The continent of opportunity: it may be somewhat of a clich, but it reflects an undeniable truth Africa presents plenty of opportunities for trade finance. Trade is at the very heart of the African economy: in 2019, exports and imports accounted for 53% of African markets GDP. And as the African Continental Free Trade Area (AfCFTA) which established a single market and customs union encompassing 55 countries matures, the cross-border flow of goods across Africa will become easier than ever before.
Meanwhile, Africa is increasingly being seen as a potential hub for green energy production. North Africa, in particular, is investing in its solar photovoltaic capacity, with large-scale solar park developments across several countries taking advantage of abundant space and sunlight exposure. Renewable energy could also be used to produce green hydrogen, creating an entirely new lucrative economic sector: it has been estimated that Africa could produce 30-60 million tonnes of green hydrogen a year by 2050, representing up to 10% of global demand.
In the context of the ongoing conflict in Ukraine, which has prompted European markets to turn away from energy supplied by Russia, gas and hydrogen produced in Africa presents an attractive alternative for countries seeking more secure sources of energy. Africas potential is not limited to the energy sector, though as trade tensions between the West and China show little signs of abating, many international corporates view the continent as a viable source of manufacturing capabilities.
Why, then, is there some reticence in the international financial sector to engage with African economies? Since the financial crisis, some in the banking industry have sought to reduce exposures in emerging markets and limit trade finance portfolios in what have been perceived as high-risk regions. Africa has clearly been impacted due in part to increased concerns over governance, as well as relatively high government debt and seemingly volatile currencies. Political instability in some Western and Central African countries has, in recent months, added to this perception of risk.
Many African markets are now facing restricted access to international investment, preventing the financing of much-needed commerce and development. This has served to grow the African trade finance gap, which now stands at an estimated $120bn, posing a major challenge to businesses across the region.
Perceptions do not always reflect reality
African markets may be perceived by some as being excessively risky to engage with but do these perceptions reflect reality? Not entirely. In a paper on Sustainable Trade Finance and African Trade, the International Trade and Forfaiting Association (ITFA) stated that the empirical data contained in the International Chamber of Commerce (ICC) Trade Register clearly demonstrates that African trade finance has an incredibly low product default rate related to trade finance.
At a regional level this default rate is often better than that in developed markets, suggesting that trade finance in African markets is not disproportionately vulnerable to credit risk. Most African nations are also keenly aware of the crucial role trade plays in their economies, and many have ensured that short-term, self-liquidating trade transactions are a top priority for central banks.
Of course, African markets do face tangible challenges. Many markets lack a mature regulatory framework when compared with international counterparts, making trade more difficult as the dissonance between frameworks and standards can cause transactional friction. Whats more, traders are often hesitant to enter markets due to serious concerns about corruption, money laundering, and other financial crime.
While these valid concerns do exist, it does not necessitate the wholesale retrenchment from trading with Africa or from financing African trade flows. Specialist financial institutions which focus their offering on trade finance in such markets consider the best response is a robust approach to risk management and compliance. In our view, transparency and stringent compliance methodologies are the keys to conducting and financing safe, sustainable trade in Africa.
The specialist approach to risk managementWhile a technological and systems-driven approach is crucial to recognising and mitigating threats, it is a banks human expertise that will turn raw data into actionable insights. Successful risk management in specialist markets requires banks to have a deep understanding of the geographies it operates in, built on long-standing relationships and on-the-ground presence. Compliance professionals must be prepared for new regulatory developments and any potential issues affecting their core markets. An acute awareness of current socio- and geopolitical contexts is necessary, and it can only be developed by a co
