MICHELLE KNOWLES AND DENISE COPPIN: How digitalisation can close the African trade finance gap and empower SMEs

Europe remains one of the most important continents for trade with Africa, but recent years have seen a decline relative to other regions, with a notable uptick in flows from the China and Middle East & Africa regions.   

Before the Covid-19 pandemic Africa’s trade finance gap was narrowing, shrinking from $120bn in 2011 to about $81bn in 2019. However, the macroeconomic disruptions and geopolitical uncertainties that followed have widened that gap again. Overall, Africa’s recorded cross-border trade has grown relatively modestly in recent decades and now accounts for 2%-3% of global trade. 

Trade agreements are key. The EU maintains open and transparent — albeit sometimes fragmented — trade policies, and post-Brexit the UK has actively sought to negotiate or refresh trade agreements, resulting in several economic partnership agreements with African nations. In early 2024 the UK will host the UK-African Investment Summit with the aim of strengthening UK-Africa ties further, another indicator of the optimism and opportunity surrounding the continent.  

International diplomacy and initiatives are a vital step forward in closing Africa’s trade finance gap, but there is further reason to be optimistic as we move towards a golden era of digitalisation in trade finance. The transformative potential of digital trade solutions is vital to empowering businesses through technological innovation and collaboration. By automating and streamlining trade finance processes digital tools can significantly reduce costs, foster inclusivity and enhance the availability of financing for African businesses. 

The pandemic has accelerated the adoption of digital trade finance, beginning a transformation of an industry that remains highly paper-based. These manual processes slow access to finance and increase costs and complexity, which worsens the challenges faced by small and medium-sized enterprises (SMEs). 

Though innovative technologies are readily available, their efficacy hinges on regulatory and legal reforms. This makes collaboration among policymakers, banks, financial institutions and development finance institutions paramount.  

Initiatives such as the African Continental Free Trade Area (AfCFTA) provide a further avenue for collaboration and establishing standards tailored to African trade while remaining aligned with global standards. Underpinned by robust political momentum, AfCFTA offers a prime opportunity to dismantle barriers to trade, and digitalisation is the cornerstone.  

Continuing efforts within the AfCFTA framework actively address policy recommendations, regulatory adjustments and the establishment of digital standards, fostering an environment conducive to digital trade. 

In the postpandemic, AfCFTA-enabled, hyperdigital world, trade technologies and environmental, social & governance (ESG) principles are converging and are of particular importance to global investors. This is paving the way for sustainable transformation across economies and societies. 

European consumers are increasingly socially and environmentally aware and prioritise products that have appropriate certifications. While this could present a barrier for some exporters, it unlocks a significant opportunity for those able to comply. 

There is a huge need for digital supplier financing solutions that directly influence supply chains and align with sustainability principles. The result is that corporate buyers can accelerate the payment collection of trade receivables for their suppliers, offering instant liquidity. This approach not only bolsters the sustainability of suppliers’ financial wellbeing, but contributes to a more resilient supply chain for corporate buyers. 

Digital trade technologies hold significant benefits from an ESG perspective, specifically sustainable financing solutions that are geared towards supporting SMEs as well as women and young people, who constitute about 80% of African economic activity. 

It is vital that there is a drive towards empowering SMEs with more inclusive access to finance. In recent months the African Export-Import Bank (Afreximbank) has proposed the formation of public and private export trading companies to bring together the continent’s SMEs so they can compete effectively in international markets. 

Another area that requires focus is the development of digital solutions to help with day-to-day financing concerns and take into account local needs and nuances. Further, to level the playing field there must be an emphasis on creating solutions that reduce the cost of these instruments and the complexity that can create barriers for access. 

As Africa continues to promote itself as a centre for global trade the synthesis of trade technologies, innovation and ESG principles is vital for the continent’s future growth and prosperity. 

Integration and adoption of digital platforms will require a combination of levers to be pulled to solve the challenges faced by SMEs. An easy win will be the development of innovative new technologies, and there are already some notable examples. However, without regulatory and legal reform and increased support for foreign currency liquidity they will gain limited traction. 

Despite hurdles posed by global geopolitical shifts, inflation and supply constraints, Africa’s commitment to economic growth through trade remains unwavering. The increasing drive towards digitalising trade finance emerges as a beacon of hope in the face of these challenges.  

• Knowles is head of trade & working capital product, and Coppin head of UK & European global clients, at Absa CIB.