(Ecofin Agency) – The report points out that the low share of trade supported by financing is partly explained by the fact that many importers and exporters have given up seeking financing from banks, due to high collateral requirements. , high interest rates and past rejections.
In the four largest economies of ECOWAS, namely Nigeria, Côte d’Ivoire, Ghana and Senegal, trade finance covers only 25% of trade flows of goods, according to a report published last May by the Foundation for Studies and Research on International Development (FERDI).
Entitled ” Support trade finance for the expansion and diversification of international trade in West Africa “, the report is based on the results of a survey carried out by the World Trade Organization (WTO) and the International Finance Corporation (IFC) among all 78 banks operating in these four countries named ECOWAS-4 .
This survey established that the total size of the trade finance market in ECOWAS-4 in 2021 was $42 billion, supporting only 25% of trade flows in goods ($168 billion) from these countries. this year.
There are, however, significant differences between the four countries. In Ghana, trade finance covers 41% of trade flows of goods compared to 33% in Côte d’Ivoire, 21% in Nigeria and 15% in Senegal.
The coverage rate of trade finance in the four countries studied is thus well below the continental average estimated at around 40% and the levels recorded in advanced countries, which range from 60 to 80%.
The main reasons for this low coverage are not only the high rejection rates of applications (21% of the number of applications and 25% for their total value), but also the fact that many importers and exporters have given up on applying for funding. to banks, due in part to high collateral requirements, high interest rates (much higher than the emerging market average) and past rejections.
A market concentrated on well-established exporters and importers
The report highlights that banks are almost the exclusive providers of trade finance in ECOWAS-4. The ten largest banks in Nigeria, Côte d’Ivoire, Ghana and Senegal account for more than two-thirds of the trade finance market, although smaller banks dedicate a higher proportion of their assets to this segment and receive two-thirds of the total requests. Scale effects lead larger companies to larger banks, which provide a larger network of international correspondent relationships and can accept larger transaction values, commensurate with the size of their balance sheets. These self-selection effects do not favor new firms, including small and medium-sized enterprises (SMEs) operating in the new sectors. As a result, local trade finance markets focus only on well-established exporters and importers, using traditional trade finance products such as letters of credit for larger importers and pre-shipment finance for exporters. commodities, such as crude oil, cocoa and rubber.
Consumer goods are the most frequently supported products, with 90% of banks surveyed providing finance to this category. Capital goods, on the import side, and exports of new products in agro-food chains that could play a role in the integration of ECOWAS-4 into regional or global value chains, receive proportionally less support from banks.
Net borrowing costs ranging from 6% in Ghana to 17% in Nigeria
On the other hand, the cost of trade finance in the four West African countries studied is very high by international standards. The net cost of borrowing for a trade transaction (i.e. the net rate charged to the trader minus the national policy rate) is estimated at 6% in Ghana, 9% in Côte d’Ivoire and Senegal, and up to 17 % in Nigeria. SMEs generally face higher costs than larger companies. These costs are up to twice the amount for trade credits or import guarantees.
A foundation under French law aimed at promoting understanding of international economic development, FERDI points out, based on the data collected in the survey conducted by the WTO and the IFC, that the removal of bottlenecks in trade finance could stimulate ECOWAS-4 merchandise trade by 8%, or $13 billion per year, in a scenario where the supply of trade finance in the four countries is brought to the level of the average for the African continent (of 25 % to 40%), while costs are reduced to levels comparable to those of emerging countries.
Raising the supply of trade finance to the levels recorded in advanced countries could, in turn, increase trade flows from ECOWAS-4 countries by 16%, or $26 billion per year.
To increase the supply of trade finance in West African countries, the report recommends integrating trade finance more firmly into the implementation of the African Continental Free Trade Agreement, strengthening making more data available to banks to broaden the range of companies that can access finance as well as using alternative forms of trade finance such as factoring, trade finance funds or electronic fund platforms rolling stock which are currently embryonic in the region.
