• Africa’s trade finance gap was recovering, but the COVID-19 pandemic exacerbated the situation once again.
• The continent is typically risky for investors and banks, largely the result of geopolitics and extreme weather.
• African banks like Absa are looking at how to improve trade finance access.

Africa’s population has swelled to account for around 17% of the world’s population. Over the same period, according to figures from the African Development Bank (AfDB), Africa’s share of global trade has decreased from 4.4% to just 3%. This paradox, in part, is the result of a lack of access to and awareness of trade finance solutions from banks on the continent.

As a result, the African banking sector is seeing a push towards digitalising trade finance. This is driven by the need to reduce the high costs of accessing trade finance and simplify access for companies of all sizes. Many different players in the ecosystem are trying to make things quicker, more efficient, and cheaper for banks and businesses—a need made particularly urgent because of some significant external setbacks to trade finance capabilities in recent years.

Banks play a crucial role in driving the digital transformation of trade by providing financial services, risk management and technology solutions to enhance the efficiency and reliability of digital trade processes. This includes digital payments and transactions, where banks facilitate secure digital payments and enable businesses to engage in online trade seamlessly. 

The wider picture of African trade finance

It may be surprising that Africa’s trade finance gap was actually sinking before the COVID-19 Pandemic. The gap in the continent shrank from $120 billion in 2011 to just under $82 billion in 2019—only to bounce back significantly as a result of COVID disruptions to trade and trade finance activities in banks. As of 2020, only 40% of African trade is bank-intermediated, half of the global average of 80%.

This problem harms small- and medium-sized enterprises (SMEs) adversely, for a large part because of an informational disjunct. Considering that SMEs are among the most significant contributors to African economies, this disjunct needs to be righted urgently.

In addition, the geopolitical landscape across the continent has made Africa increasingly risky for investors and banks. Boundary conflicts, civil wars, coups, and protests – most notably in Sudan – have led to conservative economic forecasts. Risk aversion has been capitulated by natural disasters and extreme weather: insufficient investment has rendered many regions increasingly susceptible to their consequences. As a result, increasing access to trade finance is a critical focus area for many large African banks including Absa, because it has the potential to unlock significant economic activity at relatively low risk. With banks derisking more, access to African correspondent banking facilities is more limited; this has pushed Absa to pursue contemporary creative solutions on the digital frontier.

The digital solution

Enhancing digital capability and partnering with development finance institutions (DFIs) and fintechs can increase the level of financing and liquidity available. Absa has been using a combination of technologies to this end, helping to realise its ambition around digital trade. 

A mix of advanced technologies and innovative solutions is important for transforming trade processes into seamless, transparent and efficient digital systems. Their approach to digitalisation is multi-faceted: a combination of technologies has been implemented to digitise trade finance, driving growth and efficiencies through optical character recognition (OCR), blockchain, and artificial intelligence (AI) capabilities. This is supplemented by collaboration with selected fintechs, who provide access to new markets or products. 

OCR automates document processing for letters of credit (LCs) and associated documents, such as bills of lading and invoices. Reduces manual effort speeds up processing time and minimises errors associated with manual data entry and document handling. Automated document verification and data extraction, by accurately capturing and verifying data, also reduce the likelihood of errors that can lead to disputes or delays. Additionally, the technology allows for enhanced risk management by automating compliance checks and data validation, identifying potential risks and issues early in the process enhances risk management.

Absa has deployed this technology across multiple markets, thereby reducing the time it takes to check export LC documentation by more than half and identifying duplicate invoices for trade loans. They are also in the process of automating trade-based money laundering checks through a combination of OCR and AI. 

As a result of digitalisation, the quality and quantity of information has increased significantly in recent years, greatly improving Absa’s ability to gather and analyse trade data to benefit our clients. Big data management enables advanced analytics and enhanced risk management while automating processes for scalability and flexibility and providing better reporting. 

Absa uses this data to improve risk management and business decision-making, including by proactively identifying early indicators of financial distress through the use of predictive models. They leverage various data sources to assess trade flows and corridors, particularly considering the shifts driven by the current geopolitical landscape: for instance, between Africa and China as a result of Belt and Road Initiative investment. Absa’s recent establishment of a new non-banking subsidiary in Beijing stands as a testament to Africa’s increasingly global financial footprint. 

