The International Finance Corporation (IFC) has signed a deal with Demica, which runs a supply chain finance platform, allowing banks to buy invoices from the suppliers to multinationals. IFC takes the credit risk of a clutch of top-rated multinationals, while their emerging market suppliers get paid faster — meaning they don’t have to finance hard currency invoice exposure themselves.
Given the cost of raising hard currency finance for some EM firms, a switch to invoice finance could save them between 200bp-300bp, according to Matt Wreford, CEO of Demica.
The IFC’s extensive network of local offices is expected to help with setting up know-your-client and anti-money laundering procedures, which have become increasingly challenging for private sector banks.
It is also planning a sustainable finance twist on the basic supply chain model — with the sustainability rating for the supplier feeding into the cost of the financing. Suppliers which improve their environmental credentials will be eligible for a lower cost of funds.
The plan is to scale up the financing to $9.8bn annually by 2022 — though, as the financing typically has a 60 day term, this implies outstandings of around $1.6bn. IFC will initially fund all of the invoice purchases itself, but is eventually likely to syndicate exposures to private sector banks.
Banks are already involved in financing invoices from developed market suppliers to multinationals, but the idea is that IFC will take the emerging market exposures.
“Since the crisis, we’ve seen a significant retraction in the footprint of most banks,” said Wreford. “All the banks are going regional, at the same time as multinational supply chains are getting ever more global, and that’s opening up huge gaps in supply chain financing.”
Wreford argues that the programme is unlikely to cannibalise existing private sector supply chain finance.
“It’s much more likely to grow the market,” he said. “There’s still low penetration, certainly less than 10% of the addressable market. It’s more likely to stimulate absolute growth than be a fight over a few suppliers.”
IFC is also taking a stake in Demica, with a participation in its $25m second round financing, alongside Wyelands Capital and existing investors in the company.