Africa: The Remedy for Africa’s Funding Gap


The African Development Bank (AfDB) plans to expand its trade finance products across the continent in coming years as it seeks to bridge the existing funding gap to support trade transactions.

This would help address critical market demand for trade finance in Africa by providing support for trade in vital economic sectors such as agribusiness and manufacturing.

Currently, Africa faces a funding gap of about $120 billion in trade finance.

Moreover, it will foster financial sector development and regional integration, and contribute to government revenue generation.

This was disclosed during on Thursday during an event on "Trade Finance - Fostering Regional Integration and South-South Cooperation" hosted during the ongoing Annual Meetings of the African Development Bank in Lusaka, Zambia.

"AfDB will scale up its efforts to enhance trade finance in the future," said Yaw Kuffour, AfDB head of Trade Finance Operations, adding that his department had submitted a proposal to the Bank's board of directors to at least double funding to facilitate trade finance.

In 2013, the board of the AfDB approved a $1-billion trade finance (TF) programme to support African trade and provide financing to under-served African-based financial institutions and enterprises.

Kuffour pointed out that trade finance and financial intermediation helps firms to manage risks inherent in international transactions, improve their liquidity and enable them to optimally invest to enhance their growth.

According to research by the AfDB, African banks face numerous constraints in meeting the demand for trade finance.

The main constraints are limited US dollar availability (by far the dominant currency in international trade, and by extension, trade finance) and insufficient limits with confirming banks for confirming letters of credit.

Other constraints include small balance sheets, which tends to make single obligor limits frequently binding.

These constraints also suggest that the AfDB's trade finance program, as well as those implemented by other international financial institutions, are needed and well suited to relaxing some of the most binding constraints.

Panelists pointed out that the majority of African banks have small capital bases which constrain their ability to obtain adequate trade limits from international confirming banks and to undertake sizeable transactions that have significant development impact. Besides, despite the growth in trade risk distribution globally, local banks in Africa have not significantly benefitted from this growth.

Admassu Tadesse, president and chief executive officer, PTA Bank, noted that the bank was expanding its investments across Africa as well as pushing to create more infrastructure to enable trade.

"Regional Integration and Free Trade Areas help banks to provide trade finance," said Tadesse.

Despite its importance, panelists pointed out there is limited access to quality data in most African countries to facilitate trade finance transactions.

This includes the size of the market, the variations across sub-regions, the scale of financing gap, the trade finance devoted to intra-African trade, the relative importance of on-balance sheet versus off-balance sheet financing, and constraints faced by banks.

Denys Denya, Executive Vice-President, Afreximbank, said Africa needs to create jobs and create value to increase trade finance. He added that Afreximbank has launched an initiative to address compliance issues in trade finance. (AfDB)

Source: The Citizen.