In their analysis on recent trends in trade finance in Africa, the 2021 African Trade Finance Survey Report stated that trade finance remains a key constraint to the financing and growth of African trade.
And while the past decade has seen relative improvement, the trade finance gap remains high throughout the region. “The continent’s unmet demand for trade finance over the past three years is estimated at about US$81 billion a year” according to the authors African Development Bank and African Export-Import Bank (AfDB and Afreximbank, 2020).
According to the survey, prospects for narrowing the trade finance gap are made still more difficult by the large-scale withdrawal of major international banks from Africa’s financial services landscape.
Across the continent, the report adds, African banks that had relied on correspondent banking relationships with financial institutions abroad to enable the provision of domestic and cross-border payments have been adversely impacted by the withdrawal of foreign banks from those arrangements.
“Those withdrawals have been prompted by the implementation of new regulations amidst more stringent compliance environment that arose in the wake of the global financial crisis of 2008.”
Figure 23 below shows the percentages of correspondent banking relationships cancelled during the first quarter of 2020. Of the 125 banks that experienced cancellations to correspondent banking relationships, 87.2 percent saw cancellations of less than five percent. In about 5 percent of banks, more than 21 percent of their correspondent banking relationships were withdrawn.
The main reasons for cancelling correspondent banking relationships during the first quarter of 2020 included increased risk perception associated with Africa’s customer base as a result of COVID-19, decreased profitability or lower transaction volume due to COVID-19, changes in sovereign credit risk rating, inability to comply with pre-existing legal or regulatory requirements in correspondents’ or issuing banks jurisdiction due to COVID-19 containment measures, and the inability to undertake customer due diligence due to COVID-19 containment measures.
The findings the authors say, are consistent with conclusions of both a 2015 AfDB study and 2018 Bérenger study indicating that the average rate of rejection of letters of credit, a key instrument used by banks in trade finance in Africa, was more than six percent.