Almost half of Sub-Saharan Africa’s trade every year – $362 billion of merchandise trade – settles in US dollars, despite the US accounting for less than 10 percent of Africa’s total trade in 2019.

We believe that informal trade is even more dollar-based. This begs the question: what drives the high use of dollars in informal cross-border trade in Africa?

Under our Rwanda Economy Digitalisation Programme, we conducted a qualitative study in Rubavu district to investigate this question. We found that, although the traders in the sample have access to digital devices and formal financial accounts – they prefer cash, and specifically US dollars. The additional income generated from foreign exchange arbitrage is a substantial part of their business model.

Let’s unpack this a bit more:

Meet Jean-Paul. He is a 33-year-old Rwandan from Rubavu conducting cross-border trade. He sells mushrooms and rice in the Democratic Republic of Congo (DR Congo) rather than on home soil because he can make more money that way. He and other traders are capitalising on the opportunity for trade presented by the vast food security challenges faced in the DR Congo. Rice is especially in high demand, which means Jean-Paul can make a good profit if he runs his business well.

He wakes up at 05:00 am to buy his mushrooms from either the local farmers or at the Rubavu market. He buys rice on a weekly basis from an agent who imports the rice from Tanzania. At approximately 6:30am, he makes his first trip of three across the Rubavu - Goma border through the Petite barriere/Poids Lourds crossing to sell his products.

Jean-Paul does this every day, contributing to the approximately 60,000-100,000 daily border – figures from normal situation when conflict on the other side of the border has not impacted business – crossings between Rwanda and DR Congo.

Even though he may not think about it this way, these daily border crossings generated $133 million in unofficial exports in 2022 (Cenfri, 2023), making it one of the most valuable informal trade routes in the world. In fact, it has grown in significance with informal exports to the DR Congo increasing from $98 million in 2017 to $133 million in 2022, dwarfing informal exports to any other neighbouring country (Cenfri, 2023). This informal cross-border trade corridor is therefore clearly a lucrative and critical provider of livelihoods for locals in Rwanda.

Jean-Paul is familiar with digital payments in Rwanda. He converts dollars to Rwandan Francs and deposits it into his mobile money or bank account. This allows him to pay his suppliers digitally. However, he notices a significant difference in trust towards formal financial service providers between Rwanda and the DR Congo. Jean-Paul knows that Congolese traders trust the US dollar much more than the Congolese or Rwandan franc. In fact, DR Congo traders strongly distrust the DR Congo banking system due to bank collapses in the past. This makes the US dollar more favourable for informal trade. In addition, informal traders like Jean-Paul indicate that they benefit from receiving dollars and exchanging them into Rwandan francs, which further reinforces the preference for this mode of payment. Cash, therefore remains king in this informal cross-border trade corridor.

"I like that [trading in dollars], because the exchange rate is good. I exchange the dollars at the Rwandan Forex Bureaux: for small notes ($5 - $20 notes) I exchange it for Rwf1,025 per dollar and big notes ($50- $100 notes) for Rwf1,035 per dollar’’ (Cenfri, 2022).

This trend is not atypical of trade between African countries – even going so far as seeing "wheelbarrows” of US dollars transported across borders in Africa.

However, this practice also comes with risk. Jean-Paul has on occasion ended up going home to find that the dollars he had received that day were fake. He also says his wife is often concerned about his safety as he carries a lot of cash across the border.

‘’Some clients pay me with fake bills and I don’t know how to tell the difference!’’ (Qualitative cross-border interviews, 2022).

Even though Jean Paul has some awareness of the risks he faces dealing in cash, there are no suitable digital alternatives. Despite him having a mobile money account with a Rwandan mobile money provider, he cannot easily use the account to trade cross-border as his phone does not have sufficient connectivity in Goma. In addition, the DR Congo clients are hesitant to transact digitally as they don’t trust the DR Congo banking system and struggle with poor connectivity infrastructure. Trust is in fact a vital point as DR Congo traders who reside in Rubavu are more likely to use formal financial services, as the Rwandan payment system is fairly well trusted. Many Congolese traders will however continue using cash as traders’ tend to distrust government officials in the DR Congo. This further discourages them from disclosing their incomes, even to bank officials, creating an environment where the use of cash remains prevalent.

Jean-Paul’s experience represents the typical life of a cross-border trader in Rwanda. It highlights the significance of cross border trade for the livelihoods of many Rwandans. The traders' earnings support their own families and the families of farmers and offer a crucial source of foreign exchange for the country. Nevertheless, the dollarisation of cross-border trade presents its own set of challenges. The absence of a widely adopted, interoperable digital payment system results in a heavy reliance on cash. This is problematic as cash has costs. The costs to the trader include the risk of carrying cash across the border, the risk of losing money due to fake dollars, the cost of converting USD to Rwandan francs, and the opportunity cost in terms of time taken to perform this transaction. In a nutshell, the dollarisation of cross-border trade poses challenges due to heavy reliance on cash, resulting in costs and risks for traders and hindering the efficiency of transactions between traders.

Ultimately, we walked away with two key learnings:

1. Informal cross-border trade heavily relies on the use of a stable and trusted currency accepted by both traders and customers. Unless there is stability and trust in the currencies of both bordering regions, the preference for a reliable third currency will persist. The fact that many DR Congo traders who reside near the border or in Rwanda choose to bank with a Rwandan bank also reinforces the desire for a stable currency in informal trade. The persistent lack of trust in the currency and financial system of the DR Congo implies that cash-based trade will endure for many years to come.
2. The profit on the forex trade is a key part of the business model for informal cross-border traders. In fact, the Rwandan banks have recognised this and have large cash handling capacity in Rubavu to manage all the dollar flows. This underscores the structural nature of the forex trade as the ecosystem has built itself to meet the needs of these traders. Consequently, informal traders will resist any form of digitisation of their cross-border transactions if it means that they will lose this profit margin.

Through the Rwanda Economic Digitalisation (RED) programme, Cenfri is working with the government of Rwanda to drive evidence-based policymaking through drawing key insights from various government datasets to solve cross-cutting challenges. Cross-border trade is a key part of the Ministry of Trade and Industry's (Minicom) policy interests and focus and Cenfri is therefore working with both Minicom and NBR datasets on finding ways of supporting and enhancing cross-border trade between Rwanda and its neighbouring countries.

Kinyanjui Mungai is a Senior Research Analyst at Cenfri.