Borderless Lending: What's Replacing Traditional Trade Finance in Africa?

I. After centuries of use, LCs have fallen out of favor in the last decade.

In the West, the commercial Letter of Credit traces its origins back to medieval Europe, where lettera di cambio (Italian) and Wechselbrief (German) instructed a foreign merchant houses to pay named beneficiaries in specified sums, after agreed maturity dates. In the centuries that followed, document-based trade instruments evolved into modern LCs, including one of the first fully documented commercial LCs, issued in 1836 to facilitate the sale of Brazilian produce to a New York buyer.

Since the early days of the LC, trade finance business has boomed for commercial banks as global trade flows climbed into the trillions of dollars. A 2024 ICC Trade Register reported that documentary trade products—LCs, standby LCs and guarantees— generate $58 billion in global bank revenue (41 % share). But, despite their prominence, these documentary products are not suited to the needs of businesses in frontier markets, where the next generation of high-growth trade corridors is emerging. Growth in documentary products has flattened over the last decades, while more flexible trade finance products, like invoice factoring and supply chain finance, are taking the lead. This shift toward receivables and payables-based financing is especially important for African corridors, which generate $1.4 trillion in trade flows annually.

Take, for example, Nigeria. Nigeria’s official payments data show LC outflows declined from $549 million in Q1 2023 to just $204 million in Q1 2024, a 63% drop. A BusinessDay investigation revealed some global suppliers “flat-out reject” Nigerian LCs, demanding escrow transfers instead. This anti-Nigerian-trade-finance posture is puzzling, given that Nigeria is the world's sixth most populous nation, and Africa's fourth largest economy.

To understand these trends, let's take a closer look at the factors driving compliance costs, and the resulting economics that make commercial LCs unprofitable for banks, and inaccessible to customers in Africa.

II. For traditional banks, compliance costs challenge the business case for financing African SME trade.

Capital Adequacy

After the 2008 financial crisis in the U.S., regulators globally agreed that banks needed more robust rules to absorb and prevent systemic shocks. Basel III is the voluntary set of minimum capital-and-liquidity standards regulators crafted in response, written by a club of central banks and supervisors from 28 jurisdictions, convened in Switzerland.

Each voting member of Basel must adopt the standards into its own domestic law or regulation, and progress is tracked publicly. Although South Africa is the only of Africa’s 54 countries to vote in the Basel committee, many countries – including Nigeria, Kenya and Ghana – are part of a consultative group that has aligned with the standards.

Under the final batch of Basel III rules proposed by U.S. regulators in 2023, LCs and other off-balance-sheet trade contingencies require banks to set aside an increased amount of capital as a precaution in case of default.

Even though African regulators are not obliged to copy U.S. rules, many are aligned with the principles behind the proposal. Ghana already enforces a 13 % Basel II/III capital-adequacy floor, while Nigeria’s Banking Sector Recapitalization Programme and Kenya’s amended core capital requirements move in the same direction.

The upshot of these increased capital charges is that, in each LC-backed trade transaction, the buyer’s bank now must reserve a larger share of its own equity behind that single trade—equity that the bank could have lent out elsewhere at a higher interest rate. That is, the higher the capital set-aside, the lower the LC’s profitability—so the Basel III standards feed indirectly into the higher costs and lower availability of LCs for African businesses.

Correspondent Banking

In a typical LC, the buyer’s local bank promises to pay the supplier’s local bank in another country, so long as the goods have shipped and the documentation is compliant. However, the buyer and supplier typically have different local currencies, so they agree to settle the trade in a ‘hard’ currency, like US dollars. Because no non-U.S. bank can clear U.S. dollars without a U.S.-chartered correspondent bank, the supplier’s local bank will actually pay the funds to this third correspondent bank. It’s the correspondent bank that clears the payment to the buyer’s bank, and indirectly to the buyer.

There are a limited number of these global correspondent banks, and many have pulled back from emerging market trade corridors. SWIFT data analyzed for the African Development Bank show the continent lost 18.6 % of its correspondent banking relationships between 2011 and 2017, mirroring a global contraction of roughly one-fifth over the same period.

Generally, financiers perceive traditional LC work as “low-margin but high-risk”: each relationship generates modest fee income yet consumes costly anti-money-laundering checks, sanctions screening, and—after Basel III—more capital for every LC or guarantee they confirm.

