High finance costs crimp cross border trade in West Africa

If trade finance costs are brought down, there is potential to increase cross border trade in West Africa by up to 16%. The NTU-SBF Centre for African Studies attended a panel discussion at the Africa Financial Industry Summit in Lomé, Togo, where experts unpacked bottlenecks and suggested solutions to boost the region’s trade.

In the region’s four biggest economies – Nigeria, Ghana, Côte d'Ivoire and Senegal – only about 25% of cross-border commerce is covered by trade finance, which is significantly lower than the global average estimated at 60–80%, according to Denis Medvedev, who leads the International Finance Corporation’s economic policy research department. “There’s a large opportunity to provide substantially more trade finance to cover existing trade flows,” he said.

One of the reasons for the low penetration is the region’s high cost of trade finance. The average price of a letter of credit – a widely used trade finance facility – is between 2–4% of the value of the transaction in West Africa, compared to 0.25–0.50% in high-income countries.

West Africa’s trade with Asia has grown significantly in recent years. For instance, Chinese machinery and transport equipment exports to Nigeria, Ghana, Côte d'Ivoire, and Senegal have increased by 50–100% since 2015, while total exports to India from Senegal and Ghana have expanded by more than 20% per annum over the past decade. However, there is room to enhance the region’s cross-border trade by up to 16%, or US$26bn, through improved availability and affordability of trade finance.

Most trade finance products are premised on an existing relationship between the exporter and the importer’s respective banks. Correspondent banking enables companies – unfamiliar with one another – to confidently transact thanks to the relationship between their banks. However, following the 2008 global financial crisis, developed-market lenders are subject to more stringent anti-money-laundering (AML) and know-your-customer (KYC) regulations, which has made it more expensive and time consuming to maintain correspondent relationships with multiple banks in emerging markets. According to Alexei Timofti, a trade specialist at the World Trade Organisation, this has led to some international banks withdrawing from Africa or maintaining links with only a few tier-one institutions. As a result, trade finance in Africa is concentrated among a small number of banks, which lowers competition and puts upward pressure on pricing. The top 10 banks in the region account for about 70% of trade finance. 

Timofti said African SMEs are often subject to cumbersome collateral requirements because banks are concerned about recovering money in the case of non-payment due to local legal enforcement shortcomings. He added Africa relies on expensive traditional trade finance products – such as letters of credit or pre-export finance – with limited adoption of new fintech solutions.

Gwendoline Abunaw, managing director for Cameroon at pan-African lender Ecobank, agreed. She said product innovation is required to fill these finance gaps; and that in Africa, SMEs, not multinational companies, are typically the ones that face obstacles in accessing trade finance. Because of the informal nature of their operations, many have no audited financial records and digital transaction data. This makes it difficult for banks to assess their creditworthiness. Digitalisation of their operations could lead to greater trade finance penetration.

Abunaw identified inadequate intra-African cross-border payment options as another hindrance to trade. She believes traditional banks should work with fintech companies – which are subject to fewer regulatory constraints – to simplify international money transfers. 

Turkey’s Aktif Bank has capitalised on Africa’s trade credit deficiencies. Muzaffer Utku, executive vice president for international banking at Aktif, explained that some years ago, the bank noticed the country’s exporters struggled to secure trade finance for their transactions with African clients. Many Turkish banks couldn’t support trade because they didn’t have correspondent banking facilities in Africa. Spotting an opportunity, Utku and his team visited over 30 African countries and formed relationships with hundreds of banks. Aktif has since established itself as a major trade financier between Turkey and Africa. 

Aktif also recently began facilitating intra-African trade. “We have seen major challenges moving funds from one country to another country. There are huge delays and the costs are enormous for the companies,” Utku explained. To address this, Aktif launched an intra-African payments platform, on which 200 banks are currently registered.

Some Singaporean organisations, too, have identified the prospect to increase trade credit to Africa. Singapore-headquartered trade technology company GUUD has introduced transaction-based trade finance; credit is extended using the cargo as collateral as opposed to making creditworthiness decisions based on a business’ balance sheet and cash flows. It aims to roll out this solution in Africa. “We have been operating on this model of trade finance for the past two-and-a-half years – financing products like coffee, palm oil, seafood and milk powder – and it has proven successful. We can bring this to Africa. For instance, we are currently talking to partners regarding importing building materials into Mozambique using this trade financing concept,” CEO Desmond Tay told the NTU-SBF Centre for African Studies in an interview earlier in 2022.

The Monetary Authority of Singapore (MAS) is also spearheading an initiative to increase trade between Ghanaian SMEs and their counterparts in Singapore by enabling access to better financial tools and services. In early November, MAS signed a memorandum of understanding with Ghana’s central bank and development finance institution DBG to develop the Ghana Integrated Financial Ecosystem (GIFE), which aims to stimulate mutual trade.

 

References

‘GUUD facilitates trade in Africa’, NTU-SBF Centre for African Studies, 20 May 2022

‘Trade finance in West Africa’, IFC, October 2022

‘Introduction to correspondent banking’, Finance Unlocked, Accessed 09 December 2022

‘Monetary Authority of Singapore seeks to unlock trade with Ghanaian SME’, NTU-SBF Centre for African Studies, 21 November 2022