Extending MSMEs' Access to Trade Finance under the AfCFTA
The African Continental Free Trade Area (AfCFTA) provides opportunities for financial sector development across the continent, but it also poses a real test for the region’s financial system. An effective and functional financial sector is crucial for facilitating economic growth and integration; however, the ability of Africa’s financial sector to perform this crucial function at the required scale to support the capacity of small firms to contribute to and maximize the benefits of the one African market remains shaky. The financial systems in African member countries have historically struggled to effectively mobilize funds and allocate capital. Small sized firms and low-income individuals have been the most affected as they are the most financially excluded. More recently though, financial technologies have contributed to a gradual improvement in financial inclusion and declining trade finance gap in the region, however, continued progress is being threatened due to the impact of the covid-19 pandemic. In terms of opportunities, the elimination of inhibitive regulations under the AfCFTA is expected to ease cross border trade, enable capital and information flow, attract greater foreign and intra continental investments, potentially increase capital funds, and provide a much larger customer base for financial institutions to serve. This potential new market base includes traditionally excluded micro, small and medium enterprises (MSMEs) that constitute a large share of the African economy, and are expected to be a major catalyst for increasing intra African trade and shared economic growth. However, the constraint to MSME financing is still real, requiring a more supportive business environment and collective/harmonised policy reforms across the continent to eliminate these constraints. Such intervention(s) is essential, as effective economic integration and development depends on easily accessible and affordable capital, being an important factor of production.