Fraud / Anti-money Laundering Costs

Also, behind the correspondent banking decline is the regulatory expectation that banks know not just their customers (KYC) but also their customers’ customers (KYCC), and that they screen every transaction against ever-longer sanctions and politically-exposed-person lists.  A 2023 LexisNexis Risk  study found that 98 % of Europe, Middle Eastern and African banks saw their compliance spend rise, driven chiefly by new regulatory obligations and sanctions updates.

Geopolitical tensions have multiplied the daily changes to sanctions lists; legacy screening engines struggle to keep up, generating floods of “false-positive” alerts that AI technologies have not yet successfully resolved. A May 2025 industry brief notes that banks’ aging systems cannot keep pace with daily sanctions changes, inflating manual review hours and software vendor-license fees.

Boston Consulting Group calculates that second-line compliance functions now eat 1.1 – 1.7 % of total bank costs, a share that rises sharply in complex, cross-border franchises.

As global correspondent banks reduce their exposure to low-profit, high-risk corridors, the unit cost of screening each African LC or wire transfer rises, leading banks either to charge higher fees or to exit these corridors altogether.

III. The next generation of borderless lending is  shaped by partnerships and digitization.

Over the past two decades, each successive round of Basel capital and compliance rules has made banks safer, yet also more cautious about extending trade credit to the very counterparties that need it most in emerging markets. The Basel III Endgame does not stop at commercial Letters of Credit (LCs); it also affects standby LCs, guarantees, invoice-factoring lines, working-capital loans and the full menu of bank-issued facilities.

The ripple effects are showing up on two levels. First, the “who” behind trade finance capital is shifting: specialist non-bank lenders, fintech platforms, supply-chain finance funds, development-finance institutions and even large corporates themselves are stepping in as direct providers or guarantors. Second, the “what” is evolving: digital payables programmes, receivables marketplaces, insured inventory finance, tokenised trade assets and other structures are springing up to plug the gap left by balance-sheet-constrained banks.

The sections that follow describe both dimensions—the new cast of financiers and the expanding toolkit of products they bring—to show how today’s exporters and importers can secure funding without relying on the traditional commercial LC.

The New Players

Non-bank financial institutions

Specialist funds and non-deposit lenders now channel investor capital straight into emerging-market trade flows, avoiding Basel capital surcharges altogether. For instance, Cauris, Lendable, and RealFi, mobilise impact-driven debt vehicles to lend working capital lines to African on-lending businesses and startups that are growing, but underserved by banks. In turn, export financing companies companies like Fluna, Zuvy and Liquify offer invoice financing solutions to importers, exporters and other trading business that are overlooked by traditional banks.

Neobanks

Digital banks leverage microfinance or savings & loan licenses and internal software teams to keep operating costs low. Ghana’s Affinity Savings & Loans enables customers to create bank accounts in minutes, and  access pre-shipment finance and invoice finance for sales to local corporates. In Nigeria, Kuda Bank and Lidya offer fast credit tools that have attracted millions of micro-merchants, proving that a smartphone can substitute for the branch network has proven capital-intensive for larger banks. Uganda’s Numida unlocks short-term microloans for tens of thousands of SME trading businesses. And South Africa’s TymeBank repeats the model at a large scale, already topping ten million customers while holding less of the legacy infrastructure of incumbent banks.

Payment Gateways and Digital Escrow Agents

Once pure payment gateways, fintechs are now mining transaction data to pre-approve loans inside the checkout flow. Flutterwave Capital advances one-to-six-month working-capital loans that are swept from future card and wallet receipts. WeWire, a cross-border payments gateway, recently secured its Treasury License from Mauritius, in order to become a fully integrated cross-border financial services provider. Escrow service providers, like Truzo, bridge the trust gap for smaller transactions where tying up liquidity is not a constraint.

Credit Insurers

Insurers have become behind-the-scenes liquidity makers as well. Many of these insurers are established institutions, which have been providing insurance for generations, but their technologies and product mix has evolved. Allianz Trade (formerly Euler Hermes) dominates the space with AI-driven buyer-ratings and indemnities that aim to transform SME invoices into investment-grade assets. Rivals Atradius and Coface underwrite similar policies for multinationals, spreading risk across 200-plus markets and letting exporters offer generous terms without betting the company.

Commercial Banks

Some universal banks are creating agile trade desks, to create customized products that enable large corporates to grow their trades. In June 2025, Investec closed a US $10 million supply-chain-finance facility for Singapore-based commodity trader Valency International, settling supplier invoices via a digital platform instead of issuing paper LCs. UBA received a $150 million facility from Afreximbank to help boost intra-Africa trade. Standard Chartered partnered with British International Investment on a US $100 million risk-participation program for trade finance in emerging markets.

