Why the global trade finance gap is going to get worse
Trade finance gap totaling US$1.5 trillion is hampering UN SDGs, especially women's empowerment, job creation and inclusive growth
The huge global trade finance gap amounting to US$1.5 trillion is holding back progress toward the UN Sustainable Development Goals, particularly targets relating to women’s empowerment, job creation and inclusive growth amid the ongoing economic uncertainty.
According to the latest Trade Finance Gap, Growth and Job Survey released on September 3 by the Asian Development Bank (ADB), small and medium-sized enterprises (SMEs) face the biggest challenges obtaining trade finance, while companies led by women often face additional barriers.
The survey indicates that the challenges are expected to get worse going forward with around 60% of the respondent banks expecting the trade finance gap to increase over the next two years. This implies, according to ADB, that companies could continue to experience restricted access to trade finance, impeding prospects for economic growth and jobs.
The head of ADB’s trade and supply chain finance Steven Beck describes the huge trade finance gap as a global challenge that shackles economic growth and harms efforts to reduce poverty. “Given the uncertain economic outlook, it is critical that more efficient, stable and sustainable trade finance channels are created to spur global growth and development,” he says.
The ADB survey is based on responses from banks, companies and export credit agencies globally and represents a leading barometer of trade finance health. The report notes that 45% of the trade finance applications by surveyed SMEs are rejected, compared to 39% for mid- and larger-sized firms and 17% for multinational companies.
The rejection rate for women entrepreneurs, meanwhile, is 44% compared to 38% for male-owned firms. Once rejected, the survey says, women-owned companies were less likely to seek alternative finance – whether formal or informal. Providing better access to trade financing for SMEs and businesswomen will not only narrow the gap but also empower them to contribute to inclusive growth and sustainable development.
More than three-quarters of the surveyed banks – or 76% - highlighted the requirements on anti-money laundering (AML) and know-your-customer (KYC) as the biggest barriers to expanding trade finance operations.
This was followed by high transaction costs and/or low fee income (59%), low credit ratings for the country where a firm is located (52%), low credit ratings of banks in developing countries where they act as intermediaries for trade (51%), and low credit ratings of companies (43%). The other barriers were regulatory capital requirements (48%) and global economic uncertainty such as trade tensions (41%).
While the AML and KYC regulations are crucial to ensure the global financial system is not used to fund terrorism or launder money, ADB says they can inadvertently cut off legitimate companies in less developed markets from the financial support they need to grow.
What could help address the widening trade finance gap is the reliance on technology. There is a growing optimism that fintech and digitization are potential solutions to bridge the trade finance gap, particularly among SMEs.
Global banks and large companies have collaborated to pilot information technology solutions to problems such as process inefficiency, costly regulatory compliance, and information asymmetry – all cited in the survey as major contributors to the trade finance gap.
“The gap can be narrowed by leveraging mobile internet access, cryptography, distributed ledger, blockchain technology, artificial intelligence (AI), fintech, digitization as well as big data, which can improve access and reduce the cost of financial services,” says ADB. “Blockchain and AI technology can transform raw data into useful information, helping reduce the number of rejected financing proposals.”
A majority of the banks surveyed are gearing up to service more SMEs through technology by more efficiently processing KYC (79%), deepening their ability to data-map this market segment (73%), developing new products (70%), and possibly helping to reduce their rejection rates (46%).
However, the technology take-up is compromised by high costs and lack of globally established rules and standards for digital finance. As ADB points out, digitizing operations is daunting and expensive for any firm or bank, especially given the ever-changing technical landscape.
Among the companies surveyed that use technology in their operations, the rate of application is limited – less than one-third file documents electronically (26%) and less than one-fifth use e-commerce (15%), cloud computing (14%), analytics (13%), and mobile applications (11%).
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