Key Takeaways:

• Africa's trade finance gap exceeds $120 billion, disproportionately affecting SMEs

• The financial supply chain is essential to sustaining SME trade by providing accessible funding

• Partnerships, risk mitigation, and digitisation are key to unlocking trade finance for African SMEs

Small and Medium Enterprises (SMEs) are the backbone of Africa's trade story, with the continent poised to play an increasingly significant role in global trade. Yet, access to trade finance remains a persistent and significant barrier. Estimates put the continent's trade finance gap above US$120 billion, which disproportionately affects SMEs and limits their ability to scale, innovate, and compete globally.

But to truly understand the barriers to financing SME trade, we must recognise the ‘financial supply chain’ as the critical support system for the actual physical supply chain. Just as the physical supply chain ensures the movement of goods, the financial supply chain facilitates the flow of financial products and services necessary to keep those goods moving. Both are deeply interdependent, and demand collaboration between all stakeholders across Africa's 54 distinct economies.

This article explores the key challenges hindering SME trade finance, the role of partnerships in overcoming these challenges, and practical solutions to enhance access to trade finance for African SMEs.

Physical vs financial supply chain

A supply chain is the process of moving a product from supplier to customer, involving various organisations, people, and resources at each step. Consider the production and sale of a smartphone, for example. Suppliers provide raw materials like metals and plastics, which are then assembled through value-add processes by manufacturers. Distributors manage the logistics, transferring the final products to retailers, who sell them to customers.

In the same vein, the financial supply chain refers to the development and distribution of financial products and services. In the context of African SMEs, this involves moving products like loans and guarantees from global institutions and local funding sources to SMEs, the ultimate beneficiaries. Without this, SMEs would face significant challenges in securing the funds needed to procure raw materials, manage cash flow, and cover operational costs – all crucial to the production, distribution, and sale of goods.

These financial products are developed and distributed through intermediaries, governed by SME focused eligibility criteria, financial terms, and risk-sharing mechanisms.

Step-by-step, an effective funding process looks something like this:

1. Capital sourcing (input stage)
   Global institutions (DFIs and international banks), alongside local funding providers (pension funds, insurance funds, and government programmes), allocate capital to support SME development in critical sectors (food security, financial inclusion and trade).
   
   

2. Product structuring & risk mitigation (value-add stage)
   Financing solutions, such as working capital facilities, are tailored to fit the risk profile of specific SME segments. Risk mitigation strategies, such as portfolio guarantees and credit insurance, are integrated to reduce lender exposure, manage risks and make lending more attractive to financial institutions.
   
   

3. Partnerships with financial institutions (distribution stage)
   Financial products are distributed through intermediaries such as local banks, non-bank financial institutions (NBFIs), and digital platforms. These partnerships ensure that financing solutions are properly structured, reach the right SMEs, and adhere to eligibility criteria. 
   
   

4. Monitoring & reporting (feedback stage)
   Financial institutions monitor how funds are used to ensure compliance with agreed terms. Regular reporting to global and local funding providers ensures accountability and improves future capital allocations. This feedback loop helps to refine risk management, product structuring, and the suitability of these financial products for SMEs.

While this flow looks relatively straightforward on paper, in practice, it's far more complicated.

Challenges and bottlenecks

Much like physical supply chains, the financial supply chain is prone to disruption. When the distribution of financial products is inefficient or lacks components like credit guarantees, the chain can become clogged or even breakdown entirely. This disruption makes it increasingly difficult for SMEs to maintain operations and meet payment obligations, causing a ripple effect of disruption throughout the supply chain.

Despite significant capital allocation and global initiatives aimed at supporting African SME trade finance, a significant portion of funds fails to reach the businesses that need it most. Trade finance rejection rates for SMEs can be as high as 45%, according to ADB, but the primary inefficiencies in the financial supply chain can be summarised as followed:

• Stringent requirements
  
  African financial institutions often face prohibitive requirements from DFIs to substantiate SME trade finance. Both parties tend to be bureaucratic and inflexible, relying on cumbersome, manual, paper-based reporting processes that are impractical for the low-value, high-volume portfolios typical of SMEs. These legacy systems lock DFIs and local banks into an inflexible, risk-averse model of SME financing
  
  

• Lack of key value-adds
  
  The absence of critical support measures – such as credit guarantees and simplified legal and operational frameworks  – makes lending to African SMEs unattractive to financial institutions. As a result, many banks are reluctant to extend trade finance without significant collateral – which most SMEs are unable to provide. In West Africa, 67% of banks cite insufficient collateral and high borrower risk as the main reasons for rejecting trade finance applications. Without these safeguards, institutions view SME trade finance as too risky and unprofitable.
  
  

• Risk aversion
  
  Local financiers often lack the capacity to assess and manage SME risk effectively. This capacity gap, combined with overly conservative lending practices, diverts capital to larger, more secure businesses or low-risk government bonds, leaving SMEs underserved.

In addition to these structural bottlenecks, factors like knowledge gaps in products including Reverse Factoring, limited real-time reporting, and complex regulatory environments further strain the financial supply chain. Currency volatility and limited access to foreign liquidity complicate cross-border transactions, while inefficient approval processes delay or exclude SMEs completely. 

