Foreign currency shortages and volatile exchange rates have choked trade flows across Africa, but digital platforms, local currency settlement and tailored strategies are helping banks meet the challenges.
It has been a difficult few years for African currencies. The pandemic sharply reduced countries’ hard currency earnings from trade and tourism. Inflation hit food and fuel import prices. Soaring interest rates pushed up dollar debt servicing costs, just as capital outflows weakened local currencies. Dozens of countries have watched their currencies reach record lows against the dollar.
Egypt was one of these, although its foreign exchange (FX) position has improved following recent investment inflows and IMF support. During the worst of the volatility, a shortage of hard currency left Egyptian importers unable to make payments required to clear goods at ports. “As a result, import volumes declined, disrupting supply chains and increasing costs,” says Islam Zekry, Group Chief Finance and Operation Officer at Commercial International Bank (CIB). Although CIB has been able to help most of its clients through the disruption, industries like automotives and textiles are still facing challenges, he adds.
SME’s – the backbone of African economies – have been particularly hard hit by FX volatility and hard currency rationing. Despite making up over 90% of all businesses in most markets, they have long struggled to access banking services – from simple bank accounts through to more complex trade finance products. Michael Larbie, Ecobank’s Group Executive for Corporate and Investment Banking, says his firm has enhanced its advisory support for trade finance clients, particularly SMEs, and prioritised access to hard currency.
Local currency and LCs
For many banks, a key part of supporting corporate clients through FX difficulties is providing bespoke services. Firms in the oil and gas industry face very different challenges to those in retail, for example. Zekry says CIB’s Treasury Group department offers risk management solutions tailored to each client’s unique needs. “In-depth market analysis and an understanding of specific client exposures is what allows lenders to offer customised financial solutions that mitigate risks and optimise FX transactions,” he says.
There are, however, certain products that have proved particularly popular across markets. These include FX forward contracts and non-deliverable forwards. In Egypt, letters of credit (LC) have taken precedence over unguaranteed instruments of importation. Larbie highlights the importance of LCs in the fight against FX volatility, noting that regulators are generally more supportive of providing FX for such trade instruments. “We have increased our market share on LCs across our footprint by leveraging our Paris-based affiliate, Ecobank International,” he says.
In the wake of hard currency shortages, African firms and their banks are leaning into local currency. Larbie says that hikes in soft commodity prices have prompted renewed interest in local currency structured commodity financing. As a pan-African Bank with operations in over 30 African markets, Ecobank is well-positioned to process cross-border transactions efficiently. A network of international correspondent banks are helping the firm support supply chains across regional trade corridors. “We are poised to launch a $40m avalised bills discount programme in our Francophone West Africa region, with a view to addressing our customers’ working capital needs,” Larbie says.
Meanwhile, CIB is pursuing long-term strategies to focus on local currency lending, regional integration and local currency financing. The bank is increasing its local currency lending, reporting 47% loan growth in 2024. Egypt’s participation in the African Continental Free Trade Area and Common Market for Eastern and Southern Africa are also helping CIB increase its presence in new African markets. This expansion aims to facilitate smoother cross-border transactions, offering financial solutions that cater to regional trade dynamics and promote local currency settlement, says Zekry.
Digital platform power
Digital infrastructure is a key enabler of the growth in local currency settlement. Ecobank points to its Omni Plus platform, which provides pre-trade clarity on exchange rates between African currencies, with executable rates visible before payment authorisation. Both CIB and Ecobank have integrated with the Pan-African Payment and Settlement System to help their clients conduct cross-border transactions.
Larbie emphasises that Ecobank continues to integrate new and established regional and national initiatives that promote less reliance on dollar settlements for intra-Africa trade. This includes the settlement systems of the West African Economic and Monetary Union, and the Central African Economic and Monetary Community. Ecobank is also integrated into the 16-nation Southern African Development Community system to settle South African rand transactions.
Zekry points to a continent-wide trend toward developing digital trade platforms to enhance financial inclusion, reduce transaction costs and build resilient trade systems. He views CIB’s initiatives as part of this broader movement, positioning the bank as a key player in Africa’s evolving trade landscape. “The bank offers platforms like CIB Business Online to streamline trade finance processes, enhance efficiency, reduce turnaround time and support clients in navigating complex trade environments,” says Zekry.
Economic policy uncertainty in the United States is making reliance on the US dollar increasingly problematic. For African countries eager to escape exposure to volatile exchange rates, tech-driven solutions are providing the foundation for trade finance to do just that.
