Webinar Report - Trade Finance in Africa: Overcoming Challenges
A Trade Finance webinar titled ‘Overcoming the Challenges of Trade Finance in Africa’ was held on March 21, 2018. This session, the first in a series of webinars on the topic, is an integral part of MFW4A’s work program in its 2018-2020 strategy. The webinar specifically feeds into the MFW4A Trade Finance Initiative, a joint programme with BMZ/GIZ and the AfDB.
The purpose of the MFW4A Trade Finance Initiative is to mobilize a wider community of Trade Finance stakeholders at the continental and international levels, in order to (i) foster a better understanding of the Trade Finance market, (ii) promote compliance with regulatory standards and (iii) build capacity, efficient approaches and sophistication of local bank products in the Trade Finance niche. The keynote speaker was, Lamin Drammeh, Chief Trade Finance Officer, AfDB with inputs from Yann Desclercs, Manager of Cornerstone Advisory Plus.
The session was moderated by David Ashiagbor, MFW4A Partnership Coordinator. Discussions mainly focused on factors that hinder the development of Trade Finance in Africa as underlined in the AfDB Trade Finance report. Also discussed where potential solutions to address the issues raised in the report. The survey, which covered more than 900 African banks with local and foreign capital, highlighted the following key findings:
- The total bank-intermediated Trade Finance amounts to about US$ 400 billion – about 30% of trade in Africa - with a funding gap comprised between US$ 90 billion and US$ 100 billion
- Intra-African trade financing accounts for only 20% of total trade finance on the continent, with a level of Non-Performing loans (NPLs) lower than the average in other bank asset classes: 5% vs. 12%
- Regional disparities in trade finance are significant while the SME portfolio is less than 30%; SMEs are more exposed to NPLs in Central Africa (31%) while it is lower in Southern and Eastern Africa (11%). In North and West Africa, NPLs amount to 13% and 16% respectively of SMEs’ Trade Finance portfolio.
- The main constraints to the growth of Trade Finance portfolio according to the banks questioned are: competition (21%) - capital risk (21%) - the availability of correspondent banks (18%) – Forex liquidity (17%) - regulatory constraints (16%) - and staff capacity (7%).
- The main reasons why African banks reject requests for Trade Finance are inherent to client creditworthiness (36%) and insufficient collateral (30%); while globally, and according to a study of the International Chamber of Commerce (ICC) published in 2016, banks have indicated that the main factors hindering the development of their Trade Finance portfolio are:
a) AML and KYC requirements (90%),
b) Low Issuing Bank credit rating (86%),
c) Low country credit rating (82%), and
d) Regulatory constraints (76%).
- There are positive correlations between intra-regional trade and development level, as well as between the volume of intra-regional financing in Africa and the integration level of each sub-region.
At the end of his presentation, Lamin Drammeh underscored the following points:
- Africa’s Trade Finance is estimated at US$ 100 billion,
- SMEs have limited access to trade financing,
- AML/CFT and KYC requirements have a huge impact on the availability of trade financing.
Lamin also emphasized on the need to strengthen collaboration among sector stakeholders – through targeted studies – and to explore alternative trade financing sources in Africa. Yann Desclercs' intervention focused on risk mitigation policies and strategies with correspondent banks. The expert revealed two factors influencing the risk exposure of correspondent banks:
- The insufficient volume of transactions between local and correspondent banks, compared to the risks related to transactions between them; and
- Perceived high risk of local banks regarding compliance with regulations.
Yann noted that it is crucial to boost trust between this two types of central actors in trade financing in Africa, by reinforcing public policies and infrastructure dedicated to:
- The fight against money laundering and the financing of terrorism (AML / CFT),
- Know-Your-Customer requirements (KYC), and
- Banking supervision.
Yann also pointed out that these regulatory efforts go hand-in-hand with the initiatives of local banks in the aforementioned areas, while insuring compliance with the FATF international recommendations. He also proposed that centers of excellence or hubs be created to address issues of local African banks' compliance with national and international regulations.
The Q & A session further deepened the debate on the challenges of Trade Finance in Africa based on participants' questions which to name but a few touched on issues, specifically addressing issues relating to the untapped potential of Liberian and (West) African banks in Trade Finance, the responsibility of African banks with respect to regulatory compliance with international banks; ongoing initiatives of African regulators and the AfDB that aim to stimulate Trade Finance on the continent.
Capacity building for African local banks and compliance with regulations (AML / CFT - KYC) were highlighted as necessary conditions for active and effective involvement of international correspondent banks to significantly increase the volume of Trade Finance operations in Africa. For more details on the webinar and the prolific Q & A session, the recording and Power Point presentation are available on the following link: Recording.