the changing trends in the finance industry so that they quickly derive benefits from the available flexible services,†he said.
Opeitum says this type of financing may at times slightly be constrained by price fluctuations, a challenge too small to overshadow its benefits in facilitating trade.
How does URA fit in the equation?
The Uganda Revenue Authority’s Richard Kamajugo says many have benefited from the current asset collateral system.
“Tax clearance was made easier with this system. Customers contact their banks to intervene by paying taxes on their behalf. For example, they can pay taxes for quarter of the whole consignmement and goods are partially released to the customers from the customs bonded warehouses.
After selling, he/she pays the bank, and secures more money until the whole consignment is fully cleared,†he said.
“However, most traders are ignorant of the existence of these services. But if well publicised, we shall cease to auction goods as a result of failure to clear taxes,†he added.
He was, however, dismayed that though the system was doing wonders for other traders, car importers, despite leading in tax defaulting, are not taken care of in this system because banks are still skeptical about them.
“We request banks to seek services of consultants about the possibility of tailoring flexible loan products that suit the dynamics of car dealing so that they also start being considered as collateral just as is the case in other goods,†said Kamajugo.
Central Bank’s appeal
Juma Walusimbi the Bank of Uganda was impressed the system was gaining ground in Uganda, a step towards boosting trade.
He advised banks to always ask the beneficiaries of such financial products to produce Credit Reference Bureau (CRB) cards in order to avoid risks associated with securing loans from different banks using the same securities.
A CRB card contains individual, institutional or company financial information across all banks in Uganda.
The cards are backed by high level technology with particulars about the borrowers’ debt profiles and repayment history, enabling lenders to make more informed lending decisions. It also allows inter- bank exchange of information in the process of accessing credit.
“For institutions like banks, each signatory must be availed with a CRB card which is produced to the bank to verify the credit worthiness of a given entity.
We encourage all companies and individuals to come to Bank of Uganda and we process these cards for them at no cost,†Walusimbi said in an interview.