Published Works | Without Prejudice | November 2017
Challenges faced in trade finance
Intra-African trade has being described as the key to sustainable economic development in Africa. However, the past few years have been challenging for African trade. As we have seen merchandise exports decline by 8% in 2014, the largest decline since 2009. This was caused by the falling of commodity prices, as well as the weak economic prospects for Africa's top trading partners, particularly the European Union (EU) and China. Further contributions to the low levels of intra-African trade are a result of the amount of commodities exported by African countries versus the amount of imports into African countries.
It is estimated that out of the US$555 billion total merchandise exports by Africa, only US$98 billion are intra-African trade (Rethinking Trade & Finance (ICC) re: Trade finance landscape in Africa, African Development Bank Contribution).
One of the biggest challenges faced by African traders is the gap in trade finance, especially in relation to the credit availability provided to traders in Africa. The International Chamber of Commerce (ICC) has estimated the trade finance gap in Africa at US$110 billion to US$120 billion, which is approximately 25% of total demand (Plugging the trade finance gap to benefit international trade with Africa by Frances Coppola). This gap is mainly caused by the underdeveloped and lack of sophisticated risk assessment capacity of the African banking sector. Thus resulting in medium-sized enterprises experiencing difficulty in obtaining funding and seeing fewer opportunities for African companies to buy and sell goods at a profit.
Further contributing factors, such as the fragile economic state of Africa's major trading partners, are seen to be a source of anxiety for Africa's trade. These challenges put Africa in a vulnerable position, especially for its resource-rich countries such as South Africa, Nigeria and Angola. Weaker growth prospects mean that these economies will continue to cut back on demand for oil, gas, copper and other resources that feed the Chinese and EU manufacturing industries and for which Africa is the main source. Besides global economic concerns, other structural problems remain for intra-African trade. While a majority of African countries belong to one trade bloc or another, firms trading across the continent still face an average tariff rate of 8.7% compared to 2.5% on the international market (Rethinking Trade & Finance (ICC) re: Trade finance landscape in Africa, African Development Bank Contribution).
This is coupled with stringent regulatory hurdles in African countries, including burdensome administrative procedures that are needed for clearing goods that need to be imported or exported and poor infrastructure. It is not unusual to find lines of trucks at border gates unable to cross into other African countries due to burdensome administrative procedures, or not being able to transport maize procured in Zambia directly to Kenya without taking a detour to South Africa.
Despite the many challenges faced by Africa it still has the potential to grow and improve its economy. Thus the use of trade finance techniques across the commodity value chain should enable better access to finance across the continent. These techniques allow funders access to alternative forms of collateral and can enable companies to attract finance without the traditional credit assessments on balance sheets. Such transactions can be structured using legal techniques to ensure that the funders are protected throughout the transactions.
As an example, a borrower and trader in the agricultural industry (who will be named X) situated in Kenya, wants to procure maize from a Zambian supplier, whereby the maize will be stored in warehouses in Zambia under a collateral manager. X has a balance sheet of only US$10 000, however, he wants to procure maize for the value of US$100 000. X will approach a prospective funder to finance the procurement of maize from the selected supplier in Zambia for onward sale to selected buyers in Asia and Europe. A collection account will be created for the payments made by the buyers situated in Asia and Europe. As security X will provide the funder with a security assignment over the offtake contracts between X and the selected buyers, a local law Zambian pledge over the maize stored in the warehouses and a charge over the collection account depending on its location.
To achieve intra-African trade, it is important for Africans to stand up in unity and understand the capital markets in Africa, including all the problems faced by the continent. With innovation it is possible to build strong political and economic trade on the continent.
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