A recently published report by the African Development Bank (AfDB) has identified the limited ability of Africa's confirming banks as one of the major constraints on meeting demands for trade finance on the continent.

Other constraints identified in the report entitled Trade Finance in Africa included limited US dollar liquidity at confirming banks.

Confirmation issues

The need for letters of credit (L/Cs) to be confirmed is a big issue since nearly all L/Cs issued by banks in Africa require confirmation when the counterparty is located outside the region.

While the report identified a growing list of African confirming banks, it found most of these could be found in the continent's more developed markets, thus marginalising banks and traders in less developed markets.

Growth limitations

Factors limiting the growth of confirming banks in Africa include the difficulties banks face when they are not in a country with a high GDP level with a reasonably developed financial sector.

Other constraining factors include counterparty concerns about African-owned banks and a lack of banks with strong enough balance sheets to provide L/C confirmation.

Intervention needed

The report, published on 3 December 2014, concluded that as a result of these constraints, there is a need for governments and development finance institutions to provide support for local banks.

The AfDB recommends that trade facilitation programmes that address US dollar liquidity and ease some of the constraints on local banks are needed.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.