Furthermore, data analysis assists with identifying potentially fraudulent activities, such as duplicate invoice discounting, thereby enabling us to mitigate associated risks. The United Nations Office on Drugs and Crime (UNODC) estimate that trade-based money laundering (TBML) costs the global economy up to $2 trillion per year, or 5% of global GDP.  

Due to the incidence of high-risk goods in Africa, the continent has long suffered from illicit financial flows. For instance, in 2016, a wildlife trafficking syndicate in Kenya used a front tea trading company to smuggle 6.8 tonnes of ivory to East Asia, concealing the illegal shipments and financial flows by manipulating legitimate tea exports and changing destination details en route. Financial investigations and analysis of import/export data revealed the complex operation involving multiple front companies, highlighting the use of high-risk commodities and suspicious trade patterns as indicators of TBML. Enhanced data analysis capabilities from Absa and similar banks are crucial in stamping out financial crime, with knock-on reductions in the crime itself.

—

As new trade corridors emerge in Africa and around the world, trade data is enabling the careful monitoring and identification of trends and opportunities. A variety of data sources provide insight into global trade flows and offer valuable information about how these flows and corridors are changing over time. Data is essential for identifying new trade routes by giving banks insights into shifting import and export flows. 

Those data sources are used to help the bank comprehend the different flows and opportunities related to global and African trade – and they include sources that offer a view of volumes and values of specific types of product flows, including LCs, guarantees, and collections. They have provided Absa with insight into how the use of these instruments is changing and which markets have the highest volumes and values. Absa has also used a supply chain intelligence platform that provides them with insights into global trade from both an opportunity and a risk perspective. As Absa’s pioneering work demonstrates, the digitalisation of trade finance is transforming the African trade landscape, making it more accessible, efficient, and secure. 

The post How Absa is deploying digital solutions to change African trade finance appeared first on Trade Finance Global.

International Women’s Day on 8 March, 2024 is rapidly approaching, and Trade Finance Global is preparing to host our own Women in Trade, Treasury & Payments campaign. While TFG’s campaign is designed to highlight the work that all women are doing in the TTP industry, we think it’s important to hear from some of the leaders of the industry.

Personal stories and journeys are an important part of pushing the industry in the right direction. With this in mind, Trade Finance Global’s Brian Canup (BC) spoke with Michelle Knowles (MK), Head of Trade and Working Capital Products at Absa.

1. BC: Looking at your career journey, how do you feel like you were inspired and/or included by others in your industry? 

MK: As I contemplate my career journey, I realise how fortunate I have been to have the support and influence of several role models. Each one of them played a role in my journey, some formally and others informally. 

As a self-motivated individual, I thrive on new and diverse experiences. Fortunately, I found a career that I find engaging, particularly the complexity and diversity that comes with international trade. Being part of an ever-changing environment and a global community is very fulfilling for me. 

My purpose in life is to make a difference, and my career aligns with this purpose given the vital role that trade plays in economic growth and development. Working in an emerging market, where issues like unemployment are constantly in focus, I find it meaningful to be part of developing and delivering solutions that facilitate and enable growth. I am equally highly motivated by new challenges, and I enjoy meeting and engaging with new people and cultures, as well as being motivated by new opportunities.

I also believe in providing support to emerging leaders and driving change within the organisation. I am always curious and enjoy taking on new challenges. Early in my career, I got involved in industry initiatives that took me out of my comfort zone, allowing me to grow and influence. 

This exposed me to people from different countries, including some industry giants, from whom I learned a lot. Although many of them have retired or moved on to different industries, I am still in contact with many. This process opened other opportunities that further expanded my horisons, including being appointed to some industry positions.

I am grateful to the many leaders who have influenced and supported me throughout my journey. They encouraged me to take on new opportunities, pushed me out of my comfort zone constantly, and guided me. Although my journey has not been straightforward, the challenges I faced have made me the person I am today, and each part of my journey has taught me new skills. This has given me agility and resilience, and I look forward to the next part of my journey.

