Absa CIB experts unpack the trade finance gap and how it is restricting growth on the African continent.
The African Continental Free Trade Area (AfCFTA) agreement, which took effect in January 2021, has created the largest free trade area in the world, bringing together 1.3 billion people across 55 countries, with a combined GDP valued at US$3.4 trillion (around R51 trillion).
This represents a big opportunity for commercial banks, developmental financial institutions, fintechs and other players to help close the trade finance gap in Africa, which is estimated to be up to $100 billion (R1.5 trillion).
What is the trade finance gap?
Absa Corporate and Investment Banking (CIB) head of FI trade sales (Africa) Oladapo Adeigbe revealed during a Finance Indaba Network webinar that the gap in trade finance lies within businesses’ ability to access financing in order to support trade finance activities. “The currency and language of international trade remains predominantly US dollars, and the ability of Africa markets to earn dollars is still very restrictive because of its dependency on commodity trade.”
He explained that Africa’s share of global trade currently sits at three percent, and one of the objectives of the AfCFTA is to increase this. “If Africa’s world trade increases by one percent, it could lead to a possible revenue increase of $70 billion [about R1 trillion]. This represents 300 percent of the aids and grants that currently come into Africa yearly.”
Oladapo added that, if this trade finance gap is breached, Africa would be able to feed itself.
He further explained that, because Africa’s economies depend on sales from commodities to facilitate other activities, if fluctuations occur in the markets in one country, it immediately impacts the GDP and inflation rates in other countries on the continent. “So increasing the trade activity across the continent is important for the stability of all the different economies it’s home to.”
A digital ecosystem
The webinar, which was sponsored by Absa CIB, revealed that CFOs need to consider how the current financial technology systems being rolled out globally help prepare for this, and how it will create opportunities for new revenue streams across the continent.
“Covid-19 has revealed the fragility in the way that trade finance functions,” said Karen Matsiko, head of working capital product management at Absa CIB. “It has become apparent that digitisation is imperative in keeping the engine of business running, which, in this case, is trade finance.”
Karen explained that, like the often spoken about blockchain revolution, there are various forms of digitisation that are part of the trade finance ecosystem, including:
- KYC automation – which reduces friction related to onboarding clients by creating centralised databases and credit assessments using AI and algorithms. The less time it takes to onboard clients, while mitigating risk, the quicker trade occurs.
- Electronic bills of lading – which reduces paper documents passing through multiple hands, reduces costs, and removes the unnecessary red tape.
Karen explained that Africa has come a long way in terms of technology. “Ten years ago, we used to go into first world countries to source technologies. Now, we have hubs in Kenya, Ghana, Nigeria, South Africa and other countries where people are developing systems that work for the African market.”
For example, the Pan-African Payment and Settlement System was launched by AfreximBank this year, which uses digital technology to improve access to trade information, and facilitates the use of African National currencies via intra-African trade settlements. “African countries will not need to convert to US dollars to be able to trade cross-border amongst themselves, which expedites the speed at which trade can happen,” she said.
Karen added that there are also talks of digital passports, which will make cross-border travel a lot easier and quicker. “Digitisation is no longer an option in the trade space. If businesses don’t have a digital lens or strategy, then it cannot survive in the medium to long term,” she concluded.
Trade finance benefits
According to Absa CIB head of FI trade sales, risk distribution and trade syndications Mosa Tshabalala, the AfCFTA creates a single market which accounts for $3.4 trillion (about R51 trillion) GDP. “The biggest beneficiary of this is the SME sector, which accounts for 80 percent of the businesses across the continent, and employs 70 percent of the labour force.”
He added that the agreement will also allow businesses to trade faster and cheaper, opening up new markets across Africa.
Oladapo explained that there are opportunities everywhere in Africa, including in the infrastructure, power, manufacturing, diversified FX market industries, and more. “Absa has deliberately set up our footprint to coincide with major trade routes within the country. Because of this, we have a deep understanding of the African experience, regulatory environment and opportunities. We also have an international footprint, which helps us hack into global opportunities as well.”
He concluded that, by partnering with developmental financial institutions, fintechs and other players, Absa is able to provide trade finance assistance to the African continent.
You can rewatch the full webinar here.