A Study of Côte d’Ivoire, Ghana, Nigeria, and Senegal by the International Finance Corporation and World Trade Organization
Poor access to credit facilities that finance import and export transactions is constraining the role of cross-border trade as a driver of development in West Africa. Improving the availability and cost of trade finance could boost trade volumes by 8 percent to 16 percent, supporting economic growth and diversification.
Trade brings well-documented benefits to developing countries by linking them to new markets while boosting access to technology, knowledge, and sources of capital. Firms that participate in international trade, either as importers or exporters, pay higher wages, are more skill- and capital-intensive, grow larger, and tend to be more productive than non-trading firms. 
The next decade could see a prolonged period of accelerating trade, faster growth, economic diversification, and poverty reduction across Africa as global trade flows recover from the COVID-19 pandemic and governments commit to further trade liberalization. To achieve this potential, however, companies need better access to trade finance.
To better understand the trade finance ecosystems in West Africa, IFC and the WTO conducted in-depth research in the four largest economies in the Economic Community of West African States: Nigeria, Ghana, Cote D’Ivoire, and Senegal (which we call the ECOWAS4).
The region has seen some progress over the last decade, with more firms participating in cross-border commerce and improved competitiveness explaining export growth. Between 2010 and 2020, the number of exporters rose by around 75 percent in Côte d’Ivoire and Senegal while the number of firms that import goods at least doubled. The region is also forging new trade links, particularly with China and other parts of Asia.
Yet despite encouraging signs of progress, there remains considerable room for improvement in fully enabling trade as a driver of development in West Africa. Companies based in the ECOWAS4 are active in less than 3 percent of potential export markets for their products, well below countries such as South Africa, which is at around 20 percent. Raw materials make up more than 70 percent of total exports in the ECOWAS4, and participation in regional and global value chains is low.
The $14 billion trade finance gap
The research finds that many firms in the region continue to be constrained by high costs of conducting trade compared with their peers in other parts of the world. One important element of this is a relatively high cost of, and shortfalls in access to trade finance.
In advanced economies, banks routinely provide trade finance to cover the time lag between when the exporter wants payment (on production or shipment of goods) and when the importer wishes to pay (after they receive or sell the goods to their customers). A variety of financial solutions are used for different types of trade, including letters of credit, payment guarantees, open account payments, and advance payments. In developing countries, however, access to these products is more constrained. 
To examine access to trade finance in West Africa, IFC and the WTO conducted a survey of almost the entirety of the banking sectors of the ECOWAS4, asking lenders how much trade finance they support and in what sectors, seeking to identify the biggest shortfalls in provision and which economic sectors are most affected. Bankers also submitted responses to questions on the cost of trade finance, rates of declined applications for credit facilities, and the most common reasons behind those refusals.
Based on the results of the survey, IFC and the WTO estimated that the total size of the trade finance market in the ECOWAS4 was $42 billion in 2021. However, that supports only about 25 percent of the four countries’ merchandise trade, well below published estimates for Africa of about 40 percent, or advanced country levels of 60–80 percent. At the individual country level, the study found that trade finance covers between 15 percent of trade in Senegal and 41 percent in Ghana (Exhibit 1).
Meanwhile, average rejection rates for trade finance applications by banks in the ECOWAS4 are high, amounting to 21 percent of requests and 25 percent of their total value, according to the survey. For larger banks catering to bigger clients with more resources, deeper pools of collateral and stronger credit histories, the rejection rate is lower, at 13 percent of requests and 19 percent of their value. On the other hand, smaller banks report a 23 percent average rejection rate, and 25 percent in value terms.
These rejections suggest an overall trade finance gap between supply and demand in the ECOWAS4 of about $14 billion annually (Exhibit 2).
It is important to note that rejection of a trade finance application will not always directly reflect a shortage of trade finance, as some companies will have been turned down because they are not creditworthy. Furthermore, refusal will not always translate directly into foregone trade as some rejected firms will find alternative sources of funding for their transactions.
Nevertheless, rejected trade finance applications encourage traders to turn to sub-optimal alternatives such as using their own funds or borrowing through family networks and other informal channels. This can be less efficient, riskier, and more costly. Self exclusion from the trade finance market—possibly in reaction to previous rejections—may also be leading firms to withdraw from international trade altogether.
