TRADE AND WORKING CAPITAL | 06 November 2023

A bridge over troubled waters,
how digitalisation will close
the African trade finance gap,
further ESG and empower SMEs

Absa-CIB-Author

Michelle Knowles |
Denise Coppin

Head of Trade and Working Capital
Product | Head of UK & European
Global Clients at Absa CIB

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

Before the Covid-19 pandemic, Africa’s trade finance gap was narrowing, shrinking 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. Overall 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, albeit sometimes fragmented, trade policies and 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 still 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.

Collaboration is crucial

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.

But although innovative technologies are readily available, their efficacy hinges on regulatory and legal reforms. This makes collaboration among policymakers, banks, financial institutions, and development finance institutions (DFIs) paramount.

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 trade, and digitalisation is the 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.

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 a huge need for digital supplier financing solutions which directly influence supply chains and align with sustainability principles. The result is that 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 wellbeing, but also contributes to a more robust and resilient supply chain for corporate buyers.

Empowering SMEs

Digital trade technologies hold significant benefits from an ESG perspective, more specifically sustainable financing solutions which are geared towards supporting SMEs, including women and young people, who constitute around 80% of African economic activity.

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 (ETC’s) to bring together the continents SMEs so that they can compete effectively in international markets.

Another area which requires focus is the development of digital solutions to help with day-to-day financing concerns and 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 for access.

A promising future

As Africa continues to promote itself as a centre from 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 the pulling of 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.

Absa-CIB-Author
Michelle Knowles | Denise Coppin

Head of Trade and Working Capital Product and Head of UK & European Global Clients at Absa CIB

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