Tailoring success: The custom fit of export finance in Africa

Apr 10, 2024 | Insights

The following article has been aggregated from Trade Finance Global. To read the article on their website, click here.

Imagine showing up to a wedding in someone else’s suit.

It might fit ok, there is even a chance that it will fit pretty well if the other person has a similar figure to you. But there is a chance it would be too baggy or too tight or too long and you just would not look your best.

If you want to cut a striking figure, you need a suit that is tailored to you.

The same is true in the world of export finance; it is not a one-size-fits-all solution.

What works fantastically well in one market, might work in another. There is a chance that it might even be the exact solution that the market has been looking for. But odds are what that other market needs is something different: a solution specially tailored to its own conditions.

Forcing solutions that work in one context onto another without considering the unique situations of each, is a recipe for disaster.

Take Africa for example.

One out of every six African exporters fails to meet their export sales targets due to a lack of funding, resulting in a loss of approximately $50,000 per trade, per small and medium-sized enterprise (SME) per year, according to the African Development Bank.

The deficiency of financial support ultimately leads to the trade finance gap of more than $81 billion that the continent currently faces, which impacts SMEs the most.

When it comes to export finance, Africa – and each of the many unique markets within the continent – requires uniquely tailored solutions to be able to thrive.

Export finance in the African context

African countries, which are rich in natural resources, rely heavily on exports as a means of generating alternate foreign direct investment and capital flows. However, the continent is a net importer.

This creates a challenge for most countries in that the demand for foreign capital is much larger than industry exports.

To address this challenge, there is a growing recognition that exporters need support through grant schemes or tax incentives in special economic zones if countries want to increase their exports.

Export finance in Africa is typically provided by export credit agencies, development finance institutions, multilateral development banks, and government bodies. Commercial banks and private investors also play a role, supplementing access to export financing with traditional trade finance facilities.

However, the latter category of trade financiers may face challenges in serving the magnitude of the export funding requirement in a market due to regulatory prescription and risk appetite calibration.

Export finance in Africa can address the need for technological advancement by providing funding to acquire advanced technologies, machinery, and equipment, allowing businesses to modernise their operations, improve efficiency, and enhance productivity. It can also be customised to support technology-related projects and innovation in key sectors.

Export credit agencies and financial institutions can collaborate to offer favourable financing terms for technology-focused exports, making it more accessible for African businesses to adopt and implement innovative technologies. This helps bridge the technological gap and boosts the competitiveness of African products and services in the global market.

By facilitating access to finance for technology-driven initiatives, export finance plays a significant role in empowering African businesses to embrace innovation and stay competitive. These may also play a role in facilitating trade within Africa.

Intra-African trade

The African Continental Free Trade Area (AfCFTA) aims to enhance trade between African countries and increase their global trading position by establishing the world’s biggest free trade area. The goal is to improve the low levels of intra-African trade, boost local businesses, drive GDP growth, and reduce poverty levels.

Once fully implemented, it will eliminate tariffs on 90% of goods and reduce trade barriers in services, potentially increasing Africa’s income by $450 billion by 2035.

AfCFTA is expected to grow intra-African trade by 3.9% per annum.

However, to support increased intra-African trade and provide easier accessibility, the continent needs capital investment in infrastructure – such as roads, railways, and bridges – and in technology.

Digitalisation not only benefits smaller businesses but also offers digital supply chain finance solutions that make it easier and more affordable for small and emerging businesses to access trade finance solutions.

These investments can also open the door for increased sustainable finance practices within export value chains, which is particularly important amid growing awareness and emphasis on incorporating environmental, social, and governance (ESG) considerations.

African countries increasingly recognise the importance of sustainable development, which extends to export-oriented industries. Adopting eco-friendly and socially responsible practices can enhance the competitiveness of African exports in global markets.

International investors and consumers also prefer products made with sustainable and ethical sourcing. This encourages African businesses to integrate sustainable practices into their export value chains.

The convergence of intra-African trade efforts and adopting sustainable finance practices positions the continent for a more resilient and environmentally conscious economic future but will take a collaborative effort.

Public-private collaboration

Public-private collaboration can play a pivotal role in promoting African trade, including intra-African trade, through a synergy that taps into the strengths and resources of both sectors.

Such collaboration addresses the inherent gaps left by each sector, crafting a robust ecosystem for economic growth and trade enhancement.

The public sector, comprised of governments and their agencies, sets the stage by developing and enforcing policies, regulations, and infrastructures that are vital for trade facilitation.

These include streamlining customs procedures, investing in critical transportation and logistics infrastructure, and negotiating favourable trade agreements that broaden market access. Additionally, public institutions offer essential services such as export credit guarantees, insurance, and financing programs, which are crucial for businesses looking to venture into international markets.

On the other hand, the private sector, represented by banks, financial institutions, and businesses, brings to the table tailored financial products and services that meet the specific needs of exporters.

These entities are instrumental in providing the capital, risk management solutions, and market expertise necessary for navigating global trade.

Together, the public and private sectors engage in public-private partnerships that enhance coordination, share expertise, and leverage resources effectively. This collaborative effort not only bridges the funding and information gaps but also facilitates risk mitigation and market access, making the export process more efficient and less daunting for businesses.

By fostering a conducive environment for trade, these partnerships catalyse the growth of African exports, both within the continent and beyond, thereby contributing to the overall economic development and global competitiveness of African countries.

Through such synergies, African nations can harness the full potential of their trade capacities, promoting sustainable growth and development across the continent.

Making the suit fit

Export finance capacity plays a critical role in enhancing the resilience of African economies during times of crisis. It does so by providing access to capital, diversifying revenue sources, and promoting economic stability through sustained trade activities.

This financial strength enables countries to navigate challenges, mitigate shocks, and maintain essential services, fostering economic resilience.

By pausing to understand the unique African context and the challenges that it brings, finance providers and governments can taper and hem the solutions they offer to ensure that every African export market looks and feels as dashing as possible in its new suit.

With the right financing options available, African exporters will be ready to take on the world.