Trade is a key driver of growth and sustainability for African economies, which benefit both from exports (through the income they generate) and from imports of basic products and materials. This makes integrating the African continent into international trade a big priority.
According to the World Bank, trade in Africa accounts for 50% of the Continent’s GDP. Although its share of world trade has increased in recent years, Africa still suffers greatly from not being integrated into international commercial exchanges, and its share remains very marginal (between 2% and 5%). Most of this trade is international (more than 60% is with the European Union, and more recently with China and other parts of Asia), and the share of intra-African trade within total African trade is relatively low (15% in 2017). However, African intra-continental trade could easily increase. The African Continental Free Trade Area (AfCFTA) Agreement, signed by 44 African countries in March 2018, could boost both intra-African trade flows and Africa’s integration into international commerce.
Despite this encouraging trend, cooperation between importer banks working with Proparco in Africa (“issuing banks”), and exporter banks (“confirming banks”) can sometimes be tricky. Indeed, 21% of trade finance applications are rejected in ECOWAS countries, in other words, 25% of the total value of requests, resulting in USD 14 billion worth of lost earnings every year. These problems can be due to the absence of commercial relations and payment history, country risk, the limited capacity of confirming banks in these geographical regions, or the excessively high cost of trade finance (the average cost of a letter of credit is four to eight times higher in ECOWAS countries than in the most developed countries).
Proparco aims to facilitate these relationships through its Trade Finance guarantee (GTF) programme and act as guarantor in the financial relationship between issuing and confirming bank. This enables local banks to obtain higher limits from their correspondent banks and to finance more transactions, thanks to the expansion of their network and risk mitigation on existing lines of credit provided by Proparco. A large range of needs has been identified and the integration of confirming banks in West Africa, East Africa and Southern Africa is currently being studied (to support increasing trade flows within the AfCFTA region).
Securing import and export transactions between companies
SPECIFIC FEATURES OF AGRI-FOOD TRADE IN AFRICA
While agricultural production in Africa has generally increased steadily over the past thirty years (it has almost trebled in value – almost as much as in South America, and only slightly less than in Asia over the same period), this is mainly due to the increase in cultivated land, unprecedented demographic growth and a more abundant agricultural labour force. However, yields have increased only marginally - for cereals for example, they are on average half those obtained in Asia. While the total population has more than doubled, cereal production has only increased by a factor of 1.8 – from being self-sufficient in the 1960s, Africa has become a net importer of cereals. The gap between these two trends is even greater for meat and processed products, which are increasingly in demand from a growing urban population that has trebled in just thirty years. Imports represent 1.7 times the value of exports. Africa is having to contend with major supply challenges to meet the growing food requirements of its population.
How Proparco’s Trade Finance guarantee programme works
Trade Finance refers to the different international trade finance instruments used to secure import/export transactions between companies based in different countries. A number of factors, such as country risk or the absence of commercial relations between geographically distant companies, can hamper certain transactions. Importers and exporters therefore use their respective banks, who take on all or part of the risk of these transactions.
The most secure instrument is a letter of credit (L/C). When a company wishes to import goods, it will ask its bank (the “issuing bank”) to issue a letter of credit and notify the exporter’s bank (the “confirming bank”) of the transaction. The confirmed version of the letter of credit guarantees that the exporter will be paid by their confirming bank, which is itself paid by the issuing bank, once the conditions of the letter of credit have been met (i.e., delivery conditions, receipt of a set of documents certifying that the goods have been loaded onto the cargo ship, etc.). There is therefore a banking risk because, if the importer defaults, the issuing bank must pay the cost of the goods.
In accordance with Proparco’s stated wish to support the increased integration of developing economies into world trade and to secure the supply of essential goods to Africa, Proparco has been developing a Trade Finance guarantee programme since 2017. Proparco uses the programme to guarantee the relationship between the confirming and the issuing bank: the key product provided by Proparco is a guarantee that insures confirming banks against the risk of default by issuing banks that have issued a Trade Finance instrument on behalf of one of their customers.
Proparco currently guarantees transactions – notably letters of credit and endorsed bills of exchange – between approximately fifteen issuing banks based in Africa, and around ten confirming banks, mainly based in Europe and Turkey. While the portfolio of issuing banks is based in West and Central Africa, Proparco plans to rapidly expand the programme to the entire continent. Most of the counterparties are subsidiaries of major pan-African and regional banking groups (Ecobank and Coris, for example).
