Oliver Wright of credit and political risk insurance (CPRI) broker BPL Global explores the role of the specialist insurance market in addressing the continent’s widening trade finance capital shortfall.


Africa’s trade finance gap is staggering. The African Development Bank estimates an annual shortfall of around US$81bn, which is conservative. In fact, some analyst forecasts exceed US$100bn, and by all accounts, it appears to be widening. According to the World Trade Organization, only 40% of trade in Africa is supported by trade finance. This is significantly below the global average of between 60-80%.

Africa’s trade finance gap owes itself to a heightened risk perception, a view taken by many of the world’s major financial institutions, multinationals and investors. Prior to recent high interest rates and a fluctuating inflationary environment, there was a lot of liquidity available. Africa, which had development goals to meet, offered investors good returns as margins were much higher. Despite its heightened risk profile, however, banks, in particular, have continued to up their exposure in the region and consequently have increasingly relied on the support of the specialist CPRI market.

The potential returns in Africa remain attractive, but the continent’s risk perception has degraded even further in light of broader macroeconomic volatility and geopolitical instability. One notable example is the sovereign defaults in Zambia and Ghana, and the subsequent debt restructuring. More and more, CPRI is being utilised to mitigate that risk, improve the region’s perceived risk profile and shrink the trade finance gap.


The African Continental Free Trade Area

Efforts to narrow Africa’s trade finance gap and improve its risk perception hinge on the success of the African Continental Free Trade Area (AfCFTA). Implementing this ambitious project – the world’s largest free trade deal encompassing 54 of the 55 African Union (AU) member states – has been slow but steady, says specialist intelligence advisory firm Pangea-Risk.

Beginning in September 2022, the implementation of AfCFTA started with the export of coffee products from Rwanda to Ghana, followed by a shipment of batteries from Kenya to Ghana.

So far, eight signatory countries have met the minimum trade requirements under the agreement: Rwanda, Cameroon, Egypt, Ghana, Kenya, Mauritius, Tanzania and Tunisia. Meanwhile, Africa’s largest economy Nigeria is currently training its exporters on how to implement AfCFTA’s requirements.

Since the agreement was ratified, there has been much focus on continent-wide integration. However, this remains unrealistic in Africa’s current context. Instead, regionalisation is much more practical. According to Pangea-Risk, Africa’s regional economic communities are already more integrated on a trade, regulatory, economic and financial basis. Therefore, if barriers to trade are removed first at the regional level, then implementation of a continent-wide trade deal should eventually follow.

Such an agreement could boost intra-African trade by around 33%, based on UN Conference of Trade and Development estimates. This would also cut the continent’s trade deficit by as much as 51%. Bridging this gap through AfCFTA could boost the income of African countries by 7% (or US$450bn) by 2035, according to a recent report by the World Bank, thus lifting an additional 40 million people out of extreme poverty.


The role of the CPRI market

The CPRI market can be an effective facilitator for the successful implementation of an intra-continental trade agreement by addressing specific challenges contributing to Africa’s trade finance shortfall. By providing risk mitigation solutions and promoting financial stability on a regional level, the specialist insurance market can help to foster the right conditions for intra-African trade, investment and, ultimately, continent-wide prosperity. Indeed, the CPRI market continues to be very active in African markets, despite recent headwinds such as geopolitical shockwaves and the widely reported sovereign debt defaults.

At BPL Global, Africa remains our largest regional exposure, totalling more than US$10bn, and our book continues to grow in the face of these headwinds. We have seen how the CPRI market can address some of the continent’s existing trade finance restraints by providing coverage against non-payment risks.

This, in turn, encourages African financial institutions to extend more favourable finance options to the region’s traders, stimulating further involvement in line with AfCFTA.

Across Africa, there are stark variations in political stability and economic conditions. CPRI can help to mitigate this political and sovereign risk by protecting businesses against payment risk, government actions or regulatory changes that might adversely impact cross-border trade. This type of coverage is particularly important in a region like Africa, with its diverse political landscape.


De-risking and attracting foreign capital

AfCFTA also aims to involve new entrants into its regional trade ecosystem, including SMEs, which make up a significant proportion of the continent’s economy. These businesses are impacted most of all by limited finance options and having to navigate the complexities of cross-border trade. CPRI provides a safety net, allowing these smaller players to participate in intra-African trade.

CPRI also encourages more foreign direct investment (FDI) in the region, as investors and institutions seek opportunities from a budding African market. CPRI provides protection for these players against risks such as currency inconvertibility, expropriation and political violence – many of the factors that have historically contributed to the trade finance gap.

The success of AfCFTA is heavily reliant on efficient infrastructure, a well-documented shortfall in African trade. This can include transport networks, as well as ports and customs facilities. In recent years, this has also included sustainable or green infrastructure development and community-focused projects, including gas pipelines or water treatment facilities. This has not gone unnoticed by the CPRI market, which has increasingly turned its attention to these types of transactions. This has served to make investment – particularly foreign investment – in these essential projects less risky and more attractive. In recent years, the involvement of export credit agencies (ECAs), which provide state-backed guarantees to these transactions, has seen the development of a whole new market. Increasingly, specialist insurers are participating with ECAs to further de-risk transactions, which has proved particularly fruitful in both export and project finance.

It’s clear that CPRI has helped to stoke renewed interest in Africa, serving to complement the development goals of the AfCFTA. As intra-African trade continues to develop and expand, attracting further international investment, so too will the continent’s risk environment. That’s where the continued involvement of the specialist insurance market will be crucial to mitigate risks, improve appetite and perception, and ultimately facilitate further growth and development for Africa as a whole.