The country’s cumulative trade value could increase by up to US$2.2 billion annually in the short to medium term, according to a recently released report by the International Finance Corporation (IFC), if access to trade finance, or credit facilities used by importers and exporters to transact business, is improved, especially through the banking system.
In a report titled “Trade Finance in West Africa,” which was produced in collaboration with the World Trade Organization (WTO), the trade finance ecosystem in Ghana, Nigeria, Côte d’Ivoire, and Senegal—collectively known as the ECOWAS4—was examined.
It suggests that if banks offer more facilities at lower costs, exports could rise by about US$1.6 billion (10.1%) and imports by US$500 million (7.7%).
“Under this scenario, Ghana would experience the second-largest export boost in the ECOWAS4 behind Senegal, at 21.6%, and second-largest import boost behind Nigeria, at 8%,” the report notes.
The findings of the survey, which asked “lenders accounting for almost the entire of the four countries’ banking assets” for their responses, showed that Ghana has a trade finance market for exports and imports with an estimated US$9 billion market annually.
However, there is a US$3 billion annual deficit, with about 26% of the requested trade finance going unfulfilled each year. Banks are concerned about perceived high credit risk, insufficient collateral, individual customer loan limits, inadequate documentation, and a lack of affordable sources of funding for trade finance, among other things.
This trade finance deficit is comparable to the total ECOWAS4 value, which is estimated to be US$14 billion and shares the same justification for bank financing requests being denied.
These factors made sure that domestic trade finance markets continued to favour established large exporters and importers, while rejections were heavily weighted against small and medium-sized enterprises (SMEs), particularly those that are owned and led by women.
“SMEs, with their smaller balance sheets, are more likely to face onerous collateral requirements and often lack the financial sophistication to negotiate effectively with their financiers.
Consequently, SMEs, including women-owned SMEs, are disproportionately affected by trade finance gaps,” it noted.
However, of the four countries polled, Ghana had the highest rate of trade finance covered by bank intermediation, at 41 percent, matching the continental average of 40 percent. Nonetheless, this is significantly lower than the global average of 60 to 80 percent.
According to the report, Ghana has a relatively small network of correspondent banks – lenders who provide banking services to financial institutions in other countries.
“With an average of six correspondent bank relationships, Ghana’s banks were the least internationalised of the ECOWAS4,” the report reads in part.
The average cost of a letter of credit in Ghana is around 2.3%, which is comparable to the 2% global emerging market average. It is, however, still prohibitively high – higher than the 0.25-0.5% that is the norm in more advanced economies.
A coordinated effort from key stakeholders would be necessary to change the narrative, which would greatly increase trade within the sub-region and offer many benefits in light of the African Continental Free Trade Area (AfCFTA).
“The most effective measures would include increasing the provision of trade finance through traditional and new instruments, more firmly integrating trade finance into the implementation of the AfCFTA, and expanding the range of firms that can access trade finance by working with large and small banks to extend their offerings to SMEs,” the IFC noted.
The expansion of application and alternative forms of trade finance, such as supply chain finance, trade finance funds, or working capital e-platforms, were highlighted as additional measures. These included strengthening of correspondent banking relationships, improving access to trade data, and the effective enforcement of rules for collateral.
“A higher level of digitisation could also help reduce the processing costs for trade finance instruments. Banks and other institutions can also provide training and outreach to smaller and women-owned firms to better inform them of what facilities are available, and help them to access the market,” it added.
Adopting these cost-cutting measures is predicted to increase the country’s exports to the other ECOWAS4 countries by up to 20.7%, and increasing finance coverage to levels comparable to those found globally—roughly 60 percent—will increase real exports by 15.2% and real imports by 12.5%.