Seven of the programme’s issuing banks are located in Least Developed Countries (LDCs). This programme is an integral part of the French Food and Agriculture Resilience Mission (FARM), as it provides a practical solution to the supply challenges being encountered by certain African countries in this time of crisis and rising prices for food commodities and fertilisers (90% of fertilisers consumed in sub-Saharan Africa are imported). It supports companies who are heavily dependent on imports.
GUARANTEEING AGRICULTURAL TRADE TO BOLSTER FOOD SECURITY
Africa remains dependent on imports to meet the basic needs of its people and businesses. In this context, it is particularly important to provide instruments that can support and facilitate international trade, especially intra-continental trade. This is the aim of Proparco’s Trade Finance guarantee programme, which provides a rapid response, notably around food security issues exacerbated by rising commodity prices as a result of the war between Russia and Ukraine.
Like all international trade, these transactions need to be financed by banks in importing countries. In response to these challenges, Proparco has taken concrete steps to facilitate imports of agricultural foodstuffs. First, providing advantageous rates on agricultural trade encourages confirming banks to become involved in these operations. In addition, Proparco offers higher cover for such operations – up to 100% of the total transaction amount.
Guaranteeing cereal supplies
In July 2021, Proparco signed a €15 million Trade Finance guarantee facility with Cameroon-based Afriland Bank. This line will guarantee imports of essential agricultural products for this country, which is facing major food insecurity problems: according to the World Food Programme in Cameroon, 11% of the population is in a situation of acute food insecurity, particularly in the far north, North West and South West of the country. This situation has been exacerbated by the general rise in the price of raw materials and fertilisers as a result of the conflict in Ukraine.
Since June 2022, Proparco has guaranteed more than €49 million worth of transactions, including €31.5 million in agricultural commodities, especially rice. Most of these foodstuffs come from Asia and are transported by boat to the port of Douala, then by truck to the northern regions of the country.
Proparco provides guarantees for supplies of other cereals, a commodity in growing demand in several West and Central African countries. For example, in 2022 Proparco and Bic-Bred (Suisse) SA teamed up to help the bank – a wholly-owned subsidiary of French-based Bred-Banque Populaire group – provide financing to Céréalis, a French company specialised in trading soft wheat for milling plants in sub-Saharan Africa. This will enable Céréalis to purchase bigger quantities of cereal and oilseed from its suppliers and finance receivables from customers in West and Central Africa. This risk-sharing arrangement rounds out Proparco’s existing Trade Finance offering and helps to meet the growing demand for cereals from small and medium-sized mills in sub-Saharan Africa.
Since the beginning of 2023, this guarantee programme has helped to finance $74.2 million worth of Trade Finance import transactions, including $50.2 million in agricultural commodities (wheat and rice), mainly destined for Cameroon and Liberia. In addition to the programme, Proparco is developing guarantees for facilities provided to agricultural commodity traders, to secure cereal supplies to certain African countries.
Guarantees for financial providers, critical support for food security
Yann Jacquemin, Global head Guarantees for development, Proparco
Food security is a crucial part of maintaining indigenous populations and preventing conflicts over use. Along with other factors, it gives local populations confidence in the future of their own regions and guarantees provided to financial providers (AFD Group's various guarantee products: ARIZ, EURIZ, TPE, MENA, etc.) are an excellent means of maintaining this confidence by helping them support companies in the agri-food sector.
Mitigating food insecurity can be seen from two angles: urban versus rural, or exogenous versus endogenous aspects. In the urban sphere, for example, guarantees help businesses with investments adapted to the processing of agricultural produce, frequently accompanied by support for energy efficiency measures (investment loans). In rural areas, guarantees are more likely to be of help to businesses exposed to seasonal fluctuations in their activity (treasury loans). The second angle, linked to the causality of a crisis, distinguishes between a food crisis driven by an endogenous event, specific to a region (e.g., a country emerging from armed conflict), and a strong connection to an international, exogenous event (such as inflation in international commodity prices).
Here too, guarantees have played an important role in cushioning the impact of food crises, by providing soft loans that can be organised quickly, for example by the French government (FARM programme, Choose Africa Resilience, etc.), or via EU funding (FEDD). They provide help for local financial providers (banks, microfinance institutions), the only structures with both the physical presence and specific knowledge of the context needed to support companies in the agri-food sector. By quietly absorbing a specific risk, guarantees have a tremendous ability to maintain or act as a catalyst for a crucial economic activity in certain regions.