Low financing slowing Kenya's international trade – report

The Export Promotion Council of Kenya has called for lower costs of production.

In Summary

•Kenya barely serves 23% of the potential under the African Growth and Opportunity Act (AGOA) which expires in 2025.

•Experts call for SMEs support including a revolving fund.

Royal Garments EPZ Ltd employees at work in Export Processing Zone Authority, Athi River
Royal Garments EPZ Ltd employees at work in Export Processing Zone Authority, Athi River

Local banks' failure to fully embrace trade financing is hindering growth of Kenya, regional exports to international markets, experts now say.

This comes even as the country continues to push for trade deals, among them the recently concluded Economic Partnership Agreement(EPA) with the UK, and the ongoing talks for a Free Trade Agreement (FTA) with the US.

While the country is seeking to grow its exports to the United States, it barely serves 23 per cent of the potential under the African Growth and Opportunity Act (AGOA) which expires in 2025, which eliminates import tariffs on goods from eligible African nations.

According to the the Export Promotion Council of Kenya, the country is doing only one per cent (1%) of the potential in textile and apparel, where 10 countries account for almost 80 per cent of all US apparel imports with China topping the list with a 30 per cent share.

“Trade finance is a pain to people seeking opportunities,” Export Promotion Council chairman Jaswinder Bedi said, during the launch of the 'Trade Finance Landscape Report' covering East Africa and the Horn of Africa.

According to the report by TradeMark East Africa and FSD Africa, costly loans are also making the regions uncompetitive, where 90 per cent of trade is financed by foreign banks.

For instance the high interest rates in Kenya of above the seven per cent Central Bank of Kenya base lending rate, is making manufactures and trader in Kenya uncompetitive compared to the likes of China and India, who enjoy rates of as low as two per cent.

Other challenges facing local producers is bill of materials or product structure ( raw materials, sub-assemblies, intermediate assemblies, sub-components, parts, and the quantities of each needed to manufacture an end product), cost of utilities such water and electricity,logistics costs and labour, which are key enablers if the country is to become competitive according to the council.

“We need to look at drivers of our competitiveness,” Bedi said, noting the cost and tenure of financing needs to be favourable to local industries and traders.

Low funding for SMEs is also hindering growth of trade, African Development Bank (AfDB) has noted.

This is pegged on their risk profiling by banks where in the East Africa region, SMEs account for 13 per cent of Non-Performing Loans, according to the continental lender, which underlines weak credit worthiness and inadequate collateral as a major challenge.

“We need to find ways of how we can do away with collateral,” AfDB head of trade finance,Lamin Drammeh, said.

The report has proposed a raft of measures to enhance provision of trade finance to regional SMEs among them creation of a revolving fund to address high risk perception especially in light of the Covid-19 pandemic.

This will support importers struggling with foreign currency shortage, by helping them access hard currency to import essential items.

It has also adviced on technical assistance to banks to support warehouse financing by training banks of risk assessment, discounting of warehouse receipts and facilitating creation and integration of warehouse receipt registries with bank systems, to help with registration and management.

There is also need for technical support to banks to help them structure receivables-backed finance schemes using different types of security at different stages of the value chain.

Support provision of partial risk guarantee facilities to cover government obligations would boost investor confidence, the report notes.

While financing poses a huge risk to growth of trade, the Kenya Association of Manufacturers (KAM) is pushing for the ease of doing business to remain competitive in the global export markets.

It is also keen to secure a sizable market in the local space where cheap imports, mainly from China, continues to eat into their market share.

The Covid-19 pandemic was however a blessing in disguise as Kenyan exports grew 25.5 per cent with notable increases in tea exports, according to the Export Promotion Council.

“Alot of people were staying and working from home hence tea consumption went up,” Bedi noted, adding that the council is keen to diversify Kenya's exports basket to grow its global share of trade.

Kenya National Bureau of Statistics 2020 data indicates the value of exports increased to Sh641.2 billion, up from Sh510.9 billion the previous year, with Industrialisation, Trade and Enterprise Development CS Betty Maina noting the country has managed to cut on the huge balance of trade deficit.

Major destinations for domestic exports included Uganda(a leading trading partner), UK (vegetables), Pakistan (mostly tea), Netherlands( flowers and vegetables), and Tanzania which is a common trading partner on industrial goods and food commodity.

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