#63 Lending and Technology Opportunities in Trade and Supply Chain Finance

Very big markets but very easy to get it wrong. Winning in Trade and SCF needs deep insights into how Africa trades.

Illustrated by Mary Mogoi - Website

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Why Trade Finance Matters;

“The financial system of the past 200 years was designed for the industrial era and served only 20% of the population and organizations. As we enter the digital age, we must better serve the remaining 80%. Together with our like-minded partners, our vision is that consumers and businesses will no longer have to navigate inefficiencies to find capital, but rather, capital will be matched with consumers and businesses based on data-driven predictive technologies, which will enable every consumer and small business in the world to benefit from tailored financial services. - Ant Group Chairman Eric Jing”

Trade and supply chain finance is an area that should matter to Fintechs and banks, particularly bank ecosystem teams looking to embed financial services directly to their trading customers. It’s an area in which I have experience as both a banker and an operator trying to build solutions for the industry. It’s also a misunderstood area in which there’s a lot of wasted energy and resources. This energy and misunderstanding is best seen through the failed blockchain experiments of the last decade years where everyone was building a blockchain solution for trade. Of course, from the outside it makes tons of sense. For an industry that relies heavily on documents, blockchain should definitely help. This failed premise was encapsulated in the closure of TradeLens, a joint effort between Maersk and IBM. Trade and Supply Chain is very difficult and complex. Simplified tropes such as “we must digitise trade finance” often fall flat due to a failure to understand how goods actually move and what are the biggest problems to solve.

Financing trade matters because the TAM is big and the impact is even bigger given countries get wealthier the more they trade. This article is therefore an attempt to give investors, banks and operators some insights that should inform how they approach trade and supply chain finance solutions. It’s a general overview.

I’ll break it down as follows;

1. Quickly understand what trade finance is and the constraints in terms of Africa;

2. Mapping out how trade works in Africa viz the rest of the world;

3. How banks interact with trade finance

4. Based on this mapping out the opportunities and misconceptions in different segments of Trade and Supply Chain Finance;

5. Defining what it takes to win as a trade finance Fintech or ecosystem player;

Trade and Supply Chain Finance

Trade and supply chain finance address cashflow mismatches in business operations. Trade Finance focuses on international trade, bridging the gap between when exporters need funds to produce or ship goods and when importers can pay after selling the products. It not only provides financing but also acts as a risk mitigation tool, fostering trust between counterparties across borders.

Supply Chain Finance (SCF), on the other hand, tackles cashflow mismatches within supply chains, both domestic and international. SCF solutions, such as reverse factoring, invoice discounting, and payables finance, help suppliers manage delays in payments by filling funding gaps within the supply chain.

Understanding these concepts is crucial, but applying them effectively in Africa requires insight into how African supply chains operate. Like OmniRetail’s success from understanding the flow of goods and ecosystem dynamics, succeeding trade and supply chain finance in Africa depends on a nuanced understanding of how local trade functions.

How Africa Trades

To understand the drivers of Trade and Supply Chain Finance in Africa, it’s important to understand global trade in general. This concerns how goods move around the world and how finance is structured to support the flow of those goods.

Global trade is worth US$ 32 trillion dollars with the key players in global trade being the USA, European Union, China and India. Africa is a relatively small player with total trade being worth US$ 1.1 trillion, this includes both trade between African countries as well as trade with the rest of the world. What’s key to analyse is the composition of imports and exports and the resultant shaping of African supply chains.

Africa as a continent has a population of approximately 1.3 billion people. The economy is relatively small with a GDP per capita of US$ 1,645 which is 60x lower than that of the USA. Internet penetration is also significantly lower than developed areas such as the USA, Europe and China.

The high population as well as the relatively lower income levels have an impact on the nature of trade.

Trade composition varies across regions. The United States primarily imports vehicles, consumer goods, electronics, and crude oil, while Europe focuses on packaged medicines, vehicles, electronics, and consumer goods. Many of these imports come from China, the world’s manufacturing hub.

China, in turn, imports raw materials, intermediate goods, and integrated circuits to fuel its industries, which produce machinery, electronics, and consumer goods for global export. For example, China imports semiconductors to manufacture products like smartphones and telecom equipment, which are then exported to markets like the US for consumers to purchase.

In Africa, imports mainly consist of refined petroleum, food (e.g., wheat), and intermediate goods like steel, iron, and chemicals, which support local consumption and basic manufacturing rather than an export-driven industry. These imports are done by foreign multinational companies (e.g., Unilever, Lafarge) or local manufacturers (Indian or Indigenous).

African exports, however, focus on raw materials, intermediate goods, and crude petroleum, iron ore, platinum, coltan, and coffee, which feed into global supply chains. Unlike China, whose imports fuel its export market, Africa’s imports and exports serve distinct purposes, highlighting a fundamental difference in trade dynamics.

In essence, the low income levels as well as the lack of advanced manufacturing has created an import profile which is targeted for local consumption. The players in this trade are large manufacturers producing for the local market.

How African Supply Chains are Designed

Once goods are imported into the country, there are different considerations when it comes to getting the final product into the hands of consumers. The design of the local supply chain is then determined by various factors such as;

1. GDP per capita;

2. Level of retail infrastructure;

3. Level of e-commerce infrastructure;

4. Source of final products;

In the United States, high GDP per capita, strong internet penetration, and the importation of final consumer goods support a short supply chain. E-commerce platforms like Amazon and Shopify, along with offline retailers like Walmart and Target, sell goods directly to consumers. With consumers paying upfront and suppliers offering credit, retailers face minimal cash flow challenges.