2. BC: How is Absa actively inspiring inclusion for others? 

MK: Creating a diverse and inclusive workplace is crucial for a company’s longevity, not just in terms of attracting talent, but also for business efficiency, success, and profitability. However, achieving a diverse and inclusive organisation can be challenging, and some initiatives aimed at promoting diversity can end up excluding certain individuals, causing negative reactions and fear. Therefore, everyone should be a part of the journey.

Absa, like most companies, has been focusing on creating an inclusive and diverse environment over the past few years. Several initiatives are underway, and many people are stepping up to support them. The organisation has specific working groups across the group that aim to create a diverse and inclusive environment and ensure that the voices of all colleagues are heard.

As a leader, I have been involved in many initiatives over the past few years, especially as I have progressed in my career.

I mentor several young leaders across different countries, providing a sounding board for them and sharing my journey and how I approach certain decisions and stages in my career. I have learned a lot from those I mentor, and I encourage all leaders to get involved in mentoring programs both within and beyond their organisations.

I have also been actively involved in forums within the organisation, such as the Corporate and Investment Bank Banking on Women initiative, where we focus on topics such as the gender pay gap, representation, and building a network for women within the business. 

I was part of initiating the Corporate Transactional Banking Pan Africa women’s forum last year with the help of some amazing leaders in the business. Although this is a women’s forum, we are actively engaging men across the organisation to get their views and input into the process and ensure they feel part of the change we are looking to achieve. Allies are an important part of progress.

Considerable progress has been made around the gender pay gap, increasing representation, gender-based violence, and addressing the unconscious bias we all have. However, there is still a lot of work to be done, and we need more people to get involved.

3. BC: We all like to strive for inclusivity in our companies and industries, but what makes it so difficult to be truly inclusive? How do we account for the different obstacles and barriers that many individuals face? 

MK: The industry is making satisfactory progress but there is still a way to go to achieve diversity, particularly at senior levels. While women make up more than half of the workforce, they are typically concentrated in junior and middle management. 

Representation at executive levels remains low and many organisations are not doing enough to understand the data around the development and progression of female leadership. This means that many companies are still not creating environments conducive to developing and retaining strong female leaders.

Research indicates that without specific initiatives to address the disparity in organisations, the trend is unlikely to improve. Accelerating gender parity initiatives to ensure the banking industry can realise its optimum business benefits will require decisive action at an organisational level. Furthermore, strong commitment and ongoing sponsorship and support by executive leadership are imperative.

With diversity and inclusion growing in popularity, it is more important than ever to think about how recognition systems can be utilised to optimise the benefits that come from a diverse and inclusive workplace. More companies are focusing on diversity and inclusion when it comes to ethnicity, gender identity, sexual orientation, and other social factors to maximise success.

4. BC: As we approach IWD, is there a story that you would like to share with the industry about successes you have experienced during your journey?

MK: I believe that everyone’s journey is unique, and what has been encouraging during my own journey is the increasing diversity within the industry. Looking back 10 or 15 years ago, it looked quite different from what I see today. There is now greater representation of diverse individuals in senior roles, forums, conferences, and some excellent initiatives to support leaders on their journey and create the right levels of networks. 

However, we need to ensure that there is continued focus on this. Throughout my career, I have been lucky enough to be surrounded by both male and female leaders who have supported me. It is important to remember that we should not just rely on female leaders to address issues around diversity and inclusion. There are also many great male leaders who are actively making a difference and bring valuable perspectives and insights to the conversation.

5. BC: Was there a lesson you took away from your journey that you think will help others?

MK: Advancing in your career requires more than hard work and technical competency. To achieve career growth, you need to be bold, take control of your career moves, and demonstrate your ability by taking on new challenges. Do not hesitate to raise your hand for stretch projects or opportunities.

Even if things do not work out as planned, learn from your experiences, and move forward with a positive attitude. While taking risks is essential, it is also important to remain authentic and understand how the organisation works. Building networks and presenting yourself well, both in appearance and conduct, can help you climb the ladder of success.

It is natural to feel scared when taking on a new role or project. However, growth requires experiencing new situations, learning new skills, and making new contacts. To overcome self-limiting beliefs, you must first recognise and understand them.

