Guest Articles

Data from fDi markets shows that foreign direct investment from the UAE into Africa has increased by more than 1,000% since 2021, with investments across renewable energy, ports, mining, real estate, communications, agriculture and manufacturing. The UAE is now going toe to toe with Beijing and UAE businesses have embraced the huge potential rewards of trading with Africa, which more risk- averse companies have avoided.

The UAE is in a unique position to capitalise on Africa's potential due to its proximity to the continent, excellent port infrastructure, especially stable currency and a highly business- friendly environment. The UAE, therefore, is a perfect location for a large global enterprise to base its treasury and business operations for Africa.

The Business Landscape

These pronounced advantages do come with their own unique set of challenges. Economic challenges have been compounded by FX volatility. Nigeria, for instance, has experienced prolonged pressures and dysfunctions in its currency market, which have resulted in a 400%+ devaluation of the Naira over the last five years and a varying regime of capital controls. Similar challenges have been faced by Ethiopia, Sudan and French speaking West Africa.

What does this mean for businesses? Unfortunately, the strength of the dollar has put further pressure on foreign currency reserves across Africa. This has created an acute challenge for UAE businesses exporting goods or services to countries affected. Getting paid in a timely manner becomes a significant obstacle due to due to dollar liquidity shortages across the continent.

This comes on top of long-standing under-development in the banking and financial sector on the continent, with poor coverage of mainstream financial services, even for many businesses, and inefficiencies in the banking system arising from challenges relating to governance, technology and scale. These issues are evident in large spreads between exchange rates quoted by banks, versus those available in the parallel market.

More helpfully, a corollary of these issues is that the UAE has become a highly attractive place for African businesses to locate, with more than 25,000 registered there as of 2022 according to statistics from the Dubai Chambers of Commerce. This makes the UAE a perfect marketplace for trading companies to operate seamlessly, but there is still a long way to go until more sophisticated financial solutions are in place that connect both markets. A huge number of companies in the precious metals, agro-commodities and oil & gas sectors have settled in the UAE, but still face challenges with slow and cumbersome payment delivery into and out of the continent and the risk ratings and compliance assessments attached to countries considered ‘high risk’ by banks.

“Hubpay is working with a number of medium to enterprise level businesses in the UAE who are trading with Africa. We have recently begun work with a large gold trading client who was facing issues with payment speed delivery into West Africa. Not only have we managed to cut their payments from T+4 to T+1 days, but have also managed to offer them superior rates of exchange in the process. Additionally, Hubpay has repatriated funds out of both East and West Africa for UAE clients in the technology, commodity, automotive, aviation, and heavy machinery sectors to name a few. These Hubpay customers were previously struggling with their entire business operations as they were unable to receive funds in a timely and compliant manner from their clients”

Thomas Roden, Head of Africa Sales and Trading at Hubpay

Solutions

In many ways Africa is the home of FinTech, with the wide-ranging adoption of technology and initiatives such as mobile money for the unbanked. FinTech is once again leading the way in finding solutions for businesses where banks are lagging. Netting solutions have become available for business-to-business payments, where different companies transferring funds in and out of an African economy can be brought together to offset these flows against one another, to enable them to pay for essential goods and services which keep their businesses running, whilst remaining compliant with capital controls.

With slow payment speeds and unpredictable settlement periods affecting local banking rails across Africa, many companies purchasing raw materials from Africa can face challenges in their Treasury operations. This can be especially painful for trading businesses where other aspects of their operations are in the fast-moving environment of the Dubai Multi Commodities Centre (DMCC). New solutions are being developed which allow UAE businesses to cut down on payment times through the use of nostro accounts at banks in Africa more directly connected to the ultimate destination of funds.

“Commercial and investment ties between the UAE and Sub-Saharan Africa have flourished in recent years, with the Emirates becoming a hub for African corporates and their treasury operations. This makes it an ideal location for international businesses trading in or with Africa. If you are considering routing your African trade via the UAE, speak to Hubpay. Their experts can help you navigate the unique challenges of the region.”

Sean Harkin, PHD in economics Edinburgh University and Data Science Lead at Lloyd’s Banking Group

For more information

If you would like to find out more about how Hubpay can help, get in touch with the team at [email protected]. Hubpay is an ADGM licensed and regulated payment services provider for UAE businesses, specialising in foreign exchange and international payments.