Trade serves as one of the most important drivers of economic growth. However, Africa as a continent is still not entirely capturing the growth-enhancing benefits of international commerce. Although its population has more than tripled over the last five decades to account for around 17% of the world’s population, Africa’s share of global trade has decreased steadily over the same period, from 4.4% to just 3%.
Trade Finance plays a vital role in this global growth. Currently, the deficit of trade finance is a persistent issue that the pandemic is likely to aggravate. Regulatory challenges have emerged as a significant drag on the African trade finance gap. Specifically, 15% of banks list these challenges as the main constraint to expanding the trade finance supply.
Understanding the Scale of the African Trade Finance Gap
Though the unmet demand in trade finance declined significantly from its peak of $120 billion in 2011 to $81 billion in 2019, the deficit remains stark. The global trade finance gap was estimated at $1.5 trillion in 2018, meaning the average unmet demand in Africa represents 5.5% of the total global gap.
The response from key players, including Development Financial Institutions (DFIs), contributed to the recent decline in the African trade finance gap. DFIs increasingly play an active role by providing facilities for short-term lending and credit guarantees aimed at SMEs. On average, 60% of banks in Africa that engage in trade finance receive some form of DFI support. However, despite this support, the participation rate continues to fall-dropping to 71% in 2019 compared to 87% in 2018.
Characterisation of Trade Assets within the African Trade Finance Gap
Roughly 60% of trade finance assets held by banks are unfunded transactions, such as letters of credit (LCs). In the previous decade, these assets accounted for 14% of total bank assets in Africa. Crucially, all LCs issued by African banks require confirmation from large global banks.
As global banks "de-risk" and pull out of markets they perceive as too risky, they leave many African-based banks unable to conduct trade in foreign currency. Based on SWIFT data analysis, the number of correspondent banking relationships involving US Dollar transactions decreased by about 25% between 2011 and 2017. This "de-risking" phase is a primary driver of the African trade finance gap, as it reduces the confirmation lines available to African banks.
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