Transforming Africa’s Commodity Market with Digital Technology
We had a fantastic guest lecture yesterday at Carnegie Mellon University Africa with Bonaventure Twagirimana, head of ICT and Market Data at the East African Exchange (EAX). This is part of a course offered at CMU-Africa: Strategic Use of Digital Information in Enterprises. It’s taught by Michel Bezy, Distinguished Professor and former Program Director at IBM.
Bonaventure (CMU Africa alumnus) gave insights into how the exchange is transforming the commodity market in East Africa through the use of digital technology. Some examples are the use of sensors to detect and maintain high-quality grain, cloud computing and highly effective NASDAQ trading systems.
The results of their work so far? High-quality grains, connecting farmers to capital markets, and the securitization of grains: spots, options, forwards and futures that can be traded on international markets! With over $3mn in revenue, 5 years in operation, and being a leader with only 2% of the market share, I can only conclude that the future is very bright for the exchange. The exchange plans to expand into managing other crops like coffee and tea as well as increase adoption rates by farmers in the country.
For farmers, this is good news. Many farmers in Africa often sell their products too quickly in order to ensure that they have the cash and capital for the next planting season as well as living expenses. As a result, products are often undervalued since they are also sold in times of influx supply. But now, with the help of the Exchange, these farmers can securitize their harvests and ultimately maximize their returns. Let me explain further: With the help of the Exchange, these farmers can store their grain in a warehouse managed by the EAX. Then they receive a virtual receipt that represents their physical product. Farmers can then use that receipt to access capital from financial institutions like banks since the crop is guaranteed as an asset.
Here’s what that means: The receipts/contracts can be sold based on the present/future price of the crop. They can be also be used to access loans because the product in the warehouse managed by EAX is now considered as an asset.
For investors and financial institutions in East Africa and Rwanda, this is even juicier when you compare with other numbers: Lending rates in Rwanda average 19%pa, Fixed deposits return 8–10%…whilst trading commodities can return an average of 20–30%pa for initial resellers.
(If you are new to the concept of commodities trading, I must admit that my explanation may be a little hard to grasp. Due to the scope of my post and the limited time I have to write these days, I won’t go into the details. That said, I may reword it later or illustrate it with a diagram. In the meantime then, take a look at this link to learn more or read chapter 2 of Ray Dalio’s book “Principles. If you felt my explanation was also fine, do let me know in the comments so I save my time. Thanks.)
I had an “after-party” discussion with Bonaventure and my stellar mates Wuyeh Jobe and Rahma Ahmed Samaroon and he revealed the key role governments (and other investors) have to play in supporting farmers and exchanges all over Africa. We also talked about the applications of machine learning to predict the price of grains and more.
Similar work is also taking place in West Africa with the launch of the GCX in Ghana by a founding member of the East African Exchange. These are exciting times for markets in Africa.
Here’s a worthy note by a friend and SEO Africa ’17 Alum, Desmond Darlington: “Ethiopia started this though. So if there’s a sequel, acknowledge their pioneering spirit”
Ethiopia, you are fully acknowledged.💯
There’s also one name that runs through the success and operations of these commodity exchanges in East Africa, Ethiopia, and Ghana: Dr. Kadri Alfah.
This was a short article; I have little time to write for the web these days. Leave a few claps to let me know if you enjoyed the read. I’m deliberately abstracting the contents of the article so it’s brief and since it’s my first time doing this, I’d like to get some feedback on it via comments or on WhatsApp/Skype. Thanks in advance.
If you’d like to learn more about Carnegie Mellon University in Africa and our new campus, click here: https://www.cmu.edu/news/stories/archives/2019/august/cmu-africa.html. Applications are also open for Ms. in Information Technology as well as Electrical Engineering and Computer Science. Visit https://cmu.edu/africa to start your application today.
