Rewiring Africa's Payments Landscape for Trade Growth
FEATURED BLOG
Rewiring Africa's Payments Landscape for Trade Growth
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By Tito Mbathi
Oct, 2024
Picture this: a Kenyan farmer, her truck laden with fresh produce, sits idle at the Tanzanian border. Not because of a lack of demand or subpar roads, but due to an invisible barrier - a fragmented payment system that turns a simple transaction into a Kafkaesque ordeal. This scene, replicated countless times across the continent, epitomizes the hidden struggle facing African trade.
Anyone with experience trading across borders in Africa has witnessed firsthand how our fragmented financial infrastructure strangles the lifeblood of commerce. It is incongruous that in this age where information is instantaneously accessible, our money crawls across borders, bogged down by incompatible systems and outdated regulations. From the CFA Franc zones in West and Central Africa to the multiple currency regimes of East Africa, each region operates in relative isolation. This balkanization of financial systems manifests in myriad ways: exorbitant fees for cross-border transactions, lengthy settlement times, and a pervasive reliance on third-party currencies like the US dollar, and, more recently, the renminbi. The result is a trade environment where sending money from Nairobi to Lagos can be more complex than transferring funds to London or New York.
This fragmentation is more than a mere inconvenience; it's a fundamental obstacle to African economic integration. The lack of interoperability between national payment systems, coupled with expensive, slow, and unpredictable cross-border transactions, creates a dichotomic scenario.
African businesses often find it easier to trade with partners in Europe or Asia than with their continental neighbors. As a result, many retreat into domestic markets, leaving the vast potential of intra-African trade untapped. While data indicates that local importers and exporters increasingly identify the continent as their most important market, Africa still operates far below its potential. The prevalence of cash in advance as the primary payment method for cross-border trade, while practical, highlights both the resourcefulness of African traders and the underlying systemic challenges. Therefore, although intra-continental trade is growing, the complexity of our payment systems still poses unnecessary hurdles. This partial disconnection not only constrains the full growth potential of continental commerce but also leaves our economies more vulnerable to external shocks and currency fluctuations, impacting long-term economic planning and investment.
Yet, within this fragmentation lies a seed of opportunity. The very diversity of Africa's payment landscape, coupled with the rapid adoption of mobile money, provides a unique canvas for innovation. We're not burdened by legacy systems to the same extent as the Global North, giving us the freedom to reimagine our financial infrastructure from the ground up.
The AfCFTA and initiatives like PAPSS are important first steps. They've shown us what's possible when we collaborate. But let's be honest - they're just the tip of the iceberg. What is needed now is a bold, concerted effort by Africa's central banks to collaborate in order to bridge the gap between political ambition and financial reality.
To this end, we propose innovative solutions that could transform the landscape of African payments and, by extension, intra-continental trade:
An African Liquidity Bridge (ALB): Envision a system where central banks across the continent pool a portion of their foreign exchange reserves into a collective facility. This "bridge" would serve as a multi-currency liquidity provider, enabling real-time currency conversions and settlements between African nations. The ALB could seamlessly integrate with existing infrastructure like PAPSS, offering transparent, low-cost conversions between any two African currencies, eliminating the need for US dollar intermediation. This would not only reduce transaction costs but also insulate intra-African trade from external currency volatility.
Digital Economic Zones (DEZs): Taking inspiration from Special Economic Zones, central banks could establish Digital Economic Zones – virtual spaces where businesses can conduct cross-border transactions under a unified set of rules. Businesses operating within these zones would enjoy near-instantaneous settlements, streamlined compliance processes, and potentially preferential tax treatments. Imagine a Ghanaian tech startup seamlessly collaborating with a Kenyan marketing firm and a South African manufacturer, all within this frictionless digital space.
Terraform: Taking a leaf from the tech world and 'terraforming' our financial landscape. This ambitious initiative would involve creating a standardized, open-source financial infrastructure that any African country could plug into. Think of it as building a continental financial operating system - one that's interoperable by design, respects each nation's sovereignty, but creates a seamless experience for end-users.
These solutions, while ambitious, are not beyond reach. They would represent a paradigm shift in how we approach financial integration in Africa – moving from a model of passive cooperation to active, technology-driven collaboration between central banks. By embracing these innovative approaches, African nations can turn the current fragmentation of payment systems from a barrier into a bridge, facilitating not just the flow of money, but also the realization of Africa's vast economic potential.
The path to a unified African payment landscape is neither straight nor easy. It requires not just technical innovation but also political will and a shared vision of a connected, prosperous Africa. Yet, as we stand at this crossroads of fragmentation and opportunity, one thing is clear: the future of African trade will be written not in the language of borders and barriers, but in the universal tongue of seamless, efficient payments. It is time for Africa's central banks to take up the pen and author this new chapter in the continent's economic story.
Tito Mbathi is an Associate at Botho Emerging Markets Group