Accelerating Inclusive Trade Across the African Continent
Trade finance plays a vital role in supporting the growth of African economies by providing businesses with access to capital and mitigating the risks associated with international and regional trade. Despite this importance, Africa continues to face a significant trade finance gap—estimated at over $81 billion annually according to the African Development Bank. This gap disproportionately affects small and medium-sized enterprises (SMEs), which are the backbone of the continent’s economic activity.
Africa’s trade finance market is valued at over $100 billion annually, but it remains heavily concentrated in a few large economies such as Nigeria, South Africa, Kenya, Egypt, and Morocco. Smaller and landlocked countries often struggle with limited access to banking services, low correspondent banking coverage, and fragmented trade corridors. The disparity between regions and sectors further exacerbates trade inequalities, especially in agribusiness, textiles, and informal cross-border trade.
The implementation of the African Continental Free Trade Area (AfCFTA) presents a transformative opportunity to boost intra-African trade, streamline cross-border payments, and strengthen financial integration. However, realizing this potential requires investment in trade infrastructure, harmonization of regulations, and expansion of trade finance availability. The role of development finance institutions (DFIs), multilateral banks, and regional trade finance initiatives such as Afreximbank is essential in bridging the financing gap and de-risking African trade.
Additionally, digital innovations—such as blockchain-based trade platforms, e-invoicing, and electronic customs clearance—are beginning to lower transaction costs and increase transparency in trade financing. Fintech startups and mobile-based financial services are gradually improving access for underserved businesses, though scalability remains a challenge. For Africa to fully benefit from trade finance, both public and private sectors must collaborate to modernize financial systems, invest in credit risk infrastructure, and ensure inclusive access to capital across all economic segments.
What is Trade Finance?
Trade finance encompasses a range of financial instruments and products used by companies to facilitate international and domestic trade transactions and it helps reduce the payment risk between buyers and sellers, provides working capital during the trade cycle, and enhances trust between trading partners.
By supporting exporters and importers with the necessary funding and guarantees, trade finance improves liquidity and shortens cash conversion cycles, this makes it especially critical for emerging markets and developing economies, where access to conventional credit is often limited.
Common Trade Finance Products
Key Challenges in African Trade Finance
WHY USING A LETTER OF CREDIT FOR AFRICA TRADE
In Africa as well, a letter of credit is a financial instrument that plays a major role in foreign trade since it alone facilitates the vast majority of export and import transactions while comforting the financial risks of both parties, the African exporter and African importer.
A letter of credit (“LC”) is a written undertaking by a bank (the issuing African bank) to the seller (the beneficiary) in accordance with the instructions of the buyer (the African applicant) to effect payment up to a prescribed amount within a specified time period against presentation of prescribed documents, provided these are correct in order i.e. they conform with the requirements of LC and International Chamber of Commerce (ICC) guidelines.
PARTIES INVOLVED IN A TRANSACTION GOVERNED BY A LETTER OF CREDIT IN AFRICA
The actors of a letter of credit are four:
The importer who opens a letter of credit with his bank.
The importer's bank will issue the letter and send it to the exporter's bank.
The exporter's bank that will receive the letter and who will verify that the documents sent by the exporter comply with the letter of credit received and therefore with the commercial contract.
The exporter also called the beneficiary of the letter who will receive the funds from the export operation.
Sometimes a fifth party contributes to the transaction, it is the refund bank that will settle the exporter's bank in case the importer's bank does not have an account at home.
HOW DOES A LETTER OF CREDIT WORK? PRINCIPLES TO APPLY IN AFRICA
The operation of a letter of credit is based on the principle of give and take, that is to say that both parties will only send their money against goods and vice and versa if the banks that protect them agree that everything reflects the clauses of the sales contract.
In Africa, thanks to the letter of credit the African importer's bank is obliged to guarantee to the exporter's bank that the payment is made as soon as the documents necessary for the recovery of the goods are sent by the confirming bank of the exporter.
In fact, both banks, the seller's and the buyer's bank, verify and guarantee that both parties respect their obligations, one that the payment will be made and the other that the goods comply with the terms of the contract.
As to the African trade business as well, the operation of a letter of credit follows a chain of actions that range from the signing of the commercial contract between the importer and the exporter to the payment of the goods and the delivery thereof.
PROCESS OF A LETTER OF CREDIT
A letter of credit follows the steps below:
The buyer opens a letter of credit with his bank for the benefit of the seller.
The buyer's bank sends via SWIFT the text of the letter of credit giving details of the transaction and payment terms to the seller's bank.