By challenging and re-framing your beliefs, you can change your mindset positively. Overall, advancing in your career takes effort and a willingness to take risks. But with the right mindset and approach, you can achieve your goals and reach new heights.

If you’d like to learn more about our Women in Trade, Treasury & Payments 2024 campaign, follow this link!

The post Progression through effort and risk taking: Absa’s Michelle Knowles discusses being a woman in the workplace appeared first on Trade Finance Global.

Europe remains one of the most important continents for African trade, but recent years have seen a decline relative to other regions, with a notable uptick in flows from China and MEA regions.  

Prior to COVID-19, Africa’s trade finance gap was closing, decreasing from $120 billion in 2011 to around $81 billion in 2019. 

However, the macroeconomic disruptions and geopolitical uncertainties that followed have caused that gap to widen again. In the years following, Africa’s recorded cross-border trade has grown relatively modestly in recent decades and currently accounts for between 2-3% of global trade.

Trade agreements are key. The EU maintains open and transparent trade policies, albeit they can be somewhat fragmented. 

Post-Brexit, the UK has actively sought to negotiate or refresh trade agreements, resulting in several Economic Partnership Agreements with African nations. 

In early 2024 the UK will host the UK-African Investment Summit with the aim of strengthening UK-Africa ties further, another significant indicator of the optimism and opportunity surrounding the continent. 

International diplomacy and initiatives are a vital step forward in closing Africa’s trade finance gap, but there is further reason to be optimistic as we move towards a golden era of digitalisation in trade finance.

The transformative potential of digital trade solutions is vital to empowering businesses through technological innovation and collaboration. By automating and streamlining trade finance processes, digital tools can significantly reduce costs, foster inclusivity, and enhance the availability of financing for African businesses.

1. Collaboration is key

The pandemic has accelerated the adoption of digital trade finance, beginning a transformation of an industry that remains highly paper-based. These manual processes slow down access to finance and increase the cost and complexity which further exasperates the challenges faced by SMEs.

However, while innovative technologies are readily available, their efficacy relies on regulatory and legal reforms. This makes collaboration between policymakers, banks, financial institutions, and development finance institutions (DFIs) paramount. 

Initiatives such as the African Continental Free Trade Area (AfCFTA) provide a further avenue for collaboration and establishing standards tailored to African trade while remaining aligned with global standards. AfCFTA, underpinned by robust political momentum, offers a prime opportunity to dismantle barriers to trade, and digitalisation is the cornerstone. 

Efforts within the AfCFTA framework are continuously focusing on implementing policy advice, adjusting regulations, and setting up digital norms, creating a favourable environment for digital trade.

2. The ESG convergence 

In the post-pandemic, AfCFTA-enabled, hyper-digital world, trade technologies and environmental, social, and governance (ESG) principles are converging and are of particular importance to global investors. This is paving the way for impactful and sustainable transformation across economies and societies.

European consumers are increasingly socially and environmentally aware and prioritise seeking out products which have appropriate certifications. Whilst this could present a barrier for some exporters, it unlocks a significant opportunity for those able to comply.

There is an important need for digital supplier financing solutions which directly influence supply chains and align with sustainability principles. 

As a consequence, corporate buyers can accelerate the payment collection of trade receivables for their suppliers, offering instant liquidity. This approach not only bolsters the sustainability of suppliers’ financial well-being but also contributes to a more robust and resilient supply chain for corporate buyers.

3. Empowering SMEs

Digital trade technologies hold significant benefits from an ESG perspective, particularly through sustainable financing solutions. These solutions focus on aiding SMEs, including women and young entrepreneurs, who make up approximately 80% of Africa’s economic activities.

It’s vital that there is a drive towards empowering SMEs with more inclusive access to finance. In recent months The African Export-Import Bank (Afreximbank) has proposed the formation of public and private Export Trading Companies (ETCs) to bring together the continent’s SMEs so that they can compete effectively in international markets.

Additionally, the industry needs to focus on the development of digital solutions to help with day-to-day financing concerns, which take into account local needs and nuances. 

Further, to level the playing field, there must be an emphasis on creating solutions that reduce the cost of these instruments and the complexity which can create barriers to access.

