Investec’s Wilson on how to bridge Africa’s trade finance gap

Africa's trade finance sector, estimated at around 120 billion dollars, plays a crucial role in driving socio-economic development on the continent. However, micro, small, and medium enterprises (MSMEs), which employ up to 85% of the workforce in Africa, often face a significant trade finance gap. This gap is exacerbated by stringent global banking regulations that push financial institutions towards investing in government bonds rather than providing trade finance to MSMEs. To delve deeper into this issue, George Wilson, the Head of Institutional Trade Finance at Investec, sheds light on the root causes of the trade finance gap in Africa. Wilson explains that African banks, whose core business involves financing SMEs and facilitating trade, are compelled by global regulations, such as Basel, to prioritize investing in government bonds over trade finance for African enterprises. This is primarily due to the higher returns and lower capital costs associated with government bonds. As a result, the lack of profitability in providing trade finance leads banks to opt for government bonds, thus widening the trade finance gap in Africa. Wilson emphasizes the need for solutions that are not only informed by African perspectives but also tailored to the unique context of the continent. He points out that international efforts to address the global trade gap have often overlooked the specific challenges faced by African economies. Wilson advocates for a collaborative approach involving African banks and multilateral Development Finance Institutions (DFIs) to develop sustainable solutions to bridge the trade finance gap. DFIs, with their significant resources, can play a crucial role in supporting African banks in providing much-needed finance to SMEs. Wilson highlights the importance of working together to address the root causes of the trade finance gap 'The reality is that the root causes are extraneously imposed on Africa. And it's only fair and right that the solutions should be aided by multilateral DFIs, as you suggest, particularly as they're really the only entities that have the resources to actually do anything positive.' When discussing the potential impact of the African Continental Free Trade Area (AfCFTA) on trade finance, Wilson acknowledges the positive influence of the agreement in enhancing intra-African trade and economic growth. While the removal of tariffs and the promotion of free movement of goods under the AfCFTA can benefit African merchants with existing trade finance, Wilson cautions that it may not directly address the core issue of access to finance for SMEs. He emphasizes the need to focus on resolving the underlying challenges that prevent SMEs from accessing trade finance in the first place. Despite the potential benefits of the AfCFTA, Wilson underscores the importance of addressing the fundamental barriers to trade finance to drive sustainable economic development in Africa. In conclusion, the discussion led by George Wilson highlights the complexities and challenges of bridging the trade finance gap in Africa. By emphasizing the importance of tailored solutions, collaboration between African banks and DFIs, and a focus on addressing root causes, Wilson advocates for a holistic approach to tackle this pressing issue.