Collateral managers

Independent collateral managers and stock monitors use on-site staff, IoT sensors and proprietary technology to manage pledged inventory. Jetstream’s Jetvision platform tracks goods-in-transit and and in storage, enabling financiers, guarantors and insurers to confirm the quantity and condition of the goods that they underwrite. Nigeria’s Continental Logistics partners with universal banks and government agencies to secure trade commodities ranging from cocoa and rice to electronics and energy products.

Anchor Buyers and Strategic Suppliers

Creditworthy multinationals are increasingly acting as de facto financiers, inviting vendors into early-payment programmes that piggy-back on the buyer’s rating. Unilever’s C2FO-powered Early Pay portal lets more than 400 suppliers auction approved invoices for cash straight from Unilever’s treasury. Walmart runs a similar scheme—linked to its Project Gigaton climate targets—through which suppliers that hit emissions-reduction milestones receive preferential discount rates on accelerated payments.

The New Playbooks

Collateral Management and Stock Monitoring

Instead of relying on real estate and cash collateral, financiers expect continuous, tech-enabled oversight of pledged goods. Platforms such as Jetvision stream real-time data on the status, quantity and condition of financed goods, with the backing of tripartite legal agreements between the financier, inventory manager, and borrower.

Open-account trade

When exporters are confident of the buyer’s credit—or when they carry credit insurance cover—they ship first and get paid later, typically on 30-, 60- or 90-day terms. This “seller-as-bank” arrangement, supplies interest-free working capital to the buyer while giving the seller a larger order book. Conversely, when the importer is relatively well-capitalized, they may issue an advance to their cash-strapped supplier, so that the supplier expedites order fulfillment.

Open account trade works best when there is a history of repeat business and a high-level of trust between the buyer and the seller. To avoid diversion of funds, and streamline communication, software platforms like Jetvision help strengthen open account relationships.

Supply-chain finance

SCF flips that equation by inserting a financier (often a platform) between the two parties: the funder pays the supplier as soon as the invoice is approved, then collects from the buyer at maturity, pricing the deal off the buyer’s stronger credit. PwC’s definition calls it a liquidity tool that improves working capital for both sides, and programs such as Unilever Early Pay or Walmart’s HSBC-backed sustainable-SCF scheme show the model at scale.

Working-capital Financing

Fintech lenders now carve receivables and payables into bite-sized, data-driven credit lines. Flutterwave Capital offers merchants one-to-six-month loans repaid automatically from future sales, while US platforms BlueVine and Fundbox turn unpaid invoices into same-day cash advances, charging transparent fees rather than compounding interest.

Standby Letters of Credit

A standby LC is an independent, on-demand obligation similar to a guarantee: if the applicant fails to perform, the beneficiary simply presents a complying demand and gets paid. Fees run 0.5 %–3 % per year, and the instrument remains the gold-standard safety net for big infrastructure or commodity deals where counterparties still trust banks to stand behind them.

Non-bank Guarantees

Corporate sureties replicate the standby LC’s risk-transfer effect without triggering bank-capital charges. American Express, for example, issues payment guarantees within its Working Capital Solutions suite, allowing small exporters to accept an Amex undertaking instead of insisting on a bank-issued SBLC.

Credit insurance

For larger buyers, usually credit-rated corporates, credit insurance policies indemnify sellers (and their financiers) against buyer default, effectively outsourcing credit risk to an insurer’s balance-sheet. As mentioned earlier, credit insurers now combine global buyer databases with AI scoring to grant or withdraw cover daily, turning unsecured invoices into assets that banks or funds will readily purchase.

Risk-participation agreements

Finally, banks that still originate LCs, guarantees or SCF assets increasingly sell unfunded slices of that exposure to other lenders or DFIs, freeing up regulatory capital. The $100 million Standard Chartered-BII deal is an example: BII takes a contractual share of the credit risk, and Standard Chartered originations the trade loans with more favorable accounting and capital requirements that would apply without risk sharing.

IV. Conclusion

Traditional documentary instruments like Letters of Credit are no longer the pillars of trade finance that they once were. Over the past twenty years regulation has tightened, trade has accelerated, and new actors—fintechs, impact funds, neobanks, collateral managers, insurers, collateral mangers, and even buyers and suppliers themselves—are shaping new solutions to trust and liquidity gaps. Their arrival has not replaced the bank LC so much as surrounded it with alternative guarantees, collateral management and stock monitoring, data-driven credit lines and on-demand risk sharing that can reach unrated SMEs as readily as listed multinationals.

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