Strengthening the financial supply chain

The success of any financial supply chain hinges on the collaboration and alignment of all stakeholders. Each entity brings unique strengths and expertise to the table, whether it's financial backing from DFIs, the infrastructure and risk management capabilities of banks, or innovative technologies provided by fintechs.

Only when all parties acknowledge and embrace their specialisms can the ecosystem function. Alignment is crucial – it ensures that all players work towards common goals, address key challenges, and drive sustainable growth.

Together, they must address the following areas:

1. Achieving product-market fit 

Financial products must be designed to address the specific needs and risk profiles of African SMEs. For example, Factoring with credit mitigation measures like portfolio guarantees or credit insurance can help manage higher risks in volatile markets. Similarly, Reverse Factoring with pricing support can provide liquidity to SMEs in low-margin sectors.

2. Prioritising the 'S' (Social) in ESG (Environmental, Social, and Governance) 

In 2020, global ESG investments totalled $35 trillion, but only 1% of this capital flows toward Africa, according to the GSIA. To make ESG funding more relevant for Africa’s SMEs, the emphasis must shift from rigid environmental criteria to measurable and relevant social impact, such as job creation and community development. Digitisation can support this shift by increasing transparency and aligning African SME portfolios with realistic and actionable impact metrics.

3. Leveraging technology

Implementing digital platforms specifically for trade finance reduces delays and lowers the unit cost of distributing trade finance products and services across the financial supply chain. McKinsey estimates that digitisation can cut the cost of delivering financial services by up to 90%, improving access for SMEs by streamlining applications, approvals, and disbursements. 

Digitisation also simplifies risk assessment, enabling real-time reporting and broader participation from financiers. Resources and capacity-building initiatives must support stakeholders across the supply chain to ensure scalability and transparency.

4. Diversifying distribution Channels

International and local Tier 1 banks cannot meet the diverse financing needs of African SMEs alone. According to CGAP, Microfinance Institutions (MFIs) in Africa serve over 15 million clients, with more than half being micro and small businesses. To bridge this gap, more tailored strategies could include: 

• Co-designing Supply Chain Finance (SCF) solutions
  Traditional banks and NBFIs can collaborate with corporates to develop solutions tailored to SMEs with more established credit histories.
  
  

• Flexible solutions from MFIs
  Microfinance institutions can provide more tailored financial products to meet the needs of smaller SMEs that may not have access to formal banking structures.
  
  

• Dynamic Discounting
  Large corporations can offer Dynamic Discounting to SMEs within their supply chains, providing faster access to liquidity.

Obtaining DFI support and harmonising operational and regulatory frameworks across markets will also strengthen the distribution channels, ensuring that SMEs have better access to much-needed trade finance products.

Partnership in action

The Africa MSME Trade Finance Initiative, supported by ITFA, exemplifies the importance of collaboration between DFIs, international banks, and local financial institutions. Here’s what some of the members had to say about the road ahead:

“International and regional Development Finance Institutions (DFIs) play an important role in the effort to bridge the trade finance gap. The provision of much needed funds, trade finance risk mitigation instruments and capacity building solutions to support SMEs and local banks operating in underserved countries matter. The use of the DFIs strong risk bearing capacity to increase access to trade finance, and more specifically to support access to finance for SMEs and local enterprises operating in fragile states is critical in the effort to build a robust financial supply chain in the continent.”

Mohamadou Ba, Chief Trade Finance Officer at the AfDB

“The only institutions with the appetite to underwrite SME trade finance risk are DFIs. We must focus on structures that involve DFI cover to unlock SME trade finance. The international and local banks, and other private sector participants, can then tackle the provision of liquidity and technology solutions”

Duarte Pedreira, Global Head of Trade & Working Capital Finance at Crown Agents Bank

“Once the scale and complexity of the African SME trade gap problem is grasped a realisation sets in that that all the parties in the financial supply chain must work together in the spirit of SDG 17, partnerships for the goals, for there to be any practical progress in addressing the trade gap in Africa.”

“Just as you would solve any problem, a clear understanding of the root causes of financial supply chain interruptions will be key to workable solutions on the Continent. In the ITFA ARC working group, rather than trying to impose preconceptions and programmes from other regions and segments, we are giving a voice to the actual practitioners, from MSMEs, through lower tier banks and NBFIs, to regional banks, international financiers and DFIs, to identify the real causes and table practical solutions.” 

George Wilson, Chair of ITFA’s Africa Regional Council

Conclusion

Africa's SMEs are poised to drive the continent's growth, but they need a strong financial supply chain to succeed. This can only be achieved through a coordinated commitment from all stakeholders to unlock scalable, tailored financial solutions.

Now is the time for banks, NBFIs, Fintechs, and DFIs to collaborate across the financial supply chain and create the frameworks to empower SMEs. The choice is clear: invest in designing frameworks and solutions for African SMEs today, or risk stifling the very businesses driving the African trade story.

For more information on Supply Chain Finance in Africa, its opportunities and its challenges, watch our recent webinar.