The diagram above shows the difference between a US and typical African supply chain. Supply chains in the USA benefit from high purchasing power, well-structured retail infrastructure, and efficient data integration. This streamlined system results in shorter cash cycles with fewer intermediaries.

In contrast, African supply chains are fragmented and face infrastructural challenges. Goods—whether imported final or intermediate products—pass through multiple layers to reach consumers. These layers include:

• Wholesalers: Purchase large quantities from manufacturers and push products into the market.

• Distributors: Break bulk and handle last-mile distribution.

• Kiosks/Shops: Fragmented retailers sell to consumers, often in smaller, more affordable packages (a practice known as sachetization).

Both wholesalers and distributors typically operate on 30–60 day credit terms, adding complexity to the cash cycles.

How this affects the players is;

1. Large Manufacturers and Importers bear the brunt of financing the supply chain given that they need to use wholesalers and distributors to get their goods to the final consumer. These additional layers need to be given credit days meaning that manufacturers in Africa by and large have significantly longer cash conversion cycles i.e. the period from when a product is produced to when you get cash from the sale of that product. These can be anywhere between 90 days to 360 days on the higher end.

2. Where large manufacturers have pricing power or monopoly such as in the case of large breweries or multi-national consumer companies, the brunt of financing the supply chain falls squarely on their distributors who have to pay upfront whilst waiting for cash to trickle back up the supply chain;

3. The significant volume of food imports and very little advanced manufacturing means that most supply chains aren’t mature as defined by a good number of large manufacturers coupled with a significant number of well established medium sized suppliers;

Despite these issues, there’s over US$ 1.1 trillion in trade and a trade finance gap of US$ 120 billion according to various estimates. The challenge is in building products that work;

The Challenge with Bank Lending in Trade Finance

Whilst this is not an article about why banks are not lending in trade finance, as key players in the ecosystem, it’s impossible to ignore the role banks play. It’s important to understand the institutional imperatives that shape bank participation in Trade Finance in Africa.

1. Collateral Requirements: Collateral remains a major barrier, with over 40% of trade finance applications rejected due to insufficient collateral. This issue is widely acknowledged by organizations like IFC and AfDB, making it a binding constraint on access to trade finance.

2. Relationship Manager (RM) Incentives: Banks prioritize cross-selling a wide range of products over structuring complex trade finance deals. This misalignment often results in a mismatch between client needs and the products offered. RMs see each client as a buyer of a bouquet of products therefore the ROI on increasing the size of the bouquet is greater than the ROI on structuring a trade solution. Citi stands out by tailoring bespoke solutions for clients, reflecting their superior client coverage and expertise. I’m impressed by how thorough Citi are in their African trade business.

3. Trade Finance as a Secondary Function: Trade finance is treated as a support function rather than core, with limited expertise distributed across departments. For example, SME teams may rely on only a few trade specialists to support thousands of clients, leading to inadequate client service.

4. Limited Skills and Technology: Trade finance is not central to bank strategies, resulting in minimal investment in relevant technology and skills development. Few African bank CEOs have backgrounds in trade finance, highlighting its marginal role in leadership and decision-making.

An overview of the various opportunities;

There are many ways to categorise the different ways that Fintech companies can participate in trade finance. For me, I think there are two primary categories, you can either lend directly of course utilising some form of technology or you can provide a service through technology such as providing lending software. All these opportunities are shaped by the two main factors we’ve described, how Africa trades and how banks are set up to participate in trade.

Lending

Within lending, there are different categories. Although people may categorise the opportunities differently, for the purposes of this article, our categories are;

1. Trade Finance;

2. Supply Chain Finance;

3. Vendor or Kiosk Finance

Trade Finance

Trade Finance in Africa is a significant opportunity, of the US$ 1.2 trillion in trade that happens, only a third is financed by banks. Moreover, there’s an estimated US$ 100 billion trade finance gap. The numbers are big and the opportunity is real. It’s useful to break down trade finance based on whether one is financing imports or exports and the different opportunities therein;

Import Finance

Import finance supports the purchase of goods brought into Africa, primarily by large companies importing intermediate goods like plastics or final goods like food commodities. Payment methods between importers and overseas suppliers generally follow two methods:

1. Letters of Credit (LCs): A bank guarantees payment to the supplier by promising to pay once specific conditions are met, offering the supplier security.

2. Open Account: Growing in popularity, this arrangement allows suppliers to ship goods and receive payment later (e.g., 60 days after delivery). This method thrives on trust and improved communication between trade partners.

Import finance represents a significant opportunity in Africa due to the continent's status as a net importer. However, non-bank players face several challenges:

1. Letters of Credit (LCs): Sophisticated importers still require financiers capable of issuing LCs, even as open account terms dominate trade.

2. Comprehensive Financing Needs: Importers, especially manufacturers, need multiple financing solutions, such as long-term loans for capital expenditures alongside trade facilities. Banks excel here by offering integrated financing programs.

3. Debenture Constraints: Banks secure loans with all-asset debentures, granting them exclusive legal claims on manufacturers' assets in case of default. This exclusivity limits other financiers from providing additional funding, keeping manufacturers reliant on their primary bank. This is one of the biggest challenges to expanding financing solutions for existing manufacturers.

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