Africa’s population has swelled to account for around 17% of the world’s population. Over the same period, according to figures from the African Development Bank (AfDB), Africa’s share of global trade has decreased from 4.4% to just 3%. This paradox, in part, is the result of a lack of access to and awareness of trade finance solutions from banks on the continent.

As a result, the African banking sector is seeing a push towards digitalising trade finance. This is driven by the need to reduce the high costs of accessing trade finance and simplify access for companies of all sizes. Many different players in the ecosystem are trying to make things quicker, more efficient, and cheaper for banks and businesses—a need made particularly urgent because of some significant external setbacks to trade finance capabilities in recent years.

Banks play a crucial role in driving the digital transformation of trade by providing financial services, risk management and technology solutions to enhance the efficiency and reliability of digital trade processes. This includes digital payments and transactions, where banks facilitate secure digital payments and enable businesses to engage in online trade seamlessly. 

The wider picture of African trade finance

It may be surprising that Africa’s trade finance gap was actually sinking before the COVID-19 Pandemic. The gap in the continent shrank from $120 billion in 2011 to just under $82 billion in 2019—only to bounce back significantly as a result of COVID disruptions to trade and trade finance activities in banks. As of 2020, only 40% of African trade is bank-intermediated, half of the global average of 80%.

This problem harms small- and medium-sized enterprises (SMEs) adversely, for a large part because of an informational disjunct. Considering that SMEs are among the most significant contributors to African economies, this disjunct needs to be righted urgently.

In addition, the geopolitical landscape across the continent has made Africa increasingly risky for investors and banks. Boundary conflicts, civil wars, coups, and protests – most notably in Sudan – have led to conservative economic forecasts. Risk aversion has been capitulated by natural disasters and extreme weather: insufficient investment has rendered many regions increasingly susceptible to their consequences. As a result, increasing access to trade finance is a critical focus area for many large African banks including Absa, because it has the potential to unlock significant economic activity at relatively low risk. With banks derisking more, access to African correspondent banking facilities is more limited; this has pushed Absa to pursue contemporary creative solutions on the digital frontier.

The digital solution

Enhancing digital capability and partnering with development finance institutions (DFIs) and fintechs can increase the level of financing and liquidity available. Absa has been using a combination of technologies to this end, helping to realise its ambition around digital trade. 

A mix of advanced technologies and innovative solutions is important for transforming trade processes into seamless, transparent and efficient digital systems. Their approach to digitalisation is multi-faceted: a combination of technologies has been implemented to digitise trade finance, driving growth and efficiencies through optical character recognition (OCR), blockchain, and artificial intelligence (AI) capabilities. This is supplemented by collaboration with selected fintechs, who provide access to new markets or products. 

OCR automates document processing for letters of credit (LCs) and associated documents, such as bills of lading and invoices. Reduces manual effort speeds up processing time and minimises errors associated with manual data entry and document handling. Automated document verification and data extraction, by accurately capturing and verifying data, also reduce the likelihood of errors that can lead to disputes or delays. Additionally, the technology allows for enhanced risk management by automating compliance checks and data validation, identifying potential risks and issues early in the process enhances risk management.

Absa has deployed this technology across multiple markets, thereby reducing the time it takes to check export LC documentation by more than half and identifying duplicate invoices for trade loans. They are also in the process of automating trade-based money laundering checks through a combination of OCR and AI. 

As a result of digitalisation, the quality and quantity of information has increased significantly in recent years, greatly improving Absa’s ability to gather and analyse trade data to benefit our clients. Big data management enables advanced analytics and enhanced risk management while automating processes for scalability and flexibility and providing better reporting. 

Absa uses this data to improve risk management and business decision-making, including by proactively identifying early indicators of financial distress through the use of predictive models. They leverage various data sources to assess trade flows and corridors, particularly considering the shifts driven by the current geopolitical landscape: for instance, between Africa and China as a result of Belt and Road Initiative investment. Absa’s recent establishment of a new non-banking subsidiary in Beijing stands as a testament to Africa’s increasingly global financial footprint. 

Furthermore, data analysis assists with identifying potentially fraudulent activities, such as duplicate invoice discounting, thereby enabling us to mitigate associated risks. The United Nations Office on Drugs and Crime (UNODC) estimate that trade-based money laundering (TBML) costs the global economy up to $2 trillion per year, or 5% of global GDP.  

Due to the incidence of high-risk goods in Africa, the continent has long suffered from illicit financial flows. For instance, in 2016, a wildlife trafficking syndicate in Kenya used a front tea trading company to smuggle 6.8 tonnes of ivory to East Asia, concealing the illegal shipments and financial flows by manipulating legitimate tea exports and changing destination details en route. Financial investigations and analysis of import/export data revealed the complex operation involving multiple front companies, highlighting the use of high-risk commodities and suspicious trade patterns as indicators of TBML. Enhanced data analysis capabilities from Absa and similar banks are crucial in stamping out financial crime, with knock-on reductions in the crime itself.

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As new trade corridors emerge in Africa and around the world, trade data is enabling the careful monitoring and identification of trends and opportunities. A variety of data sources provide insight into global trade flows and offer valuable information about how these flows and corridors are changing over time. Data is essential for identifying new trade routes by giving banks insights into shifting import and export flows. 

Those data sources are used to help the bank comprehend the different flows and opportunities related to global and African trade – and they include sources that offer a view of volumes and values of specific types of product flows, including LCs, guarantees, and collections. They have provided Absa with insight into how the use of these instruments is changing and which markets have the highest volumes and values. Absa has also used a supply chain intelligence platform that provides them with insights into global trade from both an opportunity and a risk perspective. As Absa’s pioneering work demonstrates, the digitalisation of trade finance is transforming the African trade landscape, making it more accessible, efficient, and secure.