Kuben Pillay, head of trade and working capital corporate sales (Pan-Africa) and Oladapo Adeigbe, head of financial institution trade sales, Africa, at Absa CIB explore why the trade finance gap remains a hurdle to Africa’s economic progress.
The trade finance gap in Africa has long held back the continent’s economic potential, posing a persistent hurdle for businesses engaging in both domestic and international trade. The African Development Bank estimates that the shortfall between the demand and supply for trade finance has grown to approximately $120 billion, exacerbated by global de-risking practices, where banks are being pushed to scale back involvement – leaving a vacuum that local financial institutions struggle to fill.
This shortfall is particularly damaging for small and medium-sized enterprises (SMEs), the backbone of many African economies who often lack access to the financial services needed to engage in trade. This gap is often even wider for youth and women-owned businesses, which face additional barriers to funding.
Trade financing is the silver bullet that will enable Africa to stimulate cross-border trade, increase production, create jobs, enhance food security, and strengthen economic resilience. However, there is no ‘one-size-fits-all’ approach to boost the continent’s output – global stakeholders must consider a multi-layered approach to reduce the trade finance gap and facilitate investments for African markets.
The industries craving capital
By providing the necessary liquidity and risk mitigation, trade finance enables businesses to expand operations, break into new markets, and engage in international trade. Africa is rich in sectors that present significant opportunities for trade finance.
For instance, agriculture is the continent’s largest employer, with more than 52 per cent of employed people in Sub-Saharan Africa active in this sector. The industry is a critical source of food security, yet requires heavy investment in modern farming technologies and infrastructure to increase production, keep up with the growing population, and tap into international markets.
This creates a significant opportunity to finance the regional and international trade flow of agricultural commodities, as well as support the development and expansion of food processing facilities.
Another sector holding a lot of promise for trade finance is the mining industry. Africa’s bountiful mineral resources make the metal and mining sector a critical component of its economy, and trade finance is essential for supporting export activities in this sector.
As countries around the world increasingly focus on green technologies and renewable energy, the demand for minerals like copper, which is essential for electrical wiring and electronics, is expected to rise. In addition, sectors such as textiles and food processing are emerging as key growth areas. In manufacturing, trade finance can provide the necessary funds for businesses to invest in machinery, raw materials, and human capital, helping to reduce reliance on raw material exports.
Bridging the funding gap with DFIs
Addressing the trade finance gap requires a multi-faceted approach, with many different types of organisations rallying around a shared goal of elevating Africa’s economy on the world stage.
Partnerships with Development Finance Institutions (DFIs) and fintechs are indispensable, especially in Africa where access to capital, payment inefficiencies, currency divergence, and risk management are ongoing challenges.
These partnerships are not only about accessing capital but also leveraging the unique strengths that each partner brings to the table. DFIs play a crucial role in taking on risks which commercial banks view reluctantly. As their funding comes from government sources, DFIs are often less commercially minded, so can provide guarantees and liquidity support that mitigates risks for private financial institutions.
On the other hand, fintechs can reach new customers more easily, providing innovative solutions that enhance access to finance, particularly for underserved groups which have traditionally struggled to secure financing.
Big-picture thinking
It is also important to consider big-picture initiatives to close the trade financing gap in Africa. By creating a single market for goods and services, the African Continental Free Trade Area (AfCFTA) is expected to boost intra-African trade by more than 50 per cent by 2025, helping to dramatically increase Africa’s income and build a more favourable environment for trade finance. However, realising this potential requires addressing the trade finance gap that currently limits many African businesses' ability to participate in cross-border trade.
Digital solutions are an important enabler. Digital trade platforms can facilitate the seamless exchange of goods and services across borders, while digital financial services can provide businesses with the liquidity they need to engage in trade. Blockchain technology also offers promising solutions for trade finance – by providing a secure and transparent record of transactions, blockchain can reduce the risk of fraud and enhance trust between trading partners. This can streamline how businesses participate in cross-border trade under the AfCFTA framework.
There is no simple, universal approach to bridging the trade finance gap; there are many moving parts. However, with layers of complexity come layers of opportunity.
By tapping into the unique advantages of DFIs, fintechs, and digital solutions, Africa can unlock its full economic potential and provide a much-needed boost to the core sectors driving its economy.
