Africa push for alternatives to dollar-based payments intensifies

ATG, which houses Afrexim’s Pan-African Payment and Settlement System (Papss), has been launched in 35 countries so far, with over 90 commercial banks and 35,000 businesses on-boarded, and trade worth Sh18.8 billion facilitated.

“It's about trade with settlement in local currencies. That's the most important thing. And it's happening in real life today. So, if you are a buyer in Kenya, your account in Kenyan shilling is the one that gets debited and the seller’s account is credited in their own local currency,” said Afrexim Bank’s Regional Director, East Africa, Kudakwashe Matereke.

The lender’s system creates a financial artery that will allow transfer of funds across borders as traders transact in export trade, though in this case traders do not have to trade in base currencies.

At the same time, economists during a conference ahead of the November G20 Summit in Johannesburg, South Africa, fronted alternative systems for African countries to use during cross border-trade, revealing growing opposition to the use of US Dollar and Euros, that has been faulted for being costly and lengthy.

The economists proposed use of systems such as dual currencies, regional payment systems such as the Southern African Development Community (SADC) Real-Time Gross Settlement (RTGS) and Papss.

The SADC-RTGS, which was launched in 2013 has been facilitating settlement of high-value transactions across Southern African countries, and is operated by the South African Reserve Bank.

The proposed use of dual currency would see countries use both local currencies for commercial transactions within borders, and a super-national currency for cross-border transactions.

Under this model, traders only use the local currencies when trading with cross-border counterparts, but at national level Central Banks use a super-national currency when goods and money move across territories, economists say.

The drive for new payment systems comes amid discomfort that settlement banks located in the US and European regions are handling majority of transactions in intra-Africa trade.

Out of the $220 billion worth of trade within the continent last year, 60 percent of the transactions were handled by settlement banks located outside the continent, shows research by Shakirudeen Taiwo, a doctorate student at the University of Johannesburg.

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Using the settlement banks has come at a huge cost in terms of delays in settling transactions, foreign exchange losses and high charges, the economists argue.

“Right now, if you're doing a cross-border transaction, the main currency that we use is either the dollar or the euro. That money has to go through a settlement bank before it comes back to the trader in Tanzania which is just two hours away. There's a lot of delay and inefficiencies that happen within that time,” says Claire Nyapucha, a Nairobi-based economist.

Ms Nyapucha says regional payment systems that allow exporters and importers to transact in local currencies have the potential to save charges imposed by settlement banks, while cutting delays from five days to hours.

The systems are expected to play a crucial role as more countries grow trade through the African Continental Free Trade Area.

Afrexim last week said its ATG platform has facilitated trade valued at Sh18.8 billion in the countries where it is already in operation, with quotations for products valued over Sh450 billion ($3.5 billion) requested.

During the pre-G20 Summit conference in Johannesburg last week, economists across countries from the Global South region said that while alternative payment systems are long overdue, the region would need to first invest in proper infrastructure to facilitate trade safely.

“African banks have 12,000 bank accounts but only 2 percent of those are within Africa. What we need is for African banks to open more bank accounts between banks in the continent so that you have to avoid all this slow process of correspondent accounts in New York City,” said Andres Arauz, a former central banker from Ecuador.

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Under the current international financial system, commercial banks have to operate under a community that brings together over 11,000 banks, to enhance secure cross-border transfer of money and link economies.

The Society for Worldwide Interbank Financial Telecommunication (Swift), is the system that enables one to send money to another party located in a different country through the banking system.

It is this system that regional settlement platforms and the economists seek to bypass, though it remains unclear the level of success they can achieve.

Economists say the alternative systems eliminate the need for businesses to procure dollars and euros to transact across borders, thus controlling local currency depreciation and related inflationary impacts.

“The depreciation effect on the local currency is due to the fact that countries like Kenya for instance must pay in another currency not in the Kenyan shilling. One problem is that it must collect the money from the Kenyans in shillings in order to pay for the products.

" But then, it also procures the dollars or the key currency to pay the exporters of other countries and it is in this process that the shilling depreciates compared to the dollars,” says Andrea Carrera, Applied Economics don at the University of Madrid.

In Kenya, Afrexim Bank has partnered with a local startup, Real Resources Africa, to onboard Kenyan businesses that want to leverage its platform for access to cross-border markets and trade financing. The lender is also partnering with local banks to offer them financing for onward lending to traders in need of trade financing.

“We are working with local financial institutions who have capacity to lend in local currency. But where additional funding is required, we also have capacity to provide funding to local banks, which can then get extended to the local borrowers,” Mr Kudakwashe said.

Governors have said the platform presents an opportunity for businesses in counties to leverage County Aggregation and Industrial Parks that are currently under construction, to access outside markets.

“With ATG, this region will now have direct access to African markets, financing solutions, digital platforms that reduce barriers to trade,” said Nyandarua Governor Moses Kiarie.

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