Even as the African continent eyes increased commerce and investment from a free trade area, one of the biggest challenges affecting trading within the region is the high cost of transacting payments from one region to another.
Through the Africa Continental Free Trade Area (AfCFTA), intra-Africa trade is projected to grow by 81% and the export volume by 29%. Additionally, over 60 million Africans will be lifted from extreme poverty.
Generally, these will raise the continent’s real income by 7% to $450 billion by 2035.
In East Africa, the United Nations Economic Commission for Africa (UNECA) has projected that AfCFTA will create at least eight million new jobs. Nevertheless, these will yield an estimated $35 billion in welfare gains.
However, the high cost of cross-border transactions may hump the prospects of the continental trade agreement, adding to the agitation of partial implementation of the terms of the same. There are also persisting non-tariff barriers which highly affect the intra-continental trade.
High cross-border payment rates compared to global rates
According to a pan-African organisation that advocates for financial inclusion, AfricaNenda, the average cost of cross-border payments in Africa is about 12-18 % of the transaction value. The rate is against a global average of 6-7%.
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According to Benedict Oramah, President of the African Export-Import Bank, Cumbersome transactions cost Africa about $5 billion in money transfer charges each year. This is so, despite Africa being home to at least 576 financial technology (Fintech) companies, according to Statista.
Furthermore, 11 of the 50 fastest growing companies in Africa in 2022, were fintech and financial services firms. This is as per the Financial Times ranking.
New start-ups are cropping up almost every month, with aims to solve different problems of financial inclusion, from high costs of transactions to inaccessibility to credit and digital wallets.
Between 2017 and September 2021, these start-ups raised over $4.5 billion in funding. This figure is more than twice the amount raised by budding companies in any other sector in the period.
Nevertheless, interoperability — the ability of payment systems in different regions to exchange and make use of information — has remained an elephant in the room for these fintechs.
What makes it difficult for African fintechs to develop a solution for the interoperability problem threatening Africa’s trade integration?
Dr Robert Ochola, AfricaNenda’s CEO, said that although Africa is making significant strides towards creating a continent-wide interoperable payment system, there are still great challenges across regions that impede these efforts.
“Fintech companies alone cannot solve this problem without the regulatory framework that creates an interoperable layer of payment system for them to plug into,” Said Dr Ochola.
“Continental interoperability can only be achieved if the regional economic communities (RECs) in the continent develop functional inclusive payment systems, which will then provide a layer for fintech companies to enable cheaper cross-regional payments,” he added.
Papps, the Pan-African Payment and Settlement System seek to enable payment transactions in local currencies between countries across Africa. The payment will happen instantly for cross-border transactions without the need for currency conversion. This will increase transparency on cross-border trade activity.
“There are security and monetary risks involved that must be effectively mitigated. Also, there are high costs and limited human capacity and knowledge sharing that slow the process,” he said.
Low average GDP per capita
According to AfricaNenda, low average GDP per capita (lower value of transactions ) makes instant payments per dollar more expensive and is among the key threats to developing interoperable instant payment systems on the continent.
“Ideally, transaction costs should be less than 1% to make cross-border trade even easier and increase financial inclusion,” Dr Ochola said.
Inclusive instant payment system.
The East African Community, West African Economic and Monetary Union, South African Development Community and the Common Market for Eastern and Southern Africa are currently working on an inclusive instant payment system.
Finally, a relatively low smartphone adoption, unaffordability of data, low access to electricity and comparably smaller markets are other challenges affecting the advancement in the payment system.