Regional report Expanding opportunities to build sustainable and resilient supply chains in Middle East & Africa

Expanding opportunities to build sustainable and resilient supply chains in Middle East & Africa

Companies globally have built up complex, extended supply chains, which have been carefully calibrated to enable them to deliver ‘just in time’ without the need to carry large inventories. These have mostly proved stable and efficient in the past. However, a combination of recent production, logistics and political disruptions, not least the COVID-19 pandemic, has emphasised the inherent vulnerability of many supply chains, and over-reliance on particular suppliers and geographies. This was the background to Standard Chartered’s global research report, Critical Indicators of Sustainable Supply Chains, in which 303 treasurers, CFOs and procurement professionals from Middle East & Africa (MEA) participated.

Vulnerabilities in MEA emphasise the need for risk-based supply chains

Although the impact of supply chain disruption and uncertainty has been felt worldwide, many companies in MEA are more vulnerable than those in other regions. For example, the early fall in commodity prices, such as oil, soon into the COVID-19 pandemic had a major impact on energy companies and their ecosystems in MEA. Companies across industries also became concerned about their over-reliance on China, which is the largest supplier and consumer to these regions.

Another important dimension in Africa, in particular, is its susceptibility to climate-related events that add significantly to supply chain risk.

This is supported by a recent report by the Intergovernment Panel on Climate Change (IPCC) that concludes, “The African continent is particularly vulnerable to the impacts of climate change because of factors such as widespread poverty, recurrent droughts, inequitable land distribution, and overdependence on rain-fed agriculture. Although adaptation options, including traditional coping strategies, theoretically are available, in practice the human, infrastructural, and economic response capacity to effect timely response actions may well be beyond the economic means of some countries¹.

¹The Regional Impact of Climate Change: An Assessment of Vulnerability, p9.

Although these vulnerabilities existed before COVID-19, the pandemic has proved a catalyst for many companies, as well as governments and regulators, to accelerate efforts to build more resilient and sustainable supply chains. They need to be agile enough to flex to changing supply and demand patterns, whilst being sufficiently transparent and interconnected to increase trust, efficiency and financial robustness.

Digital solutions can help build robust supply chains

When we talk about resilience, we are referring to the capacity to recover quickly and address immediate, dynamic requirements. There has to be an element of elasticity and flexibility in the supply chain, so your underlying policies should be such that you can respond to emergency situations without breaching compliance requirements.

CFO based in UAE

Digitisation proved to be a significant enabler of supply chain visibility and resilience during the crisis, as companies moved from paper-based to digital processes wherever possible.

Technology also can play a part when it comes to organisations seeing their trade transactions with all their suppliers, from order through to the point of payment.

African research participant

One challenge is that economies in MEA may be less advanced digitally than those in other regions, so companies have thus far benefitted slower from emerging opportunities. For example, regions such as North America and Europe have seen a gradual trend towards open account transactions.

There is a strong emphasis on manual documentary trade in MEA. Standard Chartered is providing significant support in helping to deliver the value of digitisation to clients in MEA.

A lot of banks are looking to really develop that [digital] aspect of their business, but we have access to Standard Chartered’s platform. That enables us to be able to access our transactions and see them in real time. The data that we get from that platform helps us to plan our funding [strategy], because we can see all of our FX requirements over a particular period of time, which helps us to think about how we want to source funds.

African research participant

Expanding financing opportunities to boost supply chains and economies

Financing plays a key role in building resilient supply chains; for example, a common approach to shoring up supply chains in regions such as Europe and North America is to use supply chain financing (SCF) or reverse factoring. However, SCF is a relatively recent development in MEA.

Clients are becoming increasingly conscious that their local suppliers are finding it more difficult to finance themselves at a competitive rate, particularly at a time when banks may have a reduced credit appetite. To overcome this challenge, a growing number of clients are keen to adopt SCF programmes, such as Standard Chartered’s Supplier Finance solution, which helps to enhance suppliers’ liquidity position without compromising their own working capital. In addition to reducing supply chain risk, our Supplier Finance solution also supports clients’ supplier diversification strategies, including with local suppliers that may lack access to financing.

Ahmad Izhar
Director, Trade Product Management, MENA, Standard Chartered

Although SCF is not available in all parts of MEA, Standard Chartered is providing insights and sharing SCF best practices with governments and regulators as they seek ways to support their wider economies and ensure continuity of supplies. In Pakistan, for example, unsecured lending was not permitted in the past; today, through market advocacy efforts, SCF solutions are now available, with other markets such as Bangladesh following suit.

In addition to SCF, the Bank is engaged in a range of innovative financing projects in the region to help boost resilience. In November 2000, the UK’s development finance institution and impact investor CDC and Standard Chartered announced an additional $100 million commitment to support some of Africa’s most fragile countries and significant industries, including food and agriculture, and healthcare sectors².

Our partnership with Standard Chartered Bank will support vital trade and supply chains in sub-Saharan Africa and South Asia, thereby protecting jobs and economic growth. Our trade finance programme aims to alleviate poverty, and ensure vital goods get to those that need it most across our markets.

Admir Imami
Director, Head of Trade & Supply Chain Finance, CDC

Enhancing visibility, making it easier to engage with suppliers

It is not only the availability of SCF and other financing programmes that will help build supply chain resilience, but also the ease with which suppliers can join these programmes. Digitisation accelerates and increases adoption and onboarding, and therefore increases the benefits these programmes offer.

