The Trade Finance Market In Africa

By M. Isi Eromosele

African trade has grown rapidly over the past decade, driven by growth in south-south trade and the growing importance of Africa’s role in global commerce as a supplier of key raw materials to emerging Asia.

In 2009, 73 percent of Asia’s raw materials were imported form Africa. China is Africa’s second largest trading partner and is among the top ten trading partners of 26 African countries.

African exports performed less poorly than global exports during the financial crisis while imports declined faster than global imports.

The period of 1999 to 2008 saw rapid growth of Africa’s trade with the world. According to the World Trade Organization (WTO), Africa’s trade grew from 2.2 percent of the continent’s GDP in 1995 to 3.3 percent in 2008.

Spurred by global growth, demand for Africa’s primary products, strong regional economic growth, and increasing integration into global economies as well as high commodity prices, African trade grew faster over the course of the 2000s than any other region except China.

As world trade shrunk by 12 percent from 2008 to 2010, Africa’s export performance remained stable and robust, shrinking only 8 percent. African imports performed less well, shrinking by 18 percent from 2008 to 2010.

The rapid growth in trade with developing countries in the period preceding the global financial crisis was comprised principally of growth in primary exports from Africa and imports of machinery and consumer goods into Africa.

As Asian economies continued their rapid growth, the share of primary products they imported form Africa rose to 73 percent in 2008. Fuel has dominated this growth as a result of increasing oil production in Africa and rapidly rising prices of oil.

Analysis Of Trade Finance Availability In Africa

Prior to the start of the global financial crisis in 2008, trade finance availability was increasing in most markets. The crisis led to lower demand, increased risk perceptions and volatile markets. Tenors have shortened to less than 180 days versus maximum tenors of 270 to 360 days in 2007.

Prices, which had reportedly risen 50 percent from late 2008 to mid 2009, have fallen to 25 percent above pre-crisis levels. There is an overall decrease in demand for trade products due to decreased economic activities but a higher proportion of transactions are using trade instruments. International commercial banks that historically have provided confirmation lines for those trade instruments remain risk averse.

The global financial crisis that commenced in 2008 resulted in a sharp drop in global trade. Total global trade fell by 12 percent over the course of 2008. Trade fell in both value and volume terms as lower commodity prices, due to falling demand, further impacted trade receipts.

In early 2009, banks in all markets in Africa reported decreased availability of trade finance, shortening tenors and higher prices. Banks contacted in Senegal and Ghana reported prices for letter of credit confirmation had increased by 50 percent from pre-crisis levels while banks in Kenya consistently reported prices doubling.

Nigerian banks indicated that price increases had been significant while financial institutions in South Africa reported that prices for confirmation lines had increased by over 25 percent and that liquidity was becoming difficult to access.

Similarly, banks in all markets reported that available tenors were shortening with most indicating that lines were no longer available for more than 180 days versus maximum tenors of 270 days to 360 days in 2007.

The impact of these shocks was moderated by falling demand for trade instruments. In early 2010, banks reported that their customers were using less trade finance instruments. By early 2011, commercial banks in Africa did report, however, that exports have rebounded due to increasing demand of Africa raw materials from emerging Asia.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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