A stubbornly high $1.5 trillion global trade finance gap is holding back efforts to deliver vital jobs and growth amid ongoing economic uncertainty, according to the latest Trade Finance Gap, Growth and Job Survey, released on Tuesday by the Asian Development Bank (ADB).
Small and medium-sized enterprises (SMEs) face the biggest challenges obtaining trade finance, the report notes, and companies led by women often face additional barriers.
“The huge trade finance gap is a global challenge that shackles economic growth and harms efforts to reduce poverty,” said the Head of ADB’s Trade and Supply Chain Finance Mr. Steven Beck. “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.”
The Trade Finance Gap, Growth and Job Survey is based on responses from banks, firms and export credit agencies globally and is the world’s leading barometer of trade finance health. Its 6th edition finds that the trade finance gap continues to impede progress toward the Sustainable Development Goals, especially targets pertaining to women’s economic empowerment, job creation, and inclusive growth.
According to the report, 45 percent of trade finance applications by surveyed SMEs are rejected, compared to 39 percent for mid- and larger-sized firms and 17 percent for multinational corporations. The rejection rate for women entrepreneurs, meanwhile, is 44 percent compared to 38 percent for male-owned firms. 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 (76 percent) of the surveyed banks reported that anti-money laundering (AML) and know-your-customer (KYC) regulations are major obstacles to expanding their trade financing operations. While these regulations are crucial to ensure the global financial system is not used to fund terrorism or launder money, they can inadvertently cut off legitimate companies in less-developed markets from the financial support they need to grow.
“An extreme example is the Pacific islands, where some countries risk being cut off from the global financial system—including trade finance—due to correspondent banks severing relationships with local financial institutions,” said Mr. Beck.
Around 60 percent of responding banks expect the trade finance gap to increase over the next 2 years. Technologies such as blockchain and big data have the potential to narrow the gap, but their take-up is compromised by high cost and a lack of global standards for digital finance. The report recommends adoption by governments of common rules on digital trade and e-commerce to give firms and banks legal grounds to transact digitally. Legal Entity Identifiers would help address AML/KYC concerns by applying a unique electronic 20-digit identifier for legal entities participating in financial and commercial transactions.
Backed by ADB’s AAA credit rating, the Trade Finance Program (TFP) provides guarantees and loans to over 200 partner banks to support trade, enabling more companies throughout Asia and the Pacific to engage in import and export activities. Since 2009, ADB’s TFP has supported more than 15,000 SMEs across developing Asia—through over 21,000 transactions valued at over $36 billion—in sectors ranging from commodities and capital goods, to medical supplies and consumer goods.
In 2018, TFP grew almost 40 percent to support $6.2 billion in trade through 4,470 transactions. TFP complements its financial support with knowledge products, including a study that quantifies market gaps for trade finance, initiatives to increase the role of women in banking, efforts to enhance environmental safeguards, and initiatives to fight crime through greater transparency in the global financial system. TFP also provides workshops and seminars to increase knowledge and expertise in matters related to finance, trade, risk management, and fraud prevention. For more information, visit the TFP website.—APP