October 7, 2017//-Africa’s trade finance gap in 2013 and 2014 was estimated at USD 94 billion and USD 91 billion respectively, while the comparative estimated gap was USD 120 billion in 2011 and USD 105 billion in 2012, according to African Development Bank’s latest African Trade Finance survey report.
Although, this trend suggests a gradual narrowing of the gap over time, the latter remains quite significant. The two major reasons for banks’ rejection of trade finance facility applications are weak client creditworthiness and insufficient collateral.
Banks are also facing several challenges hampering the growth of their trade finance portfolios and cite competition, lack of sufficient risk capital and limits with correspondent banks as the main constraints.
For the first time, the survey presents some evidence on constraints to access bank-intermediated trade finance for SMEs in Africa.
While there is no clear consensus on the share of SMEs operating in the private sector in Africa, it is estimated to account for more than 80 percent of all enterprises in the continent.
Given the real and perceived risks attached to them, the majority of SMEs face challenges in accessing bank-intermediated trade finance. The survey results show that, on average, only 28 percent of total trade finance portfolios of responding banks support SMEs with the remainder going to large enterprises.
SMEs and New Trade Finance Customers
It is estimated that SMEs account for 90 percent of firms in West Africa (GIIN, 2015). They also account for 80 percent of all private sector employment in Africa, according to the World Economic Forum.
On average, the ten biggest trade finance customers account for more than half (58 percent) of a bank’s total trade finance assets while SMEs account for less than 30 percent.
This suggests that the banks’ perception of SMEs being high risk clients also applies to trade finance facilities. Indeed, our findings show that the rate of default on trade finance facilities extended to SMEs is higher than that on banks’ overall trade finance activities.
The average default rate on SME trade finance assets in 2014 is 14 percent, far higher than the overall default rate of 5 percent on banks’ total trade finance assets. This trend is observed across all sub-regions.
In Central Africa, the default rate on SME trade finance customers is as high as 31 percent versus 9 percent for the sub-region’s overall trade finance portfolio. More than half of bank-intermediated trade finance benefit a few large corporates.
Banks’ new trade finance clients are particularly more constrained. Across the continent, the average share of trade finance portfolio dedicated to new customers is around 15 percent, although the default rate among this group is only 3 percent—lower than the 5 percent default rate on banks’ total trade finance assets.
This suggests that new entrants are disadvantaged by a relationship lending technique, which puts a premium on longstanding relationships.
African Eye Report
