Trade Finance: The Silent Engine of Africa’s Economic Transformation

By Danilo Desiderio

Trade finance is often described as the “silent engine” of Africa’s economic growth, yet its full potential remains largely untapped. Strengthening access to trade finance could be the key to boosting intra-African trade, empowering small and medium-sized enterprises (SMEs), and driving economic integration across the continent.

A recent analysis on Project Syndicate highlights four critical measures to unlock this potential:

1. Innovate Banking Infrastructure: Africa must accelerate the adoption of mobile banking and digital payment systems, such as the Pan-African Payment and Settlement System (PAPSS). These tools can lower high transaction costs, enhance transparency, and simplify cross-border trade.
2. Develop Inclusive Financial Instruments: Beyond conventional loans, African businesses need access to innovative tools such as supply-chain finance and trade credit insurance to manage the high risks inherent in cross-border commerce.
3. Close the Trade Finance Gap: According to the World Trade Organization (WTO) and Afreximbank, trade finance currently covers less than 40 percent of Africa’s merchandise trade – a gap estimated at US$100 billion. Addressing this shortfall is essential for enabling African products to compete with imports and stimulate domestic growth.
4. Secure Infrastructure Investment: While trade finance can catalyze investments in critical infrastructure like ports and roads, the continent’s annual infrastructure requirement of up to US$170 billion necessitates collaboration among governments, the private sector, and development-finance institutions (DFIs).

Our research echoes these conclusions. African SMEs often face growth constraints due to the banking sector’s risk aversion, driven by a high rate of non-performing loans (NPLs).

Banks frequently demand excessive collateral or deny credit entirely, restricting businesses’ access to the funding necessary for expansion. Supply-chain finance, in particular, represents a transformative opportunity for unlocking SME growth.

However, the pressing question is not what reforms are needed, but whether Africa can effectively implement them. The recent credit downgrades of Afreximbank by Moody’s and Fitch – one of the continent’s key trade finance institutions – raise concerns about the accessibility and affordability of trade finance.

As we have noted, these downgrades could increase Afreximbank’s borrowing costs internationally, subsequently raising the cost of trade finance for African businesses and potentially slowing the implementation of initiatives such as the African Continental Free Trade Area (AfCFTA).

Public-Private Partnerships: A Necessary Path Forward

Despite these setbacks, the need for public-private partnerships (PPPs) has never been greater. Relying on a single institution to close Africa’s trade finance gap is unsustainable.

PPPs offer a realistic and strategic solution:

• Risk Diversification: Pooling resources across governments, private banks, and DFIs spreads the risk currently concentrated in institutions like Afreximbank, making the system more resilient.
• Closing the Financing Gap: Africa’s US$100+ billion trade finance deficit cannot be met by one institution alone. PPPs mobilize capital from multiple sources to meet this challenge.
• Leveraging Private Sector Expertise: Private institutions bring technological know-how, efficiency, and innovation, driving advancements in digital banking, supply-chain finance, and trade credit insurance – tools essential for SME growth.
• Catalyzing Development Finance: DFIs such as the International Finance Corporation (IFC) and African Development Bank (AfDB) provide technical support, de-risk projects with guarantees, and help create investor-friendly regulatory frameworks.
• Strengthening Governance: Partnerships often impose strict governance and risk management standards, enhancing institutional frameworks and ensuring greater accountability in trade finance.

The challenges facing Afreximbank underscore the need for a diversified, robust, and sustainable trade finance ecosystem. By combining the resources and expertise of governments, private enterprises, and DFIs, Africa can build a resilient infrastructure that not only supports SMEs but also drives the continent toward the economic integration it so urgently requires.

Trade finance is not just a financial tool – it is the engine that can propel Africa toward self-reliant, inclusive, and sustained growth. The question is whether the continent’s stakeholders are ready to turn this potential into reality.

Danilo Desiderio serves as the CEO of Desiderio Consultants Ltd in Nairobi, Kenya, specializing in African customs, trade, and transport policies. He is a customs and trade expert at the World Bank and a senior associate to the Horn Economic and Social Policy Institute (HESPI).