What’s Driving Change in African Cross-Border Payments?

26 Sep 2018

According to a new white paper by SWIFT examining Africa’s cross-border payment landscape, intra-Africa payments and clearing is increasing in importance and there is a rise in the use of African currencies for cross-border payments.

Africa’s trading relationships are evolving. Over the past decade, trade has begun to move away from developed countries and towards other emerging economies including India, Indonesia, Russia and Turkey. However, boosting intra-African trade will provide the greatest potential for building sustainable development and is a key goal of policymakers across the continent.

There are several environmental factors driving the change in cross-border transactions flows, and leading to more intra-African trade.

Political will for regional integration and harmonisation

Regional harmonisation is and will continue to be a significant driver of economic transformation in Africa. This will impact all types of industrial and commercial activity across the continent, and consequently payment flows. Policy makers have recognised the need to build sound financial marketplaces with the appropriate legal framework and technological infrastructure. Regional harmonisation projects are a major catalyst for the evolution of cross-border trade and banking in Africa and are driving the increased use of local currencies across the region.

The demand side of the African market is expanding and evolving

Political will to achieve harmonisation across the continent is driving agreements that enable free trade, such as the African Union’s Continental Free Trade Area (CFTA). This is facilitating corporate growth across Africa, which, in turn, is leading to change in cross-border transactions.

The development of Africa’s financial infrastructure

African countries are investing in financial market infrastructures (FMIs), many at a regional level. Policy makers recognise that payments systems and other infrastructures are an enabler for economic growth and quickly repay their investment. The development of strong and secure FMIs has also been important in helping to drive more cross-border trade within Africa and with the rest of the world.

Regulatory pressure in financial markets

Transaction patterns are being shaped by international regulations that impose strong prudential controls. Such regulations operate a close to zero-tolerance approach to potential money-laundering and terrorist financing exposure. It is becoming increasingly difficult for global transaction banks to do business with smaller African banks that cannot easily demonstrate strong Know Your Customer, anti-money laundering and counter-terrorist financing processes. This has led many global transaction banks to review and rationalise their correspondent banking relationships. In turn, this has led to a reduction in the number of foreign correspondent banking relationships in Africa.

Africa continues to be a continent of growth and opportunity despite challenging global economic conditions over the last five years. Understanding Africa’s trade flows in terms of scale and composition will be crucial in determining the right policies and processes to support further growth on the continent. Read the full paper here.

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