Africa's massive trade finance gap amounting to US$90 billion is among the major limitations to the continent realising the full potential of a free-trade area in Africa, Moody's has warned.

The ratings agency issued its warning in a new report commenting on the prospects for the anticipated African Continental Free Trade Area (AfCFTA) that was launched on 21 March 2018 by African leaders in Kigali, Rwanda.

L/C difficulties

Difficulties obtaining letter of credit (L/C) confirmation from international banks and a high rate of L/C rejections are key features in Africa's trade finance gap.

In its landmark report, Trade Finance in Africa: Overcoming Challenges, the African Development Bank (AfDB) highlighted the need for Africa's domestic banks to obtain L/C confirmation from international banks, many of which have become increasingly reluctant to do business on the continent.

Rejection rates

Africa's banks also report a high average rejection rate for L/Cs of 6.1 per cent in 2014 according to the AfDB report published in September 2017.

Some regions have very high rejection rates, notably West Africa where it is 9.4 per cent, which is 3.4 times higher than in Southern Africa. The continental average is 5.7 per cent.

Other limitations

Other factors according to Moody's that could limit the accomplishment of the objectives of the AfCFTA - which 44 countries have signed up for although Nigeria and South Africa did not - are the continent's underdeveloped infrastructure and non-tariff barriers.

Moody's does however reckon the regional pact that aims to create a single African market for goods and services could boost intra-African trade.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.