The seller's bank notifies the seller that it is in possession of the letter and that it is ready to add its confirmation, means, it will pay even if the buyer has defaulted.
The seller sends all the necessary documents so that the buyer can recover his goods.
The seller's bank checks if the documents comply with the buyer's requirements.
The seller sends all the necessary documents so that the buyer can recover his goods.
As soon as the document are found conform, the seller's bank pays the exporter and sends the documents to the buyer's bank.
The buyer is able to use the documents to pick up the goods from the carrier.
WHAT IS AN LC CONFIRMATION FOR AFRICA?
A confirmed credit is one to which a second bank, usually in the exporter’s country, adds its own undertaking to that of the African issuing bank, that payment will be made.
Confirmation means a definite commitment of the confirming bank, in addition to that of the issuing bank, to honor or negotiate a complying presentation.
Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank's authorization or request.
When the beneficiary receives an irrevocable and confirmed letter of credit, he has not only the commitment of the issuing bank, but also a binding undertaking given by the confirming bank to pay when documents are presented which comply with the terms of the credit.
TYPES OF LETTER OF CREDIT
Depending on the type of transaction and the requirements of the importer and the exporter, there are different types of letter of credit:
Confirmed and irrevocable letter of credit.
Unconfirmed letter of credit.
Stand-by letter of credit.
Back-to-back letter of credit if the LC is not transferable.
Transferable letter of credit, if the exporter puts the letter in favor of another seller.
Letter of credit using blockchain.
As soon as the document are found conform, the seller's bank pays the exporter and sends the documents to the buyer's bank.
The buyer is able to use the documents to pick up the goods from the carrier.
REGULATION APPLIED TO THE LETTER OF CREDIT (UCP 600)
The letter of credit obeys strict regulations adopted by all parties using foreign trade instruments under Uniform Customs & Practice for Documentary Credits 600 (UCP 600) which are regularly published by the International Chamber of Commerce.
The purpose of this regulation is to enforce compliance by all parties involved in a letter of credit with their commitments in a transaction covered by a letter of credit; the UCP 600 being applied only when it is mentioned in the text of the letter sent by SWIFT.
A letter of credit is in principle and very simple to understand and use, it is the details that often make the difference and a company should always leave that to documentary credit specialists.
BENEFITS OF THE LETTER OF CREDIT FOR AFRICA TRADE
The advantages of the letter of credit are numerous especially in the case where the importer and the exporter do not know each other:
The seller is certain to recover his money as soon as his bank has added his confirmation.
The buyer is reassured that the documents provided are in accordance with the goods.
The seller does not have to worry about the money transfer or problems of foreign exchange regulations and currencies of the buyer's country.
The duration of the transaction is often fast and only takes a few days.
With a letter of credit, the exporter an imminent cash back guarantee for his banker.
DISADVANTAGES OF THE LETTER OF CREDIT FOR AFRICA BUSINESS
The disadvantages of a letter of credit applied to Africa are few:
The seller requesting a letter of credit for the sale of his merchandise indicates that he has no confidence in the buyer.
Fees and commissions are high compared to a documentary discount.
Risk of documentation for the buyer when there is a difference between the details of the documents and the goods arriving at the buyer's port.
Sometimes difficult to detect even for banks if a document is wrong or not.
AFRICA'S LETTER OF GUARANTEE
A bank guarantee/bond may be defined as the irrevocable obligation of a bank to pay a sum of money in the event of non-performance of an undertaking by a third party. The guarantee is a separate obligation independent of the principal debt or the contractual relationship between the creditor and the principal debtor. Under the terms of the guarantee the bank undertakes to pay on first demand provided that the conditions contained in the guarantee are fulfilled. Bank Guarantees are subject to the laws of the country of the Guarantee issuing bank unless otherwise it is mentioned in the guarantee documents.
A bank guarantee which has already been issued cannot be revoked; further, an amendment of the guarantee conditions is only possible with the consent of all parties to the guarantee.
A guarantee is completely autonomous from the underlying contract/business. Objections from the underlying transaction (for instance in case of a claim for payment) may therefore not be raised.
Guarantees are payable at first demand, are usually valid for a stated period, although some can be open-ended, and cannot be unilaterally extended/curtailed by the applicant.
TYPES OF LETTER OF GUARANTEE
There are a number of different types on guarantees but the main forms of guarantee are as follows:
Bid or Tender Guarantee
Performance Guarantee
Advance Payment Guarantee
Warranty or Maintenance Guarantee
TRADE FINANCE PRODUCTS FOR AFRICA
CONFIRMING BANKS AND ISSUING BANKS FOR LETTER OF CREDIT IN AFRICA BY COUNTRY