The African continent represents a market of around 1.2 billion people – most of whom are under the age of 30 – and a collective GDP of $ 2.5 billion, but currently accounts for a small portion of world trade (2%) . Intra-African trade is also low, around 18% of the total for the continent, which represents a missed opportunity for African businesses.

The majority of trade participants in Africa are SMEs. In 2020 alone, sub-Saharan Africa was home to 44 million micro, small and medium enterprises, which provide around 80% of jobs across the continent.

Due to their small size and sometimes less formal procedures – including lack of digitization, audits and credit history – these companies often struggle to secure the financing they need to effectively grow their operations. trade, hampering both their own development and that of the economy as a whole. .

In light of this, trade volumes are concentrated in the hands of a small number of multinational trading companies, a missed opportunity to broaden the base for economic growth and develop intra-African supply chains.

Supply and demand for trade finance

Securing trade finance is essential for SMEs to do business, expand their markets and export their products. Trade finance plays a particularly crucial role for SMEs in order to protect themselves against the unique risks inherent in international trade (such as currency fluctuations, non-payment or credit issues, and even political instability).

Before Covid-19, Africa’s trade finance gap already stood at $ 82 billion, and has only increased for a year and a half. The pandemic-induced economic slowdown and capital flight have placed significant strain on African banks and financial institutions, further reducing the amount of trade finance available to SMEs, despite a notable increase in the demand for trade finance. in 2020.

New opportunities for African SMEs

Despite these challenges, the space of opportunity for African SMEs is growing on the backs of global and regional factors, making it all the more crucial to close the funding gap.

The ratification and launch of the African Continental Free Trade Agreement (AfCFTA) offers the potential to see a radical change in business opportunities for African SMEs. The single market for goods and services created by AfCFTA makes Africa the largest trading bloc since the formation of the World Trade Organization (WTO).

Originally expected to increase intra-African trade by 52.3% over the next two years, the AfCFTA holds great promise for increasing trade opportunities across the continent. Even with the delays caused by the Covid-19 pandemic, it retains its potential to make the AU’s Agenda 2063 a reality.

Disruption of global supply chains during the pandemic have also opened up new opportunities for African traders to serve markets that were once out of reach. Import substitution in national or regional markets and the increased use of electronic commerce are just two of many examples.

Asoko’s research and engagement with African businesses at the onset of the pandemic found many examples of companies stepping in to fill gaps in a range of consumer products, especially goods essential to public health.

This rapid response from across the continent has highlighted the resilience of the African private sector, following a long tradition of distributors turning to manufacturing to consolidate their market position and build Africa’s industrial base. Examples include Emzor Pharmaceuticals and Doyin Group in Nigeria, Reroy Group in Ghana, MeTL Group in Tanzania, and Madhvani Group Of Companies in Uganda, to name a few.

The growth of the African common market through the AfCFTA and the convergence of these opportunities posed by the Covid-19 pandemic create a critical moment to improve the access of African SMEs to trade finance. Without trade finance, it will be difficult for these businesses to grow and significantly contribute to Africa’s economic recovery.

Innovative solutions

The good news is that the tools exist to reverse the current gap in African SME trade finance. Alternative financiers are increasingly stepping in to complement the declining participation of commercial banks by offering transaction-oriented loans for small traders.

By deploying complementary structures that work alongside a company’s existing banking relationships, such a provision enhances the ability of traders to scale by increasing access to capital.

Development finance actors such as Afreximbank and TDB, are increasingly joined by private players such as AMC Trade Finance and Coronation Merchant Bank. These companies offer innovative financing solutions that are transaction-oriented and self-liquidating through the sale of goods allows suppliers to have a different and more precise view of risk, dramatically increasing the availability of trade finance for African companies most at risk of being excluded from traditional facilities.

“The value we offer traders is the ability to fund trades on a parallel track to the working capital funding arrangements they have with their bank. Facilitating trade in this way means they can grow their business faster, which in turn should increase their access to trade credit to meet other needs by improving the overall financial position of the business, ”said Cobus Visagie, CEO of AMC, at Asoko Insight.

Innovative access solutions, such as digitizing the connections between fundraisers and capital providers, are another way to improve trade finance. Taking advantage of available technologies reduces both the time it takes to initiate and complete transactions, and can help overcome the physical limitations the pandemic places on travel.

The digital connection of African businesses and trade financiers also enables a higher degree of targeted engagements, reducing noise to speed up the transaction process for businesses that meet predefined funding criteria.

It is now

Africa’s trade finance gap cannot be closed overnight, but using innovative solutions to improve SMEs’ access to trade finance will enable businesses to grow and lead the future of economic recovery across the continent.