Transforming trade finance in West Africa


International Financial Institutions, emphasise the crucial role of collaboration between banks, development finance institutions, export credit agencies, and insurers in unlocking growth. 

With approximately 30% of Africa’s 1,45 billion people, West Africa holds considerable regional and international trade potential. However, businesses in the region need more access to credit facilities to finance import and export transactions.

Trade finance, such as letters of credit and guarantees, mitigates risk and enables businesses to engage in trade confidently. Increased trade volumes can spur economic growth by allowing countries to import essential goods and export their products.

When trade finance simplifies and secures business transactions, the region becomes more attractive to foreign investors, and the influx of capital can further stimulate economic growth. Trade finance also promotes stronger regional integration by facilitating cross-border trade, encouraging collaboration and fostering economic partnerships, leading to a more robust and resilient regional economy.

However, reports from the World Bank, International Finance Corporation, and African Development Bank highlight the challenges that West African businesses face in accessing trade finance. While it’s difficult to determine the exact trade finance deficit, estimates suggest it is substantial.

A key challenge in the region’s export credit ecosystem – including international and African banks, export credit agencies (ECAs), development finance institutions, and insurance companies – is that most trade transactions are conducted in foreign currencies while contractors and suppliers are reluctant to accept local currencies due to the risk of volatile exchange rates.


Collaboration is the future of trade finance in West Africa


Additionally, many domestic markets in West Africa lack the capacity to provide large amounts of financing in local currency because their banks are small and their balance sheets are limited. This lack of liquidity makes it difficult to find institutions capable of participating in large transactions, such as infrastructure projects that are vital for development and growth.

Despite these challenges, conducting transactions in local currencies could be beneficial. Using local currencies, businesses can avoid exchange rate risks and have more predictable costs and profits, encouraging investment and economic growth. It also eliminates foreign exchange conversion costs, promotes greater participation in the formal economy, and fosters stronger regional economic ties. Local-currency transactions enable central banks to manage monetary policy more effectively, set interest rates and implement policies tailored to their economic conditions without being influenced by fluctuations in the dollar or euro.

However, high interest rates in West Africa – like Nigeria’s recent increase to 24,75% to combat inflation of over 30% – pose a challenge. While local currency transactions have advantages, they can also be costly.

Nevertheless, stakeholders in the trade ecosystem can still unlock value for West Africa. For instance, Nedbank CIB recently partnered with other commercial banks to provide a senior debt financing package of €90 million for a multipurpose bulk terminal in Côte d’Ivoire. This bulk terminal, which handles imports and exports of various commodities, is a crucial economic gateway between Côte d’Ivoire and neighbouring countries such as Liberia, Mali, Burkina Faso, and Guinea.

In such transactions, international banks typically provide long-term, competitively priced financing in euros or dollars. Development finance institutions also provide essential support through long-term debt financing, especially for projects with a strong developmental focus.

West Africa has seen numerous infrastructure projects receive support from ECAs. African banks play a vital role in these transactions. European banks investing in Africa often adopt a cautious stance due to their lack of presence on the continent and concerns about risk and collateral. Smaller African banks, more comfortable with local risk, often provide down-payment financing for ECA deals.

Nedbank, with a 21% stake in the pan-African banking group Ecobank, can provide financing without additional collateral due to its deep knowledge of local contexts. The recent agreement between Ecobank and the Pan African Payment and Settlement System enables 32 million clients of Ecobank to expedite cross-border funds transfers.

Collaboration is the future of trade finance in West Africa. To achieve rapid economic growth, countries in the region will need support from banks and financial institutions beyond their borders. These external players must collaborate to mitigate risk and embrace their role as educators when they advise clients on currency solutions to address foreign exchange instability, costs, and high local interest rates.

West Africa needs hundreds of billions of dollars of investments in their power, transportation, water, and sanitation sectors. The infrastructure backlog continues to grow due to rapid population growth and urbanisation. Addressing the trade finance gap in this region is urgent. Collaboration – led by organisations like Nedbank CIB, with its deep African roots and commitment to the continent’s development – will be key to overcoming this challenge.