Absa, a pan-African bank, intends to use blockchain to digitize trade finance
April 3, 2023 6:24 AM
With a digital system in place, the bank may start issuing letters of credit digitally.
In order to provide its customers with a fully digital letter of credit (LC), Absa Corporate and Investment Bank, a pan-African financial institution, has joined the blockchain-based digital trade finance network Contour.
A press statement on Contour's website states that Absa CIB's customers would be able to adopt a totally digital and end-to-end LC settlement process in less time.
In an international commerce transaction, a letter of credit is a written assurance by a bank guaranteeing that the seller will receive payment on time and for the specified amount. LCs are one of the most often used payment vehicles in international commerce. Cash in advance, documented collections, and consignments are some more instances.
To get an LC, the bank checks that the buyer has sufficient assets or a line of credit. After the bank has guaranteed this, the letter is issued.
A digital Letter of Credit can be obtained in as little as 24 hours and as much as five to ten days using Contour's digital finance network.
The move comes in the wake of the African Continental Free Trade Area (AfCFTA), the African Union's main project, which intends to increase intra-continent trade by 52.3% and grow Africa's GDP to $29 trillion by 2050.
Absa CIB's Head of Trade and Working Capital, Michelle Knowles, stated:
"Digitization is critical to the democratization of trade finance in Africa, enabling SMEs to obtain access to much-needed credit to boost trade." During the last five years, Absa has been investing in digital capabilities, [and] our future access to Contour's platform is a step forward in further building our digital roadmap and supporting our clients' growth objectives throughout the continent."
Trade finance has been sluggish to catch on in an increasingly digital environment, with many transactions still being paper-based, time-consuming, and costly. A trade finance contract for a single commodity cargo is claimed to require up to 36 original paper documents and 240 copies from as many as 27 parties, a procedure that can take several weeks.
Contour attempts to send the mail in as little as five to ten working days.
Nonetheless, the presentation and verification of the applicant's documentation and assets is a significant time-consuming and arguably the most difficult component in the issuing of LCs. It's unclear how Absa's collaboration with Contour helps to shorten the time required for this, which is perhaps the most time-consuming component of the procedure.