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Overcoming Perceived Risks in Trade Finance

Posted on 28/07/2020

Trade Finance , Insights

In the wake of the COVID-19 crisis, the landscape for global trade looks markedly different than it did only a matter of months ago. To spur the recovery, corporates will need strong, committed banking partners to ease the return of cross-border trade. The challenge ahead is acute: the International Chamber of Commerce (ICC) predicts that globally, the trade-credit market will need capacity between US$1.9 trillion and US$5 trillion to spur a “rapid, V-shaped recovery”.

Within the key markets that BACB is active – particularly across North, East and West Africa – corporates’ access to trade finance can be more limited than most even in the best of circumstances. Pre-crisis, the African Development Bank (AfDB) had estimated that the trade-finance gap could be as high as US$120 billion. Compounding the challenge is that, under duress, many internationally-focused financial institutions typically begin to de-risk the balance sheet – reallocating capital from the often-considered riskier markets and business activities.

At BACB, we take a different view. As a banking partner committed to specialist markets, we are well-accustomed to operating and facilitating cross-border trade for clients in challenging market conditions. And, so far, that the sharp rise in letter of credit (LC) defaults that had been anticipated across Africa has not occurred. In fact, at the time of writing, we have yet to see an LC default during the crisis.

What’s more, we note that in recent years trade finance in Africa has steadily become a less risky proposition for lenders: 2016 and 2017, for instance, default rates declined from 0.59% to 0.05% for export LCs and 0.48% to 0.14% for import LCs. It is also important to note that today revised outlook for Africa in the crisis environment are more favourable than some regions (with some countries even maintaining positive growth projections of between 1.2% and 2.5%).

Today we undoubtedly face evolving and complex market conditions: volatility and uncertainty are rising, which means financial institutions must retain a sensible approach in their financing decisions. Yet, in our view, the fundamentals to serving our clients in specialist markets remain the same as before: profound local-market expertise; and a relationship-driven approach to banking. These two ingredients alone allow us to discern between the real and perceived risks and to keep our clients’ business moving with the financing they need. As specialists in the African marketplace, we are fully committed to serving as your banking partner through the challenging times, as well as the good.

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