Majority of African lenders are locked out of the lucrative trade financing deals in the continent mainly due to shortages of foreign exchange and regulatory restrictions.

 

This has pushed the continent into a huge trade financing deficit, while stifling trading activities, a situation that has been compounded by the Middle East conflict related disruptions of global supply chains.

The African Development Bank (AfDB) says higher oil and fertiliser prices, elevated freight and insurance costs, weaker currencies and tighter correspondent-bank risk appetite could widen the trade finance gap in the continent to between $86.6 and $102.6 billion by 2027.

The latest survey by the lender on trade finance in Africa shows majority of banks are unable to effectively participate in trade financing activities in the continent mainly due to limited foreign-exchange liquidity and insufficient limits with correspondent banks.

Over time, the risk-capital constraints and regulatory requirements have also become key impediments to the growth of banks’ trade finance portfolios, the survey shows.

Insufficient limits with correspondent banks mean that a global or intermediary bank has either restricted the total value of transactions it will process for your financial institution or suspended cross-border payment facilities due to strict risk, compliance, or liquidity constraints.

The findings of the survey are contained in a report titled “Trade Finance Supply in Africa: Post-Covid Trends and Emerging Opportunities,” published in May.

According to the survey increased foreign-exchange liquidity pressures, in addition to sanctions and supplementary compliance burdens that have imposed know-your-customer scrutiny, have potentially reduced the willingness of banks to engage in trade finance transactions.

The survey report says higher risk aversion and increased cost of trade finance operations, driven by higher compliance costs, have also contributed to making trade finance less accessible to banks’ customers in the continent“These new requirements may also lead to a drop in global international banks’ trade finance exposure in Africa, further contributing to another constraint to trade finance growth—namely, insufficient limits with correspondent banks, which the current survey has revealed as already the second major constraint to trade finance on the continent,” the survey report states.

Between 2020 and 2024, a larger proportion of banks (36 percent) cited limited foreign-exchange liquidity as a major constraint to trade finance growth relative to the previous surveys (18 percent on average).

According to the survey the Covid-19 pandemic caused significant declines in trade and tourism earnings in hard currency for African countries, with the hardest-hit implementing foreign-currency restrictions to shore up reserves. This contributed to the declining of foreign currency available to financial institutions and traders alike.

In addition, capital outflows further weakened local currencies relative to the dollar, with African firms and banks now seeking to engage in more local currency transactions.

The survey shows that international banking standards have tightened since the 2007–2008 global financial crisis and related Basel III reform measures and this is negatively impacting trade finance activities, particularly in Africa.“These constraints could tighten with the Basel III Endgame (the latest implementation phase of Basel III), which began in July 2025 and involves higher capital requirements, a new leverage ratio framework that increases banks’ capital reserves against their assets, and stricter liquidity requirements,” the survey report explains.

“Collateral requirements for trade finance in Africa tend to be very high, often including significant cash collateral requirements, bank guarantees, or high-quality tangible assets, such as property or equipment,” the survey report states. “This is mainly because banks typically do not consider the merchandise to be traded as sufficient collateral, despite this being at the heart of the International Chamber of Commerce rules on letters of credit.”In 2024, the unmet demand for trade finance in Africa was estimated at $74 billion, with total African merchandise trade and the global trade finance gap estimated at $1.35 trillion and $2.5 trillion, respectively.

The unmet trade finance demand in Africa is estimated at 5.4 percent of the region’s total trade value in 2024 and 3 percent of the global trade finance gap.

According to the survey, the share of commercial banks engaged in trade finance in the continent remained relatively flat at 77.4 percent in five years (2020-2024), and increased just marginally to 78 percent in 2024 from 77 percent in 2023.

On average, the majority of foreign and privately owned banks operating in Africa are relatively more engaged in trade finance (49 percent) than most local and privately owned banks (36 percent).

The survey notes that geopolitical tensions and related disruptions of global supply chains have contributed to challenges in trade and trade financing.

The outbreak of the conflict in the Middle East in February and impasse over the closure of the Strait of Hormuz have added a further layer of vulnerability.

The survey notes that since roughly 20 percent of global oil supply transits the Strait of Hormuz the conflict has driven sharp increases in energy and freight costs.

This has translated into higher import bills, currency pressures, and tightening fiscal space for Africa’s predominantly net oil-importing economies and countries that depend on the Middle East for fertiliser and related products.

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