3.1 Credit insurance, export credit and funds: The 5 pillars to help the African trade gap

Sponsored feature

Digital infrastructure frameworks could be a game-changer for African financial inclusion, particularly for MSMEs.

In a bid to enhance access to trade for micro, small, and medium-sized businesses (MSMEs), the World Trade Board has recently launched the ‘Financial Inclusion in Trade Roadmap’. The roadmap, developed through collaboration with major industry bodies and international stakeholders, seeks to address the challenges faced by MSMEs to accelerate their participation in global trade.

As part of the discussion, the panellists examined the five pillars of the ‘Financial Inclusion in Trade Roadmap’ reflecting on its adoption in Africa and its transformative impact in bridging the persistent African trade finance gap. They analysed how the roadmap’s coordinated approach can bolster the credit insurance landscape, enabling greater risk mitigation and financial security for market participants to reshape the trajectory of trade finance in the continent.

Pillar 1: Digital Infrastructure

Digital infrastructure frameworks could be a game-changer for African financial inclusion, particularly for MSMEs. Digital tools, such as Legal Entity Identifiers (LEIs) and e-invoicing, can profoundly improve information transparency, enhance credit decisionmaking, and enable remote understanding of financial transactions’ impact.

Referring to the influence of enhancing Africa’s digital infrastructure from a credit insurance perspective, Wulff identified 2 value-adding areas: information transparency and predictability. He highlighted the importance of tracking the flow of goods and payments, as this data can be used to assess the creditworthiness of buyers.

Such a systemic flow of information is quite challenging for African entities. This is where the roadmap offers a solution that assists credit insurers in their assessment processes. Wulff said,

“The World Trade Board works together with the organisation that publishes the Legal Entity Identifier. We can see on a oneto-one basis who is the seller and buyer, and we know it’s them.”

Reinforcing the power of the digital infrastructure pillar, Pezé expressed optimism about the feasibility of using technology in Africa to enable credit insurance to thrive, adding, “With the longterm commitment in Africa to develop that infrastructure, over time the cost of the risk will reduce.”

For DFIs, Hayashida highlighted the influential impact of the decentralised identifiers in qualifying ESG and development transactions.

“We cannot check every single document ourselves, especially for international banks and entities who don’t have a local presence in every single country,” Hayashida said.

This information becomes crucial for assessing the overall effect of trade transactions, which may affect the appetite of financial institutions and investors. Besides, Wilson emphasised the role of banks as aggregators in leveraging digital infrastructure to improve trade finance for MSMEs. Since African MSMEs face challenging infrastructure environment, such as limited access to electricity, Wilson proposed utilising banks as aggregators to improve access to trade finance for MSMEs saying, “If you can use the banks as an aggregator, apply the credit insurance to their trade credit portfolios, you could directly improve those trade financiers on the continent.”

Pillar 2: Legal/Regulatory Infrastructure

Adopting efficient regulatory regimes can greatly structure a favourable environment for reinsurers and insurers to operate in the African market. Adherence to governance standards and ethical behaviours is crucial to ensure that credit insurers’ performance aligns with industry norms.

“With a better legal environment, your asset and debt are recognised by the other country, and your ability to act legally has improved,” Pezé stated, underscoring the importance of stability and predictability in the regulatory environment to build trust and confidence among credit insurers.

Moreover, the establishment of a regulatory framework enables scalability in the African market and leverages the security levels of its participants. On that note, Adesanmi referenced the transformative potential of the African Continental Free Trade Area (AfCFTA), stating, “AfCFTA would help to dismantle the barriers within Africa, barriers around duties, free movement of goods.”

By creating a larger, scalable market, the AfCFTA fosters regional integration and encourages the production of goods within Africa, reducing dependence on imports and boosting supply chain security. This, in turn, provides insurers and reinsurers with a more stable and predictable business environment.

