The volume of bank-intermediated trade finance in Africa is about $350bn and involves about ninety-three per cent of banks operating in the region. The figure is roughly equal to one-third of total African trade. These are the findings of a survey released by the African Development Bank (AfDB) early December.
Trade finance is an essential component of international trade and helps firms to manage risks inherent in international transactions, improve their liquidity and enable them to optimally invest to enhance their growth.
It is for this reason that, in 2013, the AfDB approved a $1bn trade finance (TF) programme to support African trade and provide financing to underserved African-based financial institutions and enterprises. Despite its importance, a great deal is not known about the trade finance market in Africa. This includes the size of the market, the variations across sub-regions, the scale of financing gap, the trade finance devoted to intra-African trade, the relative importance of on-balance sheet versus off-balance sheet financing, and constraints faced by banks.
To fill the information gap, the AfDB undertook a on a unique survey of the trade finance activities performed by commercial banks in Africa in 2011 and 2012. The survey questionnaire, which was sent to about 900 banks on the continent, received a high response rate, resulting in a dataset that covers 276 banks across 45 countries. All the sub-regions on the continent are represented in the survey.
The survey found that the market is not uniformly distributed across sub-regions as the average trade finance assets per bank in northern Africa dwarfs those of the other sub-regions. The share of bank-intermediated trade finance that is devoted to intra-African trade is limited, and comprises about $68bn (18 percent) of the total trade finance assets of African banks.
‘It should be noted, however, that the share of intra-African trade accounts for $110bn (11 percent) of the value of total African trade. Given the estimated rejection rates of trade finance applications reported in the survey, the conservative estimate for the value of unmet demand for bank-intermediated trade finance is $110 billion to $120 billion, significantly higher than estimated earlier figures of about US $25 billion. These figures suggest that the market is significantly underserved,’ the report said.
The survey revealed the numerous constraints African banks face in meeting the demand for trade finance. ‘The main constraints are limited US dollar availability (by far the dominant currency in international trade, and by extension, trade finance) and insufficient limits with confirming banks for confirming letters of credit,’ it said. Other constraints include small balance sheets, which tends to make single obligor limits frequently binding. These constraints also suggest that the AfDB’s trade finance programme, as well as those implemented by other international financial institutions, are needed and well suited to relaxing some of the most binding constraints,’ the survey added.
The outlook of banks for trade finance remains positive, with 72 percent expecting to increase their trade finance activities in the immediate future. However, banks foresee obstacles to their trade finance portfolio growth such as low US dollar liquidity, regulation compliance, slow economic growth in some markets, and the inability to assess the credit-worthiness of potential borrowers.