The inability of financial institutions to provide $1.6 trillion in support to buyers and sellers of goods across countries resulted in forgone growth and job creation in 2015, according to an Asian Development Bank (ADB) Brief released today.
Developing Asia’s share of the global trade finance gap was $692 billion, including India and China.
In its new study, 2016 Trade Finance Gaps, Growth, and Jobs Survey, ADB quantifies market gaps for trade finance and explores their impact on growth and jobs through a survey of over 337 banks in 114 countries and 791 firms in 96 countries. The annual survey is now in its fourth year.
“The growth of the trade finance gap in 2015 continues to be a drag on trade, and small- and medium-sized enterprises are the most affected,” said Steven Beck, Head of ADB’s Trade Finance Program.
“The survey shows that both globally and nationally, regulators and policymakers should increase support for trade finance through smarter banking regulations, more transparent and comprehensive credit ratings systems, and capacity building for local banks. ADB’s Trade Finance Program stands ready to assist member countries and our client banks in all of these areas.”
Impact of compliance and regulations
According to the brief, trade finance gaps persist in part due to the cost and complexity of compliance with banking regulations, with 90% of surveyed banks citing anti-money laundering and know-your-client requirements as impediments to their ability to expand trade finance, especially for small businesses.
Basel III banking regulations, which set liquidity requirements for bank finance, are also cited by 77% of respondents as a major barrier to finance new trade.
The report notes small- and medium-sized enterprises (SMEs) face the greatest obstacles in accessing affordable trade financing. Globally, 57% of trade finance requests by SMEs are rejected, against just 10% for multinational companies. High rejection rates lead many firms to turn to inefficient informal financing.
Financial technology, or Fintech, can help bridge the financing gap for businesses left out of trade finance, according to the brief. But awareness of digital finance by small businesses remains low, with 70% of responding companies indicating that they are unfamiliar with these tools.
Among firms that were familiar with digital finance, peer-to-peer lending had the strongest uptake rates in developing countries.
Since 2009, ADB’s Trade Finance Program has supported more than 8,200 SMEs across the region, with about 11,800 transactions valued at over $23.6 billion, in sectors ranging from commodities and capital goods, to medical supplies and consumer goods.