Banks cite a number of barriers that limit their ability to provide more trade finance. These include challenges in working with foreign correspondent banks—lenders providing banking services to financial institutions in other jurisdictions—insufficient collateral against the high perceived risks of borrowers, particularly relating to small and medium-sized enterprises (SME), and shortages of low-cost funding.
Between 45 percent and 67 percent of banks across the four countries mention lack of collateral and high applicant risk as the top causes of rejection.
The survey also found that ECOWAS4 lenders have less extensive networks of correspondent banking relationships than their counterparts elsewhere in Africa and in other regions (Exhibit 3). Opportunities to expand the number of international partners executing cross-border transactions with ECOWAS4 banks would help ease a blockage to trade finance highlighted by nearly all the respondents in the survey.
Meanwhile, the cost of trade finance is high in the four countries by international standards. The average price of a letter of credit is around 2–4 percent of the transaction value per year, compared with a 2 percent global emerging market average and a 0.25–0.50 percent lower bound typically observed in more advanced countries.
Furthermore, SMEs typically face higher costs, with premiums for trade loans or import financing potentially costing almost twice as much as for large firms. Additionally, even though the merchandise itself often qualifies as collateral in international trade, banks in the survey reported they often ask for further collateral on the basis that unreliable legal enforcement makes it difficult to seize and resell merchandise.
Closing the trade finance gap could boost trade by 8–16%
Data gathered in the survey was used to run scenarios with a global trade model to project the potential effect on trade that would come from closing trade finance gaps. Under a scenario where the coverage of trade by bank-intermediated trade finance rises to the African average while fees and spreads are brought down to international benchmark levels, ECOWAS4 trade in goods would rise by 8 percent annually, or nearly $13 billion.
Meanwhile, raising the coverage further to the global average rate and lowering the cost of trade finance could boost ECOWAS4 merchandise exports and imports by 16 percent, or some $26 billion per year. In both cases, intra-ECOWAS trade is the biggest beneficiary of improved trade finance access, according to the simulations.
Actions by policymakers, banks, and companies are needed to close the trade finance gap
Closing the trade finance gap will require coordinated action by financial institutions, national policymakers, regulators, and international organizations, as well as companies.
Financial institutions in the ECOWAS4 can focus on increasing the provision of trade finance through traditional and new instruments. Technology solutions could facilitate the adoption of new instruments such as supply chain mapping, blockchain-like transaction tracking, and digital financing while also helping banks develop more sophisticated internal credit risk assessment systems, particularly for smaller companies. A higher level of digitization could also help reduce the processing costs for trade finance instruments.
To improve access to trade finance by smaller companies, banks will need to develop the required credit assessment expertise for such enterprises. Banks and other institutions can also provide training and outreach to smaller and women-owned firms to better inform them of what facilities are available and help them to access the market. National regulators, for their part, must provide effective enforcement of rules for collateral.
Policymakers and other leaders in the region must more firmly integrate expansion of trade finance into the implementation of the African Continental Free Trade Area and public policy discussions on the continent.
Evidence-based studies of trade finance gaps and research into what determines them are relatively rare, notwithstanding the work of some academic researchers and international organizations. Additional efforts by the research community and development finance institutions to accumulate more country-focused data and analysis will help deepen understanding of the issue and identify markets where shortages of trade finance are particularly acute.
 See: Bernard, A., Jensen, J., Redding, S., and Schott, P. 2007. “Firms in International Trade,” Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 105-130 or World Bank. 2020. “World Development Report 2020: Trading for Development in the Age of Global Value Chains,” World Bank.
 See: Kim, K., Latoja, M., Beck, S. and Tayag, M. 2021. “2021 Trade Finance Gaps, Growth, and Jobs Survey,” Asian Development Bank Briefs, Number 192, October 2021 or: African Development Bank. 2022. “Trade Finance Demand and Supply in Africa: Evidence from Kenya and Tanzania,” African Development Bank, July 1, 2022, https://www.afdb.org/en/documents/trade-finance-demand-and-supply-africa-evidence-kenya-and-tanzania