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Nigeria, others hold Africa’s $350b real sector finance market


Roberto Azevedo

Roberto Azevedo

•WTO worries over financial sector’s capacity to support industrial firms

Citing a survey by the African Development Bank of 300 banks operating in 45 African countries, the World Trade Organsiation (WTO) has described the market for trade finance in Nigeria and other developing countries in the continent to be hovering around $350 billion.
Indeed, the WTO noted that the figure could be markedly higher if a significant share of the financing requested by traders had not been rejected, noting that based on such rejections, the estimate for the value of unmet demand for trade finance in Africa is about $120 billion, representing one-third of the gap in the existing market.

Comparing the situation in Africa to that of Asia, the WTO stated that the Asian Development Bank, in a similar survey in Asia, found preliminary estimates showing an unmet demand of about $800 billion.

Based on the outcome of the surveys, the WTO stated that a lack of capacity in the financial sector to support industries, and also a lack of access to the international financial system could be a significant trade barrier for developing countries.

According to the WTO, up to 80 per cent of global trade is supported by some form of financing or credit insurance noting that the impact of financial limitations on a country’s trading potential can be very, very significant.

The Director-General, WTO, Roberto Azevêdo in a statement stated that in many countries there is a lack of capacity in the financial sector to support trade, therefore limiting the ability of these countries to use simple instruments such as letters of credit for trade.

He said: “After the financial crisis, the supply of trade finance has largely returned to normal levels in the major markets — but not everywhere and not for everyone.

“The structural difficulties of poor countries in accessing trade finance have not disappeared — indeed the situation may well have declined due to the effects of the crisis.
“There are indications that markets are even more selective now. Under increased regulatory scrutiny many institutions have lowered their risk-appetites and are focusing more on their established customers.

Some are deliberately decreasing their number of clients in a so-called “flight to quality”. “In this environment, the lower end of the market has been struggling to obtain affordable finance, with the smaller companies in the smaller, less-developed countries affected the most.

“Members asked us to provide more evidence of this phenomenon last year. I was particularly struck by the fact that the financing gaps are the highest in the poorest countries, notably in Africa and Asia.

And I was struck by the size of those gaps”. Azevêdo explained that the main reasons for the rejection of requests for financing include, the lack of creditworthiness or poor credit history, the insufficient limits granted by endorsing banks to local African issuing banks, the small size of the balance sheets of African banks, and insufficient US dollar liquidity.

According to him, some of these constraints are structural, and can only be addressed in the medium to long term adding that the retreat of global banks from Africa, and from other poor countries, is one such issue.

“Small and medium-sized enterprises are the most credit constrained as 50 per cent of their requests for trade finance are estimated to be rejected. This is compared to just 7% for multinational corporations.

“Moreover, two-thirds of the companies surveyed reported that they did not seek alternatives for rejected transactions. “Therefore these gaps may be exacerbated by a lack of awareness and familiarity among companies — particularly smaller ones — about the many options, which exist. A large majority of firms stated that they would benefit from greater financial education”.

He lamented that the findings are particularly striking as Africa and developing Asia are two areas of the world in which trade has grown fastest in the past decade, stating that the potential evolution of new production networks is faster than the ability of the local financial sectors to support them.

“This way, the lack of development of the financial sector can be a significant barrier to trade. It can prevent developing countries from integrating into the trading system and accessing further trade opportunities.

And it can therefore prevent them from leveraging trade as a powerful source of development. “So we need to respond to this problem. At the WTO we are doing everything we can to help developing countries to integrate into the global trading system. This is reflected in our technical assistance work.

It is reflected in the outcomes of the Bali Package, which we are implementing now. And it is reflected in the current negotiations on the work programme to conclude the Doha Round. “But the effectiveness of all this work will be lessened if proper access to trade finance is not secured”, the WTO boss added.

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