Trade serves as the primary engine for economic development. However, Africa faces a systemic challenge. While its population now accounts for 17 per cent of the world, its share of global trade has declined to just 3 per cent. This disparity stems largely from the persistent African trade finance gap, which experts currently estimate at $81 billion. To unlock the continent’s potential, stakeholders must address the structural barriers that prevent capital from reaching the businesses that need it most.
The SME Rejection Crisis and Regulatory Friction
Small and Medium Enterprises (SMEs) act as the lifeblood of the African economy, yet they bear the brunt of the financing deficit. Currently, over 50 per cent of SME trade finance applications face rejection. Banks often cite a lack of collateral and “high perceived risk” as the primary reasons. Furthermore, 15 per cent of banks list stringent regulatory requirements as the main constraint to expanding supply. Because economies now implement Basel III and strict Anti-Money Laundering (AML) measures, banks must set aside more risk capital. Consequently, this makes SME lending much less attractive to traditional lenders.
Global De-risking and the Correspondent Banking Squeeze
Another major driver of the African trade finance gap is the withdrawal of global financial institutions from the region. Known as “de-risking,” this trend has caused the number of correspondent banking relationships for US Dollar transactions to drop by 25 per cent over the last decade. Since all Letters of Credit (LCs) issued by African banks require confirmation from these global hubs, their exit leaves local banks isolated. Moreover, this reduced “confirmation line” capacity makes it nearly impossible for many African businesses to conduct trade in foreign currency.
Bridging the Gap: Digitisation and LC Confirmation Platforms
Fortunately, digitisation offers the most effective “plug” for this liquidity hole. Platforms like 360tf are fundamentally changing how LC confirmations work by connecting the 400+ African bank universe directly to global confirming banks.
- Immediate Risk Mitigation: On the 360tf platform, LCs receive confirmation from banks in major financial centres, which provides security to both sides.
- Operational Efficiency: Digital workflows eliminate the manual “clipboard” methods that cause delays. Additionally, these systems significantly reduce fraud risk.
- Financial Inclusion: By providing transparency and data-backed creditworthiness, fintech solutions help SMEs bypass traditional institutional gatekeeping.
Strategic Opportunities: AfCFTA and DFI Collaboration
The introduction of the African Continental Free Trade Area (AfCFTA) represents a transformative opportunity. By eliminating barriers to intra-African trade, it creates a massive unified market. However, for AfCFTA to succeed, the African trade finance gap must be narrowed. Currently, Development Financial Institutions (DFIs) are stepping up, as 60 per cent of African trade banks now receive some form of DFI support. Nevertheless, this support remains geographically skewed toward West and Southern Africa. Therefore, addressing these sub-regional disparities is essential for balanced growth across the continent.
The Path Forward: Collective Action and Transparency
Closing the gap requires a concerted effort between fintechs, regulators, and commercial banks. We must move toward a “trade, not aid” model that prioritises:
- Standardised Documentation: Specifically, this involves reducing the complexity of legal agreements for MSME traders.
- Local Currency Settlement: For instance, leveraging systems like PAPSS helps reduce the heavy reliance on US Dollar intermediaries.
- Data-Driven Compliance: Using AI and blockchain helps banks meet KYC/AML standards without the “compliance cost premium.”
