Africa: Expanding access to trade finance is necessary for SMEs

Mukudzei Borerwe
By Mukudzei Borerwe

Manages Asoko Insight's Digital Engagement Platform, Africa’s premier service connecting companies across the continent with growth-enabling stakeholders. Learn more at www.asokoinsight.com.

Posted on Monday, 29 November 2021 16:55

Spotlight: Ivory Coast: Women at work
Fofanan Man, a 59-year-old businesswoman, poses for a photograph in front of textiles in her shop in Bouake, Ivory Coast, February 10, 2016. REUTERS/Thierry Gouegnon

When it comes to enhancing access to trade finance for African small and medium-sized enterprises (SMEs), current challenges call for innovative solutions.

The African continent represents a market of approximately 1.2 billion people – most of whom are under the age of 30 – and a collective GDP of $2.5trn, but currently accounts for a small portion of global trade (2%). Intra-Africa trade is also low, about 18% of the total for the continent, representing a missed opportunity for African businesses.

The majority of trade participants in Africa are SMEs. In 2020 alone, sub-Saharan Africa was home to 44 million micro, small, and medium enterprises, which provide an estimated 80% of jobs across the continent.

Due to their smaller size and sometimes less formal procedures – including lack of digitization, audits, and credit history – these firms often struggle to secure the financing they need to scale trade operations effectively, holding back both their own development and that of the economy overall.

In light of this, trade volumes are concentrated in the hands of a small number of multinational trading companies, a missed opportunity to broaden the base of economic growth and develop intra-African supply chains.

Trade finance supply and demand

Securing trade finance is essential for SMEs to conduct business, expand markets, and export their products. Trade finance plays a particularly crucial role for SMEs to protect against the unique risks inherent in international trade (such as currency fluctuations, issues of non-payment or creditworthiness, or even political instability).

Prior to Covid-19, the trade finance gap in Africa already stood at $82bn, and has only increased over the past year and a half. The pandemic-induced economic downturn and capital flight significantly strained African banks and financial institutions, further reducing the amount of trade finance available to SMEs, despite a notable increase in demand for trade finance in 2020.

New opportunities for African SMEs

Despite these challenges, the opportunity space for African SMEs is growing on the back of global and regional factors, making it all the more crucial to bridge the financing gap.

The ratification and launch of the Africa Continental Free Trade Agreement (AfCFTA) offers the potential to see a step change in trade opportunities for African SMEs. The single market for goods and services created by the AfCFTA makes Africa the largest trade bloc since the formation of the World Trade Organization (WTO).

Originally predicted to increase intra-African trade by 52.3% over the next two years, the AfCFTA holds immense promise for increasing trade opportunities across the continent. Even with delays caused by the Covid-19 pandemic, it retains its potential for making the AU’s Agenda 2063 a reality.

Disruptions to global supply chains during the pandemic have also opened up new opportunities for African traders to serve markets once out of reach. Import substitution in domestic or regional markets and the increased use of e-commerce are just two of many examples.

Asoko’s research and engagement with African corporates in the early days of the pandemic found numerous examples of companies stepping in to fill gaps across a range of consumer items, in particular essential goods for public health.

This swift response from across the continent highlighted the resilience of Africa’s private sector, following a longstanding tradition of distributors shifting into manufacturing to cement their market position and build Africa’s industrial base. Examples include Emzor Pharmaceuticals and Doyin Group in Nigeria, Ghana’s Reroy Group, Tanzania’s MeTL Group and Madhvani Group Of Companies in Uganda, to name a few.

The growth of the African common market through the AfCFTA and the convergence of these opportunities posed by the Covid-19 pandemic creates a critical moment for enhancing African SMEs’ access to trade finance. Without trade finance, it will be difficult for these businesses to scale and meaningfully contribute to Africa’s economic recovery.

Innovative solutions

The good news is the tools exist to reverse the current gap in trade financing African SMEs. Alternative financiers are increasingly stepping in to supplement declining participation by commercial banks by offering transaction-driven loans for smaller traders.

By deploying complementary structures that work alongside a company’s existing banking relationships, such provision enhances the ability of traders to scale by scaling access to capital.

Development finance players like Afreximbank and TDB, are increasingly being joined by private players such as AMC Trade Finance and Coronation Merchant Bank. These firms provide innovative financing solutions that are transaction-driven and self-liquidating via the sale of goods enables providers to take a different, more accurate view of risk, substantially increasing the availability of trade financing to African firms most at risk of being excluded from traditional facilities.

“The value we offer traders is the opportunity to finance transactions on a parallel track to the working capital financing arrangements they have with their bank. Facilitating trade in this way  means they can grow their business more quickly, which in turn should increase their access to commercial credit to meet other needs by improving the company’s overall financial position,” Cobus Visagie, CEO of AMC, told Asoko Insight.

Another route to enhance trade finance is innovative access solutions, such as digitising connections between fund-seekers and capital providers. Leveraging available technologies reduces both the time required to initiate and complete transactions, and can help overcome the physical limitations that the pandemic imposes on travel.

Digitally connecting African businesses and trade financiers also allows for a higher degree of focused engagements, cutting through the noise to speed the transaction process for companies that meet pre-set financing criteria.

The time is now

The trade finance gap in Africa cannot be reversed overnight, but using innovative solutions to enhance SMEs’ access to trade finance will allow businesses to grow and lead the future of economic recovery across the continent.

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