Intra-African trade has been a long-standing headache in the continent, with African countries often exporting cheap raw materials but importing value-added manufactured goods. First launched in 2018 - and progressing painfully slowly - the African Continental Free Trade Area (AfCFTA) was set to double intra-African trade.
Almost every country on the continent has signed the agreement, and over 40 have made the requisite list of products that will be exempt from tariffs. So far, however, the results have been lacklustre. “It’s something we've all been looking forward to, but the execution has been very disappointing,” says Segun Adeyemi, the CEO and co-founder of Anchor, which provides digital infrastructure for banking and payment products. “It's an amazing initiative, but we need the implementation.”
The movement of people and capital across the continent is still highly constrained. Africa’s richest man, industrial entrepreneur Aliko Dangote, complained earlier this year that he has less visa-free travel access to the continent than a tourist with a French passport.
This does not mean that the AfCFTA has had no impact. Ola Oyetayo is co-founder and CEO of Verto, a B2B fintech firm that provides access to enterprise grade cross-border payments, FX and banking solutions. “We've seen significant growth in intra-Africa cross border payments from customers in three markets - Nigeria, Kenya and South Africa,” he says. This activity involves transactions in local currency, for example a South African business making a payment to a business in Nigeria, converting its rand to naira. “We’re probably one of the only firms that help to do this,” says Oyetayo. “But we are seeing that growth.”
The existence of more than 40 currencies across more than 50 different countries has always made intra-African trade difficult. The World Bank estimates that the transaction costs associated with all the different currencies are around US $5bn annually. The practice of settling trade in US dollars means firms have to source FX and are then exposed to exchange rate risk.
The pan-African payment settlement scheme, which is being used in an extended AfCFTA pilot this year, holds the promise of settlement in local currency. “The more we can do that, the better it is for the continent,” says Oyetayo. “It's still early days but you have innovative firms such as ourselves already doing it and we've seen a lot of growth in that space.”
Fintechs fill the gaps
The picture is one of private sector dynamism and progress while governments and policy makers drag their heels. Seyi Ebenezer, CEO of Payaza points to the massive growth in digital trading and cross-border payment platforms. Y Combinator-backed Waza raised $8m in seed money this year to expand beyond its operations in Ghana and Nigeria and offer new trade finance products. A key section of the Waza customer base are importers and trades that need to pay suppliers in foreign countries but have limited access to FX. Lagos-based SME-focussed trade finance fintech FrontEdge raised US $10m in 2023, which it plans to use to scale operations across Nigeria, Ghana, Côte d'Ivoire and Kenya.
Rather than be all things to all customers, many of these new entrants specialise. “There are businesses that provide trade financing for specific sectors,” says Ebenezer. “One will pick the auto industry, because they understand that sector from end-to-end and can provide finance and settlement. Another will choose pharmaceuticals, so you have a comprehensive sector-specific service.”
Shekel Mobility is one such example - a fintech platform that is designed specifically for the auto industry. The firm provides financial and management services including credit facilities to used car dealers, facilitating secure cross-border transactions and connections. Credit limits reach up to US $200,000 and loans are usually provided for a maximum of three months. The African used car market is worth around US $30bn and Shekel wants to facilitate US $10bn in transactions on its platform annually by 2025.
This new wave of specialised digital platforms is well suited to the kind of higher value-added specialisation that the AfCFTA ultimately hopes to create. Hippolyte Fofack, former chief economist at the African Export-Import Bank, has described this as a world where rubber exporters Liberia and Cote d’Ivoire become hubs for tire manufacturing. Similarly, lithium-rich countries such as the Democratic Republic of Congo and Zambia would not simply export raw lithium, but instead integrate into global value chains as exporters of lithium batteries for EVs. “Preliminary estimates show that intra-African exports would increase by 109%, led by manufactured goods, especially if the implementation of the AfCFTA is accompanied by robust trade facilitation measures,” Fofack said in an analysis for the Brookings Institute.
An IFC study on trade finance in West Africa suggested that “technology solutions could facilitate the adoption of new instruments such as supply chain mapping, blockchain-like transaction tracking, and digital financing.” There is a vision of a world where the AfCFTA strips away tariffs and makes trade increasingly frictionless, allowing a new ecosystem of local fintechs to provide tailored trade finance services across sectors and supply chains.
“Fintechs are probably best placed because they are more innovative by design and they have access to the kind of data and tools that perhaps traditional banks don't,” says Oyetayo. “There's a big use case for fintechs to address this supply-demand imbalance in trade finance.”