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Trade Finance

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Trade is a key driver of economic growth and poverty reduction and drives the exchange of goods and services, capital movement, and fosters cultural links between people and between countries. It is an important catalyst for regional economic integration, economic growth and poverty reduction. Botswana, Namibia and Mauritius are examples of countries that have transformed themselves from low to middle income countries by improving their ability to trade in regional and global markets (ITC, 2018).

However, Africa is yet to address the constraints to trade and fully capture its growth-enhancing benefits. Expanding trade within Africa and with the rest of the world remains a challenge due in large part to a trade finance gap estimated at more than US$100 billion. Filling this gap means addressing the obstacles African banks face in expanding access to trade finance. These include low US dollar liquidity, the costs and complexities of regulatory compliance - including Basel III and anti-financial crime regulation, and the inability to assess the credit-worthiness of potential borrowers. Boosting Africa’s intra-regional and international trade also requires a good understanding of the African trade finance landscape.

Despite trade’s importance as an engine of growth, Africa’s share of global trade is only estimated at 3%, with an even lower share of intra-regional trade compared to other regions (Africa:15%, European Union:63%, North America: 50%, and Asia:52%). Increased intra-African trade can contribute towards the development of cross-border infrastructure, catalysing intra-regional investment, and reducing the constraints of unfavourable boundaries for landlocked countries.

CHALLENGES

The lack of availability of trade finance is therefore a major impediment to the development of Africa’s trade sector and, more acutely, to intra-African trade. The 2015 AfDB’s Africa Trade Finance Survey shows that bank-intermediated trade finance in Africa is estimated at about USD 400 billion, or about one third of total trade on the continent. The Survey also exposed a persisting trade finance gap of approximately USD 100 billion (excluding the informal sector’s needs).

Figure 1: Bank-Intermediated Trade Finance and Trade Finance Gap in Africa

Trade Finance Gap - Africa 2017

Source: AfDB (2017)

Moreover, the survey highlighted the limited access to trade finance for SMEs, high-risk perceptions despite low non-performing loan ratios, information asymmetry and lack of credit infrastructure (e.g. credit bureaus, collateral registries ) and the need for capacity development in banks. 

There are several obstacles to increasing trade finance by African Banks. Regulatory issues present considerable challenges and are among the main constraints to expanding trade finance portfolios. International standards, especially anti-money laundering (AML), Counter-terrorism financing (CFT) and Know Your Customer (KYC) rules have become more stringent as have risk capital requirements since the global financial crisis - and will become even more so with the implementation of Basel III.

Rising compliance costs combined with weak credit information systems have created the perception that trade finance operations are highly risky and costly in Africa. These factors are driving the current de-risking move, with some international banks reducing their correspondent banking relationships with African banks whilst others are simply withdrawing from the continent.

Filling this gap means addressing the obstacles African banks face in expanding access to trade finance. In the African context, many of these obstacles have a disproportionate impact on SMEs, which are already struggling to access other forms of finance.

OPPORTUNITIES

Governments and development partners have made significant efforts to reduce barriers within Africa’s trade finance industry in the last decade.  Multi-lateral Development Banks have created facilities to de-risk transactions for banks, by using their strong financial backing and credit ratings, through facilities like the AfDB’s Trade Finance Program and the IFC’s Global Trade Finance program.

Afreximbank’s Mansa, a due diligence platform launched in July 2018, aims to facilitate African trade by providing a single trusted source of primary data for due diligence checks on African counterparties.  

Technological innovation is also being explored to stimulate trade finance. Indeed, according to a recent survey conducted by the International Trade Centre, African MSMEs have cited failure to access internationally recognized payment systems as a major obstacle to cross-border e-commerce. Although domestic e-commerce offers a wide range of payment possibilities13 – including cash on delivery – cross-border transactions with customers in high-value markets such as the European Union and the United States require sellers to have access to internationally recognized payment systems. In a number of African countries, MSMEs can only receive payments from foreign credit card holders through costly intermediaries, as the domestic system lacks the necessary international links. Global platforms such as PayPal or Google Wallet offer integrated payment solutions that could overcome some of these transaction barriers. However, these services come at a cost, and are not available in all countries.

Finally, the African Continental Free Trade Agreement (AfCFTA) signed by 52 countries in May 2019 is a major step forward. Through the creation of a single continental market for goods and services, with free movement of business persons and investments, it will expand intra-African trade through better harmonization and coordination of trade liberalization and facilitation instruments across the RECs and across Africa in general. This represent a unique opportunity to strengthen and develop the trade finance sector.

Section 2: Highlights of our Activities

The MFW4A Trade Finance Initiative, launched in early 2018 as a collaborative effort with the African Development Bank (AfDB) and GIZ (with funding from BMZ) aims to improve the understanding of the trade finance market in Africa, promote sound financial sector policy, regulatory reforms and joint thematic research.

The objective is to overcome barriers to trade finance (including access for SMEs) and to build the capacity of local banks to introduce sophisticated products and grow their business.

Knowledge Management and Research

Webinars, Knowledge Briefs, Case Studies

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Financial Crime Legislation and Compliance Requirements in Trade Finance

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Trade Finance in Africa: Overcoming the Challenges

Networking and Advocacy

High-Level Conferences and Roundtables

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Workshop – “ The consolidation of international correspondent banking in Africa", in Frankfurt, Germany

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ACCB/CABS - Consultative Meeting with African banking supervisors: “Addressing the de-risking challenge: the implications on African Trade Finance” – in Cape-Town, South Africa

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Workshop – Closing the Trade Finance Gap for African SMEs in Abidjan, Cote d’Ivoire

Project Support and Capacity Building

Trainings and Marketplaces

NEWS & EVENTS

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Aug 05, 2020
Marieme Esther Dassanou is the Coordinator of Affirmative Finance Action for Women in Africa (AFAWA) the African Development Bank’s flagship pan-African
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Jul 28, 2020
As a Partnership committed to the African financial sector (AFS) development and resilience, Making Finance Work for Africa (MFW4A) has implemented a number of…
News
Jul 28, 2020
As a Partnership committed to the AFS development and resilience, Making Finance Work for Africa (MFW4A) has implemented a number of recent initiatives to…
News
Jul 28, 2020
As a Partnership committed to the African financial sector (AFS) development and resilience, Making Finance Work for Africa (MFW4A) has implemented a number…
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Sep 17, 2020 - Sep 18, 2020
Nairobi, Kenya
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Strategic Partners

We are a multi-donor initiative with a strong partnership and collaborative mindset. We work with a variety of local, regional, and international institutions, both public and private, in order to achieve our mission to develop the African financial systems. Below is a summary of the institutions we work with to support the development of trade finance in Africa.