Trade is one of the most important drivers of economic growth. However, Africa as a continent is still not capturing fully trade’s growth-enhancing benefits. Although its population has more than tripled over the last five decades to account for around 17 percent of the world’s population, Africa’s share of global trade has decreased steadily over the same period, from 4.4 percent to 3 percent. Furthermore, Africa’s trade is characterized by limited intraregional activity compared to other continents. While the constraints created by infrastructure deficits as well as tariff and non-tariff barriers are well documented, supply-side constraints and financing gaps have also curtailed the expansion of both extra- and intra-African trade.
This report, the third in the “Trade Finance in Africa” research series, sheds light on the trade finance landscape in Africa. The deficit of trade finance is a persistent issue that the COVID-19 pandemic is likely to exacerbate. The African Development Bank (AfDB) and African Export-Import Bank (Afreximbank), recognizing the importance of access to trade finance for businesses, have been intervening directly in the market to address the shortfall in commercial bank financing for trade.
The AfDB launched the Trade Finance Initiative (TFI) in 2009 and the fully-fledged Trade Finance Program (TFP) in 2013. TFP has seen 53 projects approved across 324 financial institutions in 44 African countries, with USD8 billion in underlying trade flows supported. As the trade finance bank for Africa, Afreximbank has been engaged in the financing of trade since its inception in 1993. By December 2019, it had approved more than USD81 billion in furtherance of this mandate. In 2018, Afreximbank launched its African Trade Facilitation Program (AFTRAF) with a view to further enhance its trade finance intermediation. AFTRAF comprises a network of 350 banks and more than 120 credit facilities amounting to USD2.2 billion, spanning across 32 African countries.
Success in ongoing efforts by these two institutions to alleviate trade finance constraints hinges on a better understanding of the dynamics of Africa’s trade finance market. As two of the continent’s premier development finance institutions (DFIs), the AfDB and Afreximbank have sought to bridge this knowledge gap. The first trade finance report highlighted the size of the financing gap and other challenges facing African financial institutions, especially in low income countries. The second examined the trade finance challenges faced by small and medium-size enterprises (SMEs) and commercial banks’ first-time trade finance clients.
This third report provides a decade-long review of the trade finance landscape in Africa and offers insights into the role that DFIs play in trade finance intermediation. The survey revealed that unmet demand in trade finance declined significantly from its peak of USD120 billion in 2011 to USD81 billion in 2019. The global response from key players in the trade finance industry, including DFIs, undoubtedly contributed to this decline. DFIs are increasingly playing a more active role in Africa’s trade, with facilities for short-term lending of working capital and credit guarantees aimed at SMEs. The survey highlighted that an average of 60% of banks that engaged in trade finance activities received some form of DFI support between 2015 and 2019.
Nevertheless, significant challenges remain. The trade finance gap, while contracting, remains unacceptably high. SMEs, among the most significant contributors to African economies, have witnessed a higher share of their trade finance applications rejected by banks even as the risk profile of their trade finance assets has improved. In addition, compliance with stringent anti-money laundering and know-your-customer measures, along with new Basel regulations, have imposed higher costs on financial institutions in the trade finance sector, leading to fewer banks engaging in trade finance activities.
The report outlines some policy recommendations to help address these challenges, including raising awareness about the impact that stringent regulatory requirements have on African financial intermediaries, with various actors collaborating on approaches that would make compliance more cost effective. It advocates more robust and sustained engagement with SMEs, inviting DFIs to expand their trade finance network of banks that support these enterprises. Finally, it stresses the need to address geographical disparities, particularly with regards to the scope and nature of instruments offered by DFIs to boost African trade, especially intra-African trade, and enhance implementation of the African Continental Free Trade Agreement (AfCFTA).