Why African trade finance is broken

The Hinrich Foundation's title — "Why African trade finance is broken" — is the right framing. The system that should intermediate $400 billion in EU-Africa trade alone, on the EU's own counting, is intermediating a small fraction of it. The headline gap of $81.8 billion a year that the AfDB has reported since 2020 is a structural number, not a cyclical one. It does not narrow with growth. It has not narrowed with the recovery of trade volumes since 2022. It will not narrow with another round of donor concessional facilities.

This note works through why.

The first cause: correspondent banking has withdrawn

The starting point is the bank-to-bank chain. An African importer in Lagos who needs to pay a German exporter in Hamburg does not transact directly; their bank holds an account with a correspondent bank that clears in EUR or USD, that correspondent transmits funds, the German bank receives them. That chain, in the period from 2008 to roughly 2018, was systematically dismantled by Western banks for whom the AML cost of holding African correspondent relationships exceeded the revenue.

Citibank's exit from Nigerian correspondent activity in 2021 was the visible end of a longer trend. Standard Chartered narrowed its African correspondent footprint over the same period. The result is that mid-tier African banks — exactly the ones whose customers are the SME importers and exporters who drive intra-African and EU-African trade — have fewer correspondent options and more concentrated exposure to those that remain. A single correspondent withdrawal in 2024 can pause settlement for thousands of customers of a tier-two Nigerian or Kenyan bank.

The IFC's 2022 West Africa Trade Finance Report quantified the consequence at the customer level. In the ECOWAS four, trade finance supports about 25 per cent of goods trade, against a global benchmark of 60 to 80 per cent. Average rejection rates on trade finance applications run at 21 per cent by value, rising to 25 per cent at smaller banks. The structure passes the AML cost downstream until the customer absorbs it as denial.

The second cause: Basel risk-weighting penalises the segment

Even where the correspondent chain holds, the capital treatment of African bank exposure under Basel III makes the relationship expensive for the European or US bank carrying it. African banks typically carry investment-grade ratings well below the equivalent European bank; the issuing country ceiling drags ratings down further; the resulting risk weight on a confirmed letter of credit between, say, a Spanish bank and a Nigerian bank is materially higher than the comparable EU-EU transaction.

The Basel calibration is not designed to favour African trade. It is designed to be conservative on emerging-market bank exposure, and it succeeds. The consequence is that even where a bank wants to support the corridor, the regulatory capital required to do so erodes the unit economics, and the bank declines marginal volume.

Trade finance covers about 25 per cent of West African goods trade. The global benchmark is 60 to 80 per cent. The gap is not commercial reluctance; it is capital arithmetic.

The third cause: FX controls intercept settlement

A large share of African economies operate FX controls. Egypt's USD bottlenecks through 2022 to 2024 created sustained delays for SME importers seeking EUR or USD to pay European suppliers. Nigeria's Naira windows have varied dramatically through the same period. Ethiopia, Angola, and Algeria all operate variants of administrative FX allocation that intercept commercial settlement.

For trade finance specifically, FX controls compound the correspondent banking problem. Where the importer cannot reliably access hard currency, the bank confirming the letter of credit cannot reliably expect to be repaid in the currency of the obligation. The lending decision becomes a sovereign-FX decision dressed up as a commercial credit decision. Most banks decline to make that decision, particularly outside top-tier obligors.

The fourth cause: the SME exclusion is structural

The African Development Bank's data is clear that the trade finance gap is concentrated in SMEs. The continent's largest corporates — the oil majors, the agribusiness exporters at scale, the state-owned strategic enterprises — are not the missing segment. They have banking relationships, they have collateral, they have hard-currency revenues. The missing segment is the mid-market: the cocoa processor in Ghana, the cut-flower exporter in Naivasha, the cassava plant in Côte d'Ivoire.

The IFC's data shows rejection rates rising at the SME tier. The reason is partly information asymmetry — the SME's accounts are less audited, less recent, less digitised — and partly the absence of usable collateral under bank-acceptable terms. For trade finance specifically, this means that the borrower whose underlying transaction is most demonstrably commercial — a confirmed purchase order from a creditworthy EU buyer — is denied finance because the borrower's own balance sheet does not support the lender's standard credit committee.

The stablecoin overlay

Into this set of structural problems, stablecoin settlement has grown as a working substitute. Chainalysis data for the year to June 2025 puts Sub-Saharan African on-chain value received at over $205 billion, with stablecoins accounting for 43 per cent of regional digital-asset volume. Nigeria alone accounts for $92 billion of the regional total.

The error is to read this as a consumer-crypto phenomenon. The transaction sizes, the corridors involved, and the timing of the flows suggest B2B activity — import payments, treasury management, supplier settlement — substituting for the correspondent-banking chain where it has failed. Mercy Corps pilot data on Kenyan freelancers showed payment cost falling from 29 per cent of the gross transaction to 2 per cent when settlement was routed through USDC instead of the conventional rail. That is not a marginal improvement; that is a different cost regime.

What this means in practice is that any advisor working in African trade finance in 2026 has to understand the stablecoin rail well enough to know when it is the correct settlement choice and when it is not. The rail is not a substitute for credit underwriting; it is a substitute for settlement infrastructure. The credit decision still has to be made on the underlying obligor.

What this means for an advisor

The mandates that work in this space share three characteristics. They route the credit risk to a creditworthy obligor in a jurisdiction the bank can underwrite — typically the EU buyer rather than the African seller. They wrap the corporate counterparty risk with insurance from a tier-one underwriter to bring the receivable to a bank-acceptable rating. And they use the settlement rail — SEPA, SWIFT, or stablecoin — that is fit for the specific corridor, rather than insisting on one rail for political reasons.

None of this resolves the four structural problems above. It works around them. The work for the next decade is to make the working-around routine, transparent, and well-documented enough that the next wave of corporate counterparties trading with African sovereigns and sovereign-owned enterprises does not have to invent the structure from scratch. That is what bankable trade finance, in this corridor, now means.