Absa CIB’s Kuben Pillay, head of trade and working capital corporate sales, pan-Africa, and Oladapo Adeigbe, head of financial institution trade sales, Africa, explore why the trade finance gap remains a hurdle to Africa’s economic progress.

 

The trade finance gap in Africa has long held back the continent’s economic potential, posing a persistent hurdle for businesses engaging in both domestic and international trade. The African Development Bank estimates that the shortfall between the demand and supply for trade finance has grown to approximately US$120bn, exacerbated by global de-risking practices, where banks are being pushed to scale back involvement – leaving a vacuum that local financial institutions struggle to fill.

This shortfall is particularly damaging for small and medium-sized enterprises (SMEs), the backbone of many African economies, who often lack access to the financial services needed to engage in trade. This gap is often even wider for youth and women-owned businesses, which face additional barriers to funding.

Adding to this challenge is Africa’s infrastructure. The continent continues to have significant needs – particularly road and rail networks, water, power and telecoms – inhibiting commerce and development. And while the requirement is clear, financing remains a barrier.

Trade financing is the silver bullet that will enable Africa to stimulate cross-border trade, increase production, create jobs, enhance food security and strengthen economic resilience. However, it is critical to lay the groundwork to support Africa’s economic development. There is no ‘one-size-fits-all’ approach to boost the continent’s output – global stakeholders must consider a multi-layered approach to reduce the trade finance gap and facilitate investments for African markets.

 

The industries craving capital

By providing the necessary liquidity and risk mitigation, trade finance enables businesses to expand operations, break into new markets and engage in international trade. Africa is rich in sectors that present significant opportunities for trade finance. With increased access to capital, businesses operating in these sectors could invest in people, technology and infrastructure, helping to move the needle in accelerating productivity and output.

For instance, agriculture is the continent’s largest employer, with more than 52% of employed people in Sub-Saharan Africa active in this sector. The industry is a critical source of food security, yet requires heavy investment in modern farming technologies and infrastructure to increase production, keep up with the growing population and tap into international markets. This creates a significant opportunity to finance the regional and international trade flow of agricultural commodities, as well as support the development and expansion of food processing facilities.

Absa is the largest agricultural funder in South Africa, creating bespoke funding solutions for agricultural partners, tailored to individual projects and needs. Key investments in sectors such as grain, coffee and cocoa strengthen the entire agri-food value chain – not just benefiting agricultural businesses themselves, but also contributing to broader development by creating jobs and improving livelihoods.

Another sector holding a lot of promise for trade finance is the mining industry. Africa’s bountiful mineral resources make the metal and mining sector a critical component of its economy, and trade finance is essential for supporting export activities in this sector.

As countries around the world increasingly focus on green technologies and renewable energy, the demand for minerals like copper, which is essential for electrical wiring and electronics, is expected to rise. Electric car sales, for example, have boomed in the last five years – rising from 2% of all cars sold in 2018, to 18% in 2023 – showing a growing opportunity for trade finance to support the expansion of Africa’s mining exports.

As Africa continues to push towards expanding its industrial base, sectors such as textiles and food processing are emerging as key growth areas. In manufacturing, trade finance can provide the necessary funds for businesses to invest in machinery, raw materials and human capital, helping to reduce reliance on raw material exports. Trade finance empowers African manufacturers to expand operations and contribute to the continent’s broader industrialisation goals.

 

Bridging the funding gap with DFIs

Addressing the trade finance gap requires a multi-faceted approach, with many different types of organisations rallying around a shared goal of elevating Africa’s economy on the world stage.

Partnerships with development finance institutions (DFIs) and fintechs are indispensable, especially in Africa where access to capital, payment inefficiencies, currency divergence and risk management are ongoing challenges.

These partnerships are not only about accessing capital but also leveraging the unique strengths that each partner brings to the table. For instance, development lender British International Investment agreed a US$100mn trade finance deal with Africa earlier this year. The finance will be used to fund trade, farming and food security on the continent, particularly for regions affected by climate change and inflation.

DFIs play a crucial role in taking on risks which commercial banks view reluctantly. As their funding comes from government sources, DFIs are often less commercially minded, so can provide guarantees and liquidity support that mitigates risks for private financial institutions. This allows commercial banks to extend financing to sectors and regions that might otherwise be considered too risky, enhancing overall market participation.

 

Strengthening inclusion with fintech partnerships

Although fintech companies have a different set of strengths, they play an equally vital role in closing the trade finance gap. Fintechs can reach new customers more easily, providing innovative solutions that enhance access to finance, particularly for underserved groups which have traditionally struggled to secure financing.

For example, Absa Bank Kenya spearheaded a deal with a digital financing platform to improve access to finance for women-owned and led SMEs, offering new sources of capital to scale operations. By ring-fencing funds towards sustainable business investments, financial institutions can drive local and global access to markets. Alongside financial support, Absa Bank Kenya’s programme also provides SMEs with mentor matchmaking, networking activities and sustainability training to help them grow sustainably. This initiative showcases how fintechs can provide the tools that help larger, more established financial institutions fund SMEs with a more nuanced understanding of risk.

 

Big-picture thinking

It is also important to consider big-picture initiatives to close the trade financing gap in Africa. By creating a single market for goods and services, the African Continental Free Trade Area (AfCFTA) is expected to boost intra-African trade by more than 50% by 2025, helping to dramatically increase Africa’s income and build a more favourable environment for trade finance. However, realising this potential requires addressing the trade finance gap that currently limits many African businesses’ ability to participate in cross-border trade.

Digital solutions are an important enabler.

Digital trade platforms can facilitate the seamless exchange of goods and services across borders, while digital financial services can provide businesses with the liquidity they need to engage in trade. Blockchain technology also offers promising solutions for trade finance. By providing a secure and transparent record of transactions, blockchain can reduce the risk of fraud and enhance trust between trading partners. This can streamline how businesses participate in cross-border trade under the AfCFTA framework.

There is no simple, universal approach to bridging the trade finance gap; there are many moving parts. However, with layers of complexity come layers of opportunity.

By tapping into the unique advantages of DFIs, fintechs and digital solutions, Africa can unlock its full economic potential and provide a much-needed boost to the core sectors driving its economy. With the right strategies and investments, Africa can look forward to a blossoming future with greater productivity, food security, and new levels of economic resilience.