Reviving Africa's Trade Finance, Demands Bold DFI-Bank Partnerships

Letters of Credit (LCs) remain elusive due to burdensome collateral requirements, while alternative financing options are either prohibitively expensive or insufficiently available. These challenges are not isolated.

Across the continent, businesses both large and small confront the same structural barriers: the absence of accessible, scalable trade finance inhibits their ability to seize cross-border and domestic opportunities, ultimately curbing Africa’s broader ambitions for economic integration.

Because banks intermediate nearly a third of trade activities across the continent, and the majority of those involved in trade finance have received some form of DFI support, these two institutions are critical enablers in addressing the trade finance gap – and more robust and strategic partnerships between them are needed.
It's essential to consider here that the financing landscape, particularly in emerging markets, is not homogeneous. Whether dealing with international trade finance, local banking capacity, or the often-overlooked SME sector, each segment presents distinct barriers, which can manifest as a lack of liquidity, inadequate risk assessment mechanisms, or the absence of bespoke financial instruments designed for specific industries or geographies.

Consequently, financial institutions must move away from a one-size-fits-all approach.

African banks, in collaboration with DFIs, must adopt a comprehensive, layered approach, with each segment of the market requiring distinct but complementary strategies. For example, trade finance instruments need to be available in a variety of forms, with terms and conditions that are adaptable to the risk profiles and transaction cycles of both the exporter and the importer.

However, for this to be effective, we must overcome the heavy reliance DFIs have on local banks to conduct holistic, in-depth risk assessments of businesses seeking larger-scale funding. While DFIs are often poised to offer broader financial support, the bottleneck frequently arises when banks – tasked with evaluating these businesses – apply their conventional, often conservative, capital and lending policies, typically structured to minimise risk and preserve their balance sheets, which, while prudent from a banking perspective, can stifle the growth of African businesses.

DFIs should take a pragmatic approach here, relying on trusted institutions' financial data, management accounts, and risk assessments – rather than duplicating processes – and providing support through technical expertise, capacity-building programmes, and de-risking strategies. This would allow them to focus their efforts on the developmental aspect of financing, where greater risk tolerance can result in outsized developmental returns that emphasise impact over short-term profitability.
This doesn’t mean abandoning prudence – it means applying it in a way that factors in the broader developmental goals of poverty reduction, climate change mitigation, economic diversification, and SME growth.

DFIs like the British International Investment have long classified their funding as impact investments for this purpose, partnering with banks that share a vision of social and economic advancement, particularly for underserved and vulnerable groups such as women and minority-owned businesses.

For example, the BII’s historical partnership with Absa since 2019 has provided much-needed trade liquidity in countries including Ghana, Nigeria, Kenya, Uganda, Tanzania, and Mozambique – supporting over US$1bn in trade volumes. This partnership has now been extended through the provision of an additional US$150mln to Absa, ring-fenced and purposefully incentivised towards sustainable business investments, such as youth and women-owned SMEs operating in high-impact sectors like agriculture, healthcare, or education.

Structuring such investments as impact-focused adds an additional layer of accountability and transparency, setting measurable targets and KPIs that both the DFIs and their banking partners are held to. In doing so, a self-reinforcing system is created where financial returns and social impact are no longer viewed as competing objectives but as complementary goals.

For this approach to be sustainable, it is imperative for banks to adopt an Environmental, Social, and Governance (ESG) mindset as a foundational approach in their capital deployment strategies, even before considering external partnerships.

By integrating ESG principles into their core operations, banks not only mitigate long-term risks but also align themselves with the growing demand for sustainable investments from global capital markets – enhancing their credibility and attractiveness to both investors and DFIs, while ensuring that their financial decisions contribute positively to societal and environmental outcomes. Moreover, embracing ESG standards fosters innovation in financial products, such as green bonds and sustainability-linked loans, enabling banks to support projects that drive inclusive growth and resilience across the continent.

This alone, however, will not be enough; trade finance cannot thrive in isolation. By its very design, trade finance is about risk mitigation: banks act as risk intermediaries, and their ability to assess, manage, and distribute this risk is central to the smooth functioning of trade finance systems. For DFIs and other stakeholders to support trade finance effectively in Africa, they must work in tandem with local financial institutions that are already established in the market. This means engaging with banks on the ground, building capacity where necessary, and ensuring that these institutions are equipped to handle the complexities of international trade transactions through the creation of regional de-risking facilities, risk-sharing platforms, and investment in digital infrastructure.

These initiatives will empower African banks to take on more trade finance transactions, reduce their exposure to risks, and serve a broader range of businesses, particularly SMEs. By aligning these efforts with regional frameworks like the AfCFTA, bold partnerships between DFIs and banks can contribute to the creation of a more integrated and resilient African economy, where trade finance is accessible.