A promising future for African trade

As Africa continues to promote itself as a centre of global trade, the synthesis of trade technologies, innovation, and ESG principles is vital for the continent’s future growth and prosperity.

Integration and adoption of digital platforms will require pulling a combination of levers to solve the challenges faced by SMEs. The easy win will be the development of innovative new technology, and there are already some notable examples of this.  

But without regulatory and legal reform and increasing the necessary support for foreign currency liquidity, they will gain limited traction.

Despite hurdles posed by global geopolitical shifts, inflation, and supply constraints, Africa’s steadfast commitment to economic growth through trade remains unwavering. The increasing drive towards digitalising trade finance emerges as a beacon of hope in the face of these challenges. 

The post Three keys to enhance African trade potential in the digital age   appeared first on Trade Finance Global.

The African trade landscape has navigated its own complex journey through market turbulence and volatility, with rising inflation and supply limitations posing hurdles. Despite this, the continent stands resilient, propelled by some of the world’s fastest-growing economies, with trade emerging as a crucial driver of economic growth and recovery. 

In Sub-Saharan Africa, this year’s growth projection of 3.6% – despite a global slowdown – underscores the resilience of the economies in that region. Africa’s aggregate cross-border trade, though modest in recent decades at 2-3% of global trade, is gradually evolving, with intra-regional trade now accounting for 17% of Africa’s exports. 

This determination to bolster economic ties does not stop at Africa’s shores. Europe remains a prominent trade partner, closely followed by China, and the Middle East and Africa (MEA) are witnessing increased flows, indicative of a broader uptick in bilateral trade activity. 

Despite the clear importance of trade, limited access to trade financing continues to loom large for small and medium-sized businesses across Africa, hindering their growth and potential. This complex issue is influenced by many factors, including the costs associated with trade finance instruments, perceptions of risk, data challenges, and regulatory hurdles. 

While the continent’s trade finance gap was narrowing pre-pandemic, shrinking from $120 billion to around $81 billion, subsequent geopolitical uncertainties in regions like Ukraine and Taiwan, coupled with broader macroeconomic dynamics, have since led to a widening of this gap. Spiralling input costs and supply chain bottlenecks further exacerbated the situation. 

In this context, the digitalisation of trade finance emerges as a beacon of hope, holding promises for banks and SMEs alike. By automating and streamlining trade finance processes, digital tools can significantly reduce costs, foster inclusivity, and enhance the availability of financing for African businesses.

Through all of this, we can see the transformative potential of digital trade solutions, which is helping Absa Bank’s concerted efforts to bridge this gap and empower businesses through technological innovation and collaboration. 

The journey to digital innovation

Headquartered in South Africa and fully operational in ten African markets, we are attuned to the critical nature of expanding access to trade finance by enhancing its digital capabilities. 

The transformational potential of technology in bridging the African trade finance gap is undeniable. Trade finance, as a convergence of physical, information, and financial flows, stands uniquely positioned to benefit from digital innovation. 

The COVID-19 lockdowns served as an initial catalyst for the adoption of digital trade finance solutions, disrupting traditional paper-driven processes that hindered swift access to finance. Over the course of the pandemic, Absa witnessed a substantial uptake in the adoption of our digital trade solutions across the continent. 

While innovative technologies are readily available, their efficacy hinges upon regulatory and legal reforms, making widespread collaboration among policymakers, banks, financial institutions, and development finance institutions (DFIs) paramount – something that Absa is actively involved with. 

Initiatives like the African Continental Free Trade Area (AfCFTA) provide a further avenue for collaboration and establishing standards tailored to African trade while remaining aligned with global standards. AfCFTA, underpinned by robust political momentum, offers a prime opportunity to dismantle barriers to regional trade, with digitalisation as a cornerstone.

Ongoing efforts within the AfCFTA framework actively address policy recommendations, regulatory adjustments, and the establishment of digital standards, fostering an environment conducive to digital trade. 

Combining global and local lenses 

When exploring the realm of tradetech, it becomes evident that a dual perspective – both global and local – is essential to fostering comprehensive and impactful growth. 

