Trade finance executives across Africa are urging multilateral development banks (MDBs) to “intervene decisively” and boost credit support to banks on the continent as a potential insolvency crisis looms.

In a new report – compiled by several African-focused MDBs and trade development institutions, featuring findings from conversations with 70 trade finance heads in Africa – banks say there needs to be an “urgent” switch in focus towards the private sector and MDB programmes that help smaller businesses.

Since the onset of the pandemic in the early months of the year, the MDBs and development institutions who authored the report have between them announced billions in financial support to prop up the continent’s trade.

The African Development Bank (AfDB), for instance, approved a US$10bn Covid-19 response facility in April, while also agreeing to provide up to US$1bn in trade finance liquidity and risk mitigation support to local banks in all member countries.

The other contributing organisations include the Arab Bank for Economic Development in Africa (BADEA), the West African Development Bank (BOAD), the East African Development Bank (EADB), the International Chamber of Commerce (ICC), the International Trade Center (ITC), the International Islamic Trade Finance Corporation (ITFC), and the Trade and Development Bank (TDB).

But in spite of measures introduced by multilaterals and trade development institutions, trade finance bankers are keen for MDBs to do more and boost support to the private sector, so as to avoid a “second wave insolvency crisis”.

The paper notes that none of the small to medium-sized banks interviewed for the report were aware of available MDB funding or risk-sharing programmes. “This could reflect the fact that, while MDB support to the private sector was not absent, support to governments has been more prominent,” the authors add.

At the same time, some banks raised concerns that the current support on offer from MDBs doesn’t go far enough, and that a “huge share” of enterprises continue to be excluded from access to trade finance due to Covid-19.

Banks interviewed for the report also highlight that there are constraints on their ability to extend credit outside of their well-known or larger clients due to macro-prudential constraints, for instance, and call for MDBs to take on a greater percentage of risk loading.

Outlining the reasons for banks’ concerns, the report reads: “50/50% arrangements are judged insufficient at this time to overcome macro-prudential reporting limits for SME lending or for convincing confirming banks.”

Such risk-loading could take the form of guarantees or low-rate risk participation agreements (RPAs), the report says, adding that “a diligent and decisive ‘risk-reduction nudge’ from MDBs specifically dedicated to Covid-19 recovery would be timely”.

It adds: “Such facilities offered to banks [could] allow them to safely expand trade credit and ease access to confirmation counterparties whilst conforming to reporting needs.”

Carl Chirwa, head of international banking at Mauritius-based Bank One, tells GTR that an expansion in risk participation or guarantee schemes would be a boon to banks operating on the continent.

He says there are around 40 African countries where banks like Bank One require DFI risk mitigation solutions in order to be able to conduct trade finance business. He adds that Covid-19 has meant country risk and sovereign default risks have risen even further, making risk-sharing solutions a necessity.

GTR reported last week that the risk of sovereign default is growing across Africa because of higher debt levels and currency risk. Meanwhile, reduced demand and lower commodity prices have pushed some African countries, particularly those reliant on the export of oil and metals, into deep recessions.

“I would love to do more, but I can’t do that myself, and I’m not prepared to go in and take all the risk,” says Chirwa. “But DFIs can help because they mostly have professional accredited status in these countries, which we as banks can really leverage to be able to provide solutions.”

The report offers up a number of suggestions to MDBs to help facilitate access to trade finance in the short term. These include adapting MDB funding to reach micro, small and medium enterprises (MSMEs), which have historically been locked out of the trade credit markets due to the weakness of their collateral, bankability or poorly designed applications.

It notes that prior to the outbreak of Covid-19, various MDB initiatives – such as those related to women empowerment and investment funds – had been working to help such businesses, until the pandemic caused long-term risk premiums to rise.

As such, it calls on MDBs to scale down their offering towards smaller financial institutions (FIs) that deal with exporting and importing MSMEs.

Other suggestions for helping the private sector with access to trade finance include accelerated due diligence, as well as campaigns to raise awareness of available MDB support for SMEs.

A report released by AfDB and the African Export-Import Bank (Afreximbank) in September revealed that smaller businesses in Africa are facing increasing hurdles when it comes to trade finance.

According to that particular study, rejection rates for trade finance applications for SMEs in Africa are rising, and bank participation in activities is decreasing. It claimed that the continent’s trade finance gap, estimated to be more than US$81bn, is also growing.