Africa’s trade finance market: Facts and challenges
Eugene Bempong Nyantakyi, Mouna Ben Dhaou, Lamin M Drammeh, Mouhamadou Sy 08 October 2016
Boosting Africa’s intra-regional and international trade takes a good knowledge of the African trade finance landscape, like the identification of markets where in fact the need is greatest. This column presents a few of the major patterns of the marketplace in Africa using primary survey data from commercial banks. Banks intermediate almost a third of trade activities over the continent, but nonetheless reject a substantial value of trade finance applications due mainly to weak client creditworthiness and inadequate collateral.
Among the observed top features of global trade is that Africa consistently makes up about a restricted share – significantly less than 5% when it comes to exports (Figure 1). For many years, trade experts have identified several factors because of this low participation. From low productive capacity to high market access barriers, the literature is rife with myriad explanations. However, very little has been discussed usage of trade finance and its own effect on Africa’s participation in international trade. For policymakers, such an understanding gap presents significant challenges for appropriate trade policy formulation and implementation.
Figure 1. Share of regional exports altogether world exports
Source: WTO World Trade Data, 2015
To overcome a few of this knowledge gap, in 2013 the African Development Bank (AfDB) started collecting data on trade finance activities of commercial banks across Africa, which culminated in to the publication of the first continent-wide Trade Finance in Africa report in 2014. The goal is to track and estimate how big is bank-intermediated trade finance, magnitude of the financing gap (unmet demand) and supply-side challenges amongst others. Another survey was conducted this season (AfDB 2016), the findings which are briefly presented here.
Size of bank-intermediated trade finance in Africa
How big is bank-intermediated trade finance in Africa averaged about $371 billion from 2011 to 2014 (Figure 2) and represented approximately 31% of total African trade. This relatively low degree of intermediation suggests that a substantial share of African trade still depends on inter-firm trade credit through open accounts and also cash-in-advance transactions. When it comes to distribution by client segment, a disproportionate share (58%) of bank-intermediated trade finance is due to banks’ top 10 clients. Although SMEs constitute a lot more than 80% of enterprises in Africa, they take into account only 28% of banks’ trade finance portfolio.
Figure 2 . African trade and size of bank-intermediated trade finance ($ billion)
Source: World Trade Organisation and authors’ calculations
Unmet demand: Trade finance gap in Africa
Unmet trade finance demand is a great indicator of banks’ capacity to supply trade credit, but estimating how big is this gap is usually a tricky task. Using the estimated size of bank-intermediated trade finance and the rejection rate of customer requests by banks, the trade finance gap in Africa is conservatively estimated at $91 billion in 2014. Although this represents a decline in comparison to previous years, there can be an emerging and consistent picture that the gap continues to be significant and ranges between $90 billion and $ 120 billion (Figure 3).
Figure 3 . Trade finance gap in Africa ($ billion)
Known reasons for trade finance application rejection
Although trade finance assets tend to be short-term and asset-backed (when it comes to the traded goods being financed), banks still cite poor client creditworthiness (36%) and insufficient collateral (30%) as the primary known reasons for rejecting trade finance demands by clients (Figure 4). We believe these reasons reflect the generally weak credit assessment infrastructure in Africa instead of any peculiarities of the trade finance market specifically.
Figure 4. Known reasons for banks’ rejection of trade finance applications by customers (2013-2014)
Trade finance risk profile in Africa
Regardless of the difficult credit risk assessment environment, trade finance continues to be considered by banks in Africa as a comparatively low-risk activity. For just about any given year inside our study, default rates on trade finance assets are significantly less than the common non-performing loans ratio (NPLs) of other asset classes (Figure 5). This lower risk profile could be explained by the actual fact that trade finance transactions are usually asset backed, short-term and self-liquidating. However, this default rate is relatively high in comparison to other regions where in fact the default rate on trade finance assets is leaner than 1% normally.
Figure 5. Default rate on trade finance assets vs. NPLs of most asset classes in Africa
Trade finance specialized in intra-African trade
A big proportion of Africa’s trade has been all of those other world instead of intra-regional. In 2014, intra-African trade accounted for only 15% of the continent’s total trade in comparison to 63% for the EU, 50% for THE UNITED STATES, and 52% for Asia respectively. However, across all years that we’ve data, the share of bank-intermediated trade finance focused on intra-Africa trade is greater than the ratio of intra-Africa trade to total trade (Figure 6). This shows that intra-Africa trade does receive its fair share of trade finance in Africa.
Figure 6 . Share of trade finance focused on intra-African trade
Trade finance in Africa is a comparatively unexplored topic (recent studies on Africa include Humphrey 2009). In this column, we’ve presented a number of the major patterns of the marketplace in Africa using primary survey data from commercial banks spanning 2011 to 2014. We remember that banks intermediate almost a third of trade activities over the continent, but nonetheless reject a substantial value of trade finance applications due mainly to weak client creditworthiness and inadequate collateral. The financing gap continues to be sizeable, around $90 billion to $120 billion. A disproportionate share of the available financing is provided to large corporates (top clients) at the trouble of SMEs that define more than 80% of most businesses in Africa. By assisting to enhance the credit assessment environment and providing targeted support for both banks and enterprises, particularly SMEs, national governments and development finance institutions can play a substantial role in improving the trade finance landscape in Africa.
Authors’ note: The views expressed listed below are those of the authors , nor necessarily represent those of the institutions with that they are affiliated.
AfDB (2016), Trade Finance in Africa: Overcoming Challenge, African Development Bank.