Integrating a global lens ensures the improvement of regional value chains and bolsters seamless integration into the broader global value chains. This approach acknowledges the interconnectedness of economies and the benefits of collaboration across borders. 

However, it is equally imperative to adopt a local lens, recognising the nuanced intricacies of emerging markets that demand tailor-made solutions and a deep understanding of local dynamics. 

Notably, East Africa has exhibited robust momentum in trade digitisation, intertwining payment capabilities and unveiling digital platforms that empower small businesses to expand their trade horizons. 

The triumph of initiatives like M-PESA in mobile money underscores the potency of localised approaches. Initiatives like the Africa Trade Gateway, pioneered by Afreximbank, further exemplify the commitment to driving digital transformation. 

Africa’s innovation landscape in trade digitisation is vibrant, yet success hinges on fostering a collaborative environment for effective economic transformation. 

When it comes to trade digitalisation, collaboration is key

Absa’s approach to digitalising trade is rooted in a multi-faceted strategy, reflecting our commitment to innovation and seamless integration across the complex landscape of platforms, standards, and players. 

Central to our strategy is a client portal built on open-source architecture. This portal empowers the bank to seamlessly integrate with various ecosystems through application programming interfaces (APIs), ensuring it can connect with strategic partners and systems efficiently. 

Moreover, Absa is harnessing the power of big data and artificial intelligence (AI) to optimise key processes. By leveraging these technologies, we are not only staying ahead of increasing regulatory demands but also automating checklist processes, leading to lower overall client costs. 

Our partnership with Traydstream, a pioneering AI platform in the trade space, is a great example of our innovation journey. This collaboration has enabled Absa to automate crucial steps within the trade lifecycle, transforming labour-intensive document-checking processes into streamlined digital workflows. 

The solution went live in December 2022 and is anticipated to deliver substantial benefits. With estimated wait times of 2-5 days reduced to 10-15 minutes per stage, enhanced accuracy, and improved client experiences, the resulting cost reduction is projected at an impressive 60-70%. 

Moreover, our commitment to creating connected and trusted ecosystems is embodied by our status as the first African bank to join the Contour Network. This decentralised technology platform unifies banks, corporations, and ecosystem partners, fostering the seamless flow of reliable data across global trade routes. 

As Absa navigates the intricate trade finance landscape, its comprehensive strategy underscores its dedication to driving digitisation, automation, and integration that ultimately empowers smoother, more efficient, cost-effective, and more sustainable trade processes.

Trade digitalisation is also great for ESG

Digital trade technologies also hold significant benefits from an environmental, social, and governance (ESG) perspective, aligning with Absa’s commitment to fostering a just and sustainable economy.

As a notable example, Absa’s sustainable financing solutions are geared towards supporting SMEs, including women and youth, who constitute a significant portion of the economy. 

This commitment is mirrored in Absa’s emphasis on addressing environmental and social imperatives, especially given the continent’s priority to alleviate poverty and drive economic growth in line with the United Nations Declaration on Financing for Development.

One of our central focuses is empowering SMEs with more inclusive access to finance, exemplified by initiatives like the Supplier Financing solution, which directly influences supply chains and aligns with sustainability principles. 

Through this digital platform, corporate buyers can accelerate the payment collection of trade receivables for their suppliers, offering instant liquidity. This approach not only bolsters the sustainability of suppliers’ financial well-being but also contributes to a more robust and resilient supply chain for corporate buyers. 

As Absa continues our journey as a catalyst for positive change, the convergence of trade technologies and ESG principles pave the way for impactful and sustainable transformation across economies and societies.

Pioneering progress in trade finance

In a world marked by complex challenges and dynamic shifts, Africa’s trade landscape has proven resilient, driven by determined economies and a burgeoning trade spirit. Despite hurdles posed by global geopolitical shifts, inflation, and supply constraints, Africa’s steadfast commitment to economic growth through trade remains unwavering.

Absa Bank’s approach to digitalising trade finance emerges as a beacon of hope in the face of these challenges. By harnessing the transformative power of technology, Absa stands committed to bridging the trade finance gap that hampers SMEs’ growth potential. 

