Last year, the African Development Bank (AFDB) published a report analyzing the “trade finance gap” in Africa. This refers to financial tools such as credit letters and guarantees. This is a company that is necessary for cross-border trade, but African companies often struggle with access.
Trade finance is essential for both small and medium-sized enterprises (small and medium-sized enterprises) and large enterprises to reduce the risks associated with international trade, improve cash flow, and ensure smooth imports and exports. According to the AFDB, around 80% of national trade relies on some form of trade funding worldwide.
However, there is a major shortage – a shortage that suppresses the ability of businesses to trade and thus avoids economic growth. In 2022, the gap in global trade finance was $2.5 trillion. This has increased by 47% since 2020. In Africa alone, the deficit in 2019 exceeded $80 billion.
Relaxing against customs problems
There is reason to suspect that trade finance gaps will grow even larger on the continent. This is the result of President Donald Trump's decision to impose a universal 10% tariff on almost every country, and could potentially reimpose a higher “mutual” tariff on African countries that the United States claims to have a massive trade deficit after a 90-day suspension.
Trade restrictions mean that African countries are more likely to export fewer goods to the US.
As a result, the liquidity of the US dollar required to promote trade financing will be reduced. This is necessary to further limit the bank's ability to provide its products and services and to successfully carry out trade.
In this context, UK International Investment (BII), a UK development financial institution, is partnering with the International Bank of Ghana (GHIB) to begin closing trade finance gaps in seven African frontier markets.
Bii and Ghib recently announced a $50 million trade finance facility that will expand credit access to Sierra Leone, Liberia, Gambia, Benin, the Democratic Republic of the Congo, Rwanda and Tanzania. The initiative aims to enable companies in these markets to seamlessly exchange with international partners, stabilize their supply chains and promote stronger economic growth.
Africa Investment Accelerator
The trade facility with GHIB is part of BII's African Resilience Investment Accelerator (ARIA) initiative and is currently aimed at unlocking investments in frontier markets that are currently underserved not only by commercial banks but also by development financial institutions.
David Banson, investment manager at BII, told African businesses he has described the initiative as “the trade finance gap is perhaps the biggest inhibitor of Africa's growth.”
“Small businesses provide a very broad foundation for the economy to grow. They are the bedrock of the economy and account for 80% of Africa's employment,” he says. “But they need to have access to credit, access to the global economy and, most importantly, thrive in an environment where trade is not curbed.”
“If there is a trade finance gap, it means that we don't have all the facilities that allow trade to happen,” adds Vanson. “This trade finance gap we see reflects the amount of control that Africa's economy grows.”
Ghib's chief commercial officer Richard Agbenu noted that a partnership with BII is essential as private sector banks do not have the ability or balance sheet to fill trade finance gaps alone.
“In international trade, all transactions are different. Therefore, you need to order trade finance products. This is why it takes a lot of time,” he explains.
“You need knowledge of various products that require time and resources. A typical trade finance transaction requires collateral, which requires that the inspector validate this collateral. There are regulatory considerations to ensure that banks handle it comfortably. All of these things need to be done.”
“Therefore, for most banks there is an opportunity cost to deal with trade financing,” Agbenu said. “When you can buy government papers and make great returns, do you have time to invest in this? To close the trade finance gap, you need to take deliberate effort and encourage banks.”
Bii hopes that the $50 million trading facility will ensure sufficient liquidity for Ghib to provide trade finance products, while at the same time freeing up the time and resources that banks need to provide such services. Agbenu said, “With the support of BII, risk can be distributed, but trade facilities provide greater leverage to deploy more capital.”
Being attacked by the frontier market
Vanson says that he has chosen to partner with Ghib (as Bii, headquartered in London) as he is a systematically important bank in seven markets targeted under the initiative. He added that it is essential for development institutions such as BII to be involved as regulatory obstacles make it extremely difficult for commercial banks to provide trade financing in frontier markets where commercial banks are perceived as higher risk. “International verification banks have limited ability to provide services in countries such as Sierra Leone due to the regulations they have to deal with.
“Regulations instruct banks to confirm that they model African risks in a specific way, meaning there are limitations to what these banks can do in the African market.
“Because of the restrictions these regulations place on these banks, the only way to make progress is through development financial institutions,” Vanson says. “We are not commercial banks and are not bound by the same restrictions. Global regulations create the need for developmental financial institutions to support commercial banks so that they can provide trade finance in their target markets.”
A 2022 survey by the International Finance Corporation (IFC) found that Kote Daiboir, Ghana, Nigeria and Senegale trade finance support only 25% of the trade in goods. This was well below both the 40% and the global average in Africa, 60% to 80%.
Agbenu said, “If this is the number of large countries in West Africa, then the number of much smaller countries like Liberia, Sierra Leone, Gambia and Guinea could be even worse, perhaps 10% to 15%.”
Although accurate numbers are difficult to predict, Bii and Ghib aim to significantly increase the amount of business supported by trade funds across these frontier markets. Strong growth is certainly viable. Agbenu notes that with the support of BII and other partners, Ghib was able to increase trade finance volume by 100% last year.
Commercial banking model
Both Banson and Agbenu note that Bii and Ghib's work ideally serve as a model for other commercial banks on how such services can be delivered in the African market by enhancing access to trade funds in these markets.
Agbenu said, “Bii will join us to do this, giving other lenders comfort. It will give us the 'vision' of trade finance and helping to promote it in the region. ”
Trade finance is essential to giving businesses the leverage they need to implement international trade, expand their operations, create more jobs and promote stronger economic growth.
“If trade finance helps manufacturers import raw materials, for example, not just to allow manufacturing to continue manufacturing,” Vanson said.
“You are helping it grow, and by growing, you can do more by hiring more people and hiring more people.