The sustained efforts to continuously improve the legal and regulatory infrastructure in Africa are fundamental to attracting and retaining reinsurers and insurers and promoting confidence in the continent.

“The only way it could work is with a long-term commitment,” Pezé said.

Pillar 3: Data Infrastructure

Striking a balance between providing sufficient capital to African companies, specifically MSMEs, and having enough risk information about clients is essential.

The strong correlation between transparency and the fight against corruption in Africa is validated based on the latest statistics by the Transparency International Index of Perceived Corruption, in which 34 African countries are among the lowest 80 of the 180 countries that were assessed.

“The more transparency you can provide, the less you will have the corruption problem,” Wulff noted. Recognising the potential of trade, especially for MSMEs, to reduce inequality, he called for “more transparent information not only for risk assessment but also for fighting corruption.”

Furthermore, Pezé suggested the establishment of independent organisations as repositories for shared information. He emphasised the feasibility of structuring data and the importance of collaboration among stakeholders, saying, “It’s essentially the willingness of different parties to collaborate and to feed that data.”

Pillar 4: Technical assistance

Technical assistance is of utmost significance in supporting African MSMEs and ensuring access to capital. However, Wilson pointed out the existing gap between international expectations and local African market realities, adding “If we’re expecting vast numbers of very granular individual SMEs across the continent, to seek out technical assistance so they can fit in with the expectations of the international community, I’m afraid that’s not very realistic.”

He explained that the immense scale and geographic diversity of the continent make it impractical to expect MSMEs to meet international standards.

On the other hand, Adesanmi presented a divergent view, focusing on the need for effective communication and translating technical assistance into practical actions, noting, “Let us move from talk into action, have pilot schemes so we know what needs to be improved, what we need to build on, and we can come up with a revised form of technical assistance.” Adesanmi also stressed the significance of measuring success periodically and conducting reviews to ensure that technical assistance reaches its intended beneficiaries.

Reaffirming the need for pilot programs and continuous measurement of success to refine and improve technical assistance initiatives, Hayashida shared the approach taken by the Multilateral Investment Guarantee Agency (MIGA) in identifying bottlenecks and facilitating successful pilot cases with government and subsovereign entities.

He further stressed the significance of disseminating information about successful cases to encourage similar entities to adopt and replicate those transactions, ultimately fostering the growth and development of MSMEs.

Pillar 5: New funding sources

The fifth pillar of the discussion focused on exploring new funding sources to encourage development investments in the

African market. The goal is to inject liquidity into the African trade finance market and reduce the cost of funding over time.

Adesanmi stressed the importance of exploring alternative funding options, including digital platforms and trade funds, to inject liquidity into the African trade finance market. He emphasised the need for incentivising banks and reducing the cost of funding over time, leading to a market where participants with a track record become industry leaders, stating, “If the banks are incentivised the right way over a period of time, the cost of the funding and the cost of capital would ultimately reduce.”

In addition, Pezé proposed a pragmatic, step-by-step approach with the long-term perspective of equity and reinsurance, supported by local governments and banks, suggesting, “Setting up an independent vehicle which will autonomously assess the risks and provide cover.”

Furthermore, a successful example of partnering with banks and factoring companies in Columbia was presented by Wulff. He added, “What we’ve seen working fairly well is partnering with banks and partnering with factoring companies. I’ve seen that work really well in Colombia.”

This case study shows the potential for credit insurance to thrive by means of private industry initiatives and government support. With the support of both private industry initiatives and government backing, credit insurance can thrive, providing protection and confidence to investors in African markets.

By leveraging digital tools, improving regulatory environments, promoting transparency, providing targeted technical assistance, and exploring alternative funding options, there are ways to use the roadmap to create a more inclusive and supportive trade finance ecosystem. Panel members identified how the collaboration of industry bodies, international stakeholders, and the commitment of local governments and banks can present a promising path forward to reshape the trajectory of trade finance in Africa, unlock the potential of MSMEs and lower the African trade finance gap.