As we continues our journey as a catalyst for impactful change, the synthesis of trade technologies, innovation, and ESG principles paints a promising picture for the continent’s future. 

The post Bridging the trade finance gap: Absa’s digital journey in Africa appeared first on Trade Finance Global.

Closing Africa’s $100 billion trade finance gap is going to require alignment across a number of ecosystem elements, especially given current geo-political instability and supply chain issues. 

Estimated reading time: 4 minutes

It is often debated whether the reported existing trade finance gap, which over the last 3 years has oscillated between $100 billion and $120 billion, will diminish or whether the nature of illiquid, growth-focused, emerging market economies means that the gap will never truly close. 

Before 2020 and the COVID-19 pandemic, there had been some meaningful progress; the trade finance gap had dropped to $81 billion. If we can get back to these kinds of levels, a $20-30 billion injection into the small business sector will be welcomed. 

However, 2022 has thus far shown no signs of such a return. The world today looks very different, with geo-political uncertainty in Ukraine, Russia, China and Taiwan, amongst others. 

This, in turn, has seen spiralling input costs and constraints on supply chains. Considering that a lot of emerging market debt is dollar-based, this again puts pressure on the trade finance ecosystem. 

This is perfectly highlighted through a case study of a South African client whose core business was disrupted by events in Ukraine. 

The steep increase in input costs and the knock-on impact on escalating freight costs meant that the client had to reinvent its business model completely. 

Absa increased an import letter of credit facility from 1.8 billion rand (R) in 2021 to R6.5 billion in 2022 in response to the evolving environment. 

The result of this was that the client saw a rise in profitability while maintaining its leading position in the South African market, in addition to a growing market share in Mauritius and The Democratic Republic of Congo.

Surging inflation and rising input costs, coupled with the Central Bank tightening, are likely to result in pressure on emerging market businesses that had just begun to rebuild their balance sheets.

Avoiding a situation where banks start withdrawing credit at a time when businesses are cash-hungry is paramount, especially when these businesses are only just beginning to take advantage of an economic recovery. 

Here, it is important to reiterate that, by its nature, trade finance is less risky than other types of financial support for importers and exporters. 

According to the African Development Bank (ADB), the average approval rate for trade finance transactions was 88% in 2019, while the average default rate on trade finance between 2017 and 2019 was 7.5%, compared to 11% on other types of non-performing loans. 

In Southern Africa, this number was as low as 2% over the period spanning 2011 to 2019. This highlights the power of getting liquidity into the right places in the system, showing how economic activity can be unlocked without the burden of excess risk.       

Fortunately, we live in a world which is constantly evolving, and countries will continue to both import and export their goods, particularly as the African continent develops economically. 

Furthermore, there have been meaningful developments in terms of digitisation, liquidity, financial inclusion, and involvement from Development Finance Institutions (DFIs) to enhance Africa’s growth prospects. 

Jeff Gable, the chief economist at Absa, shares this sentiment, saying, “Despite supply-chain and other global challenges, Africa’s trade flows have really accelerated significantly.  

“International Monetary Fund (IMF) data show that the dollar value of Africa’s exports to the world have increased by more than a third over the last year and are up by more than half from pre-pandemic levels.      

“Africa is showing similarly exciting increases in trade values within the continent as well, with exports up 37% in the first quarter of 2022 as compared to a year ago, and up more than 40% post-pandemic.”

Approximately 60% of banks that engaged in African trade finance activities received some sort of support from DFIs. 

This highlights just how close the relationships between these parties are and why there is excitement around some of the innovation and interest from the DFIs who are focusing time and resources on this market sector.         

For instance, the ADB recently approved a $175 million regional trade finance facility for Eastern and Southern Africa, specifically a “strategic effort by the ADB to support the Africa Continental Free Trade Area’s agenda of reshaping markets and economies across the region by helping to boost output in the services, trade, manufacturing, and natural resources sectors.“  

This deal is expected to release $2.1 billion in value over the next 3 years. 

Absa believes that increasing access to trade finance represents one of the most critical focus areas, with a potential to unlock significant economic activity at relatively low-risk. 

The post African trade finance enters an exciting new phase appeared first on Trade Finance Global.