The growing acceptance of digitisation, however, both amongst companies and governments, will fuel further progress. For example, digital opportunities in some parts of the region are increasing, particularly in Middle Eastern states such as Saudi Arabia, Abu Dhabi, Oman and Bahrain.

In these states, governments are encouraging SCF in order to reduce supply chain delays and disruptions and minimise the macroeconomic impact. This is particularly significant as governments themselves are often the largest off-takers of payments, due to high levels of spending.

Syed Khurrum Zaeem
Head of Transaction Banking and Trade, AME, Standard Chartered

Standard Chartered’s Supplier Finance programme is simply initiated through a digital instruction from the ‘anchor’ client. Suppliers can onboard digitally, and can join the programme whether they bank with Standard Chartered or not. This has proved crucial for many anchor companies and their supplier ecosystems during the pandemic, particularly in sub-Saharan Africa where a large proportion of small suppliers are unbanked, and given the speed with which supplier failure or delay can impact on wider ecosystems.

With a heightened awareness of supply chain risk, clients are now approaching Standard Chartered, and seeking our solutions, earlier in the sales cycle. As a result, we are engaging closely with commercial teams’ treasury, and third parties to create innovative financing solutions. For example, traditionally, only approved invoices have been included in SCF programmes. Today, some fintech providers are delivering platforms that support financing at an earlier stage in the purchase-to-pay (P2P) process, such as purchase order issuance, which banks can then finance.

Motasim Iqbal
Head of Transaction Banking Sales, MENA, Standard Chartered

In addition to expanding SCF programmes to a wider spectrum of direct suppliers, companies are also looking for more inclusive financing solutions to support deep tier (i.e. indirect) suppliers.

FMCGs engage [with the] bank to… support these agri-communities. [Banks] provide financial support for these farmers and they are able to purchase equipment.. fertilizers and chemicals ..that.. help increase the yield, and so this is a strong way in which [banks can] help.

African respondent

The ability to pay to mobile wallets, rather than to bank accounts, is an important way to achieve this objective, by making programmes accessible to unbanked suppliers. Parts of Africa, particularly east Africa, are already global leaders in mobile wallet payments, while Nigeria has emerged as a regional centre for digitisation, including Jumia, a pan-African eCommerce platform, and Flutterwave, a payment services provider focused on small businesses.

Identifying and accessing target suppliers, however, relies on a high degree of visibility across supply chains.

As SCF becomes more inclusive in terms of the number and profile of suppliers, programmes also need to be more flexible. In many markets, many suppliers engaged in our Supplier Finance programme, such as in the agricultural sector, do not have a bank account, so funds can be paid instead into mobile wallets.

Ahmad Izhar
Director, Trade Product Management, MENA, Standard Chartered

Tackling social and environmental risks in MEA supply chains

The demand for more inclusive and transparent supply chain solutions, including financing, is in part driven by supply chain risk management concerns, but also by companies’ environmental, social and governance (ESG) priorities. Social considerations have often been the highest priority concerns in MEA, such as workers’ rights, health and safety, fair treatment of suppliers, and community engagement.

When we select a vendor, we go through all their licenses and make sure that they are compliant with regulatory procedures. If they are not, then we would reject the vendor.

CFO based in the Middle East

Another respondent comments,

When we select vendors, we are not necessarily looking for the cheapest; rather, we are looking for vendors who comply with safety and security requirements.

In addition to social priorities, companies are also extending their focus to energy efficiency and climate change.

Looking at indirect supply chains, these figures are similar: nearly half (49 per cent in Africa and 44 per cent in Middle East) stress the relative importance, but only 38 per cent and 37 per cent record a high degree of success. This is a particular challenge for companies in MEA given the prevalence of extractive industries such as oil, gas and mining, which are at different levels in their transition to sustainable operations.

As a result, even in these transitional industries, companies are making demonstrative efforts towards sustainability, and increasingly setting ESG targets. The Nigerian National Petroleum Corporation states, for example, “In line with our Group Health, Safety and Environment (HSE) Policy Statement, NNPC is committed to conducting its activities in a manner that promotes the Health and Safety of its employees, assets and the public, as well as protection of the environment³.”

Aramco is investing in mobile carbon capture to reduce the environmental impact of internal combustion engines⁴, while Anglogold Ashanti has a published pathway towards net zero carbon emissions⁵.

One of the biggest challenges today for many companies seeking to build resilient and sustainable supply chains is obtaining and monitoring data about new and existing suppliers, both to determine potential vulnerabilities, and measure ESG performance.

The growing momentum behind ESG-linked supply chain management is also a positive development of which Standard Chartered is strongly supportive. There are still further developments required in terms of setting reliable and consistent metrics that can be measured and monitored, with demonstrable benefit; for example, few companies are MCSI-certified [independent ESG rating]; however, this will develop over time.

Syed Khurrum Zaeem
Head of Transaction Banking and Trade, AME, Standard Chartered

Encouraging progress in sustainability and resilience for wider economic benefit

Despite the inherent supply chain challenges in MEA, there are encouraging signs for the future. The experience of the pandemic has prompted companies in MEA to adapt and build resilience, including managing ESG risks, into their supply chain model to be better prepared for the future. With improving insights, digitisation and collaboration across supply chains, companies are able to understand financial, environmental and social vulnerabilities, and provide financing and support to help mitigate them. These efforts are critical to resilient and sustainable supply chains, communities and economies, and the protection of the environment in which they operate.