A new report warns that restricted access to trade finance is preventing East African Community (EAC) Partner States and the Horn of Africa from playing a significant role in global commerce.
According to the study, despite accounting for 17% of the global population, Africa only accounts for 1.8 per cent of global trade exports and 2.1 per cent of global trade imports.
East Africa continues to have the lowest overall export trade in goods and services of all sub-regions of the continent, necessitating concerted action by all stakeholders.
TradeMark East Africa (TMEA) in collaboration with FSD Africa launched the report titled ‘Trade Finance Landscape in East Africa and Horn of Africa: Barriers, Opportunities & Potential Interventions to Drive Uptake’Speaking during the launch of the report, TMEA Chief Executive Officer (CEO), Mr Frank Matsaert noted that the report provided a good starting point in tackling key challenges limiting the region’s performance in global trade.
“The low intra-regional trade in Africa is because trading activities across the continent are inhibited, for SMEs (Small and Medium Enterprises) in particular, by limited access to finance but also due to high export costs, political instability, poor infrastructure and high taxation,” he observed.
The study focused on agriculture, construction, textiles and garments, finding key barriers to uptake existing both at ecosystem and trade finance provision level, underscoring the importance of holistic interventions for meaningful impact.
The report has proposed a raft of measures to enhance the provision of trade finance to regional SMEs in the select sectors.
Some of them are a creation of a revolving fund to address high-risk perception especially in light of the Covid-19 pandemic to support importers struggling with foreign currency shortage; by helping them access hard currency to import essential items.
It proposes technical assistance for banks to support warehouse financing by training banks of risk assessment, discounting of warehouse receipts and facilitating the creation and integration of warehouse receipt registries with bank systems to help with registration and management.
Further, it comes with advice for technical support to banks to help them structure receivables backed finance schemes using different types of security at different stages of the value chain.
The report calls for technical support to banks to help them develop tailored factoring and reverse factoring solutions and a structured approach to the identification of Fin-techs that could serve as intermediaries for processing reverse factoring transactions to improve uptake of the solutions.
Supporting provision of partial risk guarantee facilities to cover government obligations is said to be able to boost investor confidence.
FSD Director for Credit Markets, Mr Jared Osoro, called for a comprehensive address of the bottlenecks holding back the region’s access to trade finance.
“Barriers to trade finance uptake exist at both eco-system and trade finance level.
A joined-up and well-sequenced approach in addressing both the broader ecosystem challenges affecting trade and those undermining the growth of trade finance has the potential to deliver meaningful and sustainable impact,” he said.
In agriculture, the regions’ economic mainstay high collateral requirement and pricing, limited instruments tailored for agriculture SMEs, few risk mitigation instruments and lengthy approval processes were noted as leading barriers denying SMEs in the sector the much-needed trade finance.
For the construction sector, limited awareness of available trade financing options, stringent trade finance terms, limited instruments for construction SMEs, delayed payments from key sector clients such as governments were identified as leading stumbling blocks starving the sector’s SMEs the trade finance lifeline.
Related challenges were identified in the textile and garments sector, where a combination of high collateral requirements, limited suitable trade finance instruments, limited awareness of the few trade financing options available and limited risk mitigation instruments were the leading impediments blocking access to finance.