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

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.