A gap with a specific cause
The shortfall in African trade finance is well documented. Its causes are less about the underlying transactions — which are frequently short-tenor, self-liquidating, and well secured — than about the infrastructure around them.
Correspondent banking withdrawal. International banks have reduced correspondent relationships in several markets, driven by compliance cost relative to revenue. A local bank without a correspondent cannot confirm a letter of credit, which removes the instrument that underpins much cross-border trade.
Compliance and documentation. Know-your-customer requirements applied across a chain of intermediaries are expensive for small transactions. The economics fail below a certain ticket size regardless of credit quality.
Limits, not appetite. Confirming banks apply country and bank limits. Where those limits are full, good transactions are declined for reasons unconnected to their merits.
Instruments in use
Trade finance guarantee programmes. Development institutions guarantee confirming banks' exposure to issuing banks, releasing limits that would otherwise be full. This is the most direct response to the limit problem and has been scaled up considerably.
Supply chain finance. Where a creditworthy buyer sits at the end of a chain, suppliers can be financed against approved invoices at the buyer's credit rather than their own. This reaches suppliers who would otherwise be unbankable.
Receivables discounting and factoring. Growing in markets where the legal framework supports assignment of receivables. The constraint is usually enforceability rather than appetite.
Regional trade institutions. Institutions established for African trade provide direct facilities and confirmations where international banks have withdrawn.
What matters for structure
- Whether the issuing bank has confirming relationships, before the transaction is agreed
- Whether a guarantee programme covers the corridor and the bank concerned
- The legal position on assignment of receivables in the relevant jurisdiction
- Documentation quality: trade instruments are strict, and discrepancies delay payment
- Currency: whether payment and funding are in the same currency, and who bears the gap
The direction of travel
Regional integration is increasing intra-African trade, which is proportionally more constrained than trade with the rest of the world because fewer correspondent relationships support it. Structures that solve for regional flows — regional confirmations, guarantee programmes covering intra-African corridors — address a gap that is widening in absolute terms as the trade grows.
