The African Development Bank (AfDB) has released its second Trade Finance in Africa survey report, which indicates that commercial banks support about one third of total trade in Africa.
Dubbed ‘Trade Finance in Africa: Overcoming Challenges’, the report builds on the findings of the maiden 2013 survey, covering the period 2013–2014, to gauge other aspects of bank-intermediated trade finance, such as the challenges encountered by SMEs and first time trade finance clients.
With combined data findings of 2013 and 2015, the survey shows that the value of bank-intermediated trade finance in Africa in 2013 and 2014 was estimated at US$430 billion and US$362 billion, respectively.
Further, the report states that the share of bank-intermediated trade finance devoted to intra-African trade is still modest, with only 20% of bank-intermediated trade finance devoted to intra-African trade in 2014
In the report, banks in East and Southern Africa reported the highest share (25%) while those in North and Central Africa reported the lowest, around 5% and 4%, respectively.
But it warns that the value of the bank-intermediated trade finance gap in Africa remains significant at an estimated US$91 billion in 2014, although it has gone down slightly from an estimated US$94 billion in 2013.
According to the report, trade finance continues to be a relatively low-risk activity for commercial banks in Africa. “The estimated default rate on trade finance transactions in 2011 and 2014 were 4 and 5%, respectively, compared to 9 and 12% Non-Performing Loan (NPL) ratios for all bank asset classes,” it says adding that the trade finance default rates are lower for banks in Southern (2%), East (3%), and North (4%) Africa compared to banks in Central (9%) and West (7%) Africa.
In the report SMEs performed poorly as they only account for only 28% of banks’ total trade finance portfolio. “The relatively low share could be attributed to the higher risk perception associated with this client segment,” it says. The average trade finance default rate of SMEs was 14% in 2014, far higher than the overall trade finance default rate of 5% for the same period.
First time applicants face significant challenges in accessing trade finance facilities from banks. Only 15% of banks’ trade finance portfolio is composed of new applicants, although the default rate attributed to these clients was only 3% in 2014.
The report also reveals that the major reasons why banks reject trade finance demands include poor creditworthiness and lack of adequate collateral.
The report recommends that a win-win partnership and a collaborative approach involving development partners is needed to overcome the challenges of access to trade finance faced by financial institutions and the private sector in Africa.
Commenting on the report, AfDB Director of Financial Sector Development, Stefan Nalletamby said the Bank has so far supported more than US$5 billion of trade involving 90 banks in 25 African countries. The key sectors supported are agriculture (22%) and manufacturing (25%). Intra-African trade represented at least 20% of total trade supported.
These achievements, he concluded, “are clear indications that trade finance can be an effective vehicle for driving the Bank’s High 5 priority goals such as ‘Feed Africa’, ‘Industrialise Africa’ and ‘Integrate Africa’, respectively.”