Businesses of all sizes continue to struggle to access sufficient credit, resulting in a global trade finance gap of $1.5 trillion in 2016, according to an Asian Development Bank (ADB) Brief. Developing Asia’s share of the trade finance gap was 40% of the global total.
In its fifth annual study, 2017 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 515 banks and 1,336 firms from 103 countries.
While the global trade finance gap stabilized in 2016 compared to the 2015 record high of $1.6 trillion, it still translated to missed growth opportunities and job creation.
“A sizeable trade finance gap is a drag on trade, growth, and job creation,” said Steven Beck, Head of Trade Finance at ADB. “We hope the results of the survey will encourage private and public sectors to ramp up collaborative efforts to improve businesses’ access to trade finance. Our Trade Finance Program (TFP) is here to assist and address these market gaps.”
Micro, small, and medium-sized enterprises (MSMEs) have the biggest difficulties in accessing trade finance, representing 74% of total rejections last year, compared to just 57% in 2015. This high rejection rate means foregone trade, which is a drag on overall economic growth.
The ADB study suggests that a 10% increase in trade finance globally could boost employment by 1%.
Findings in the study revealed that one of the biggest reasons financial institutions are reluctant to provide trade finance to small businesses is rooted in the cost and complexity of anti-financial crimes due diligence and the perception of low returns on financial support from smaller firms (reported by 29% of banks).
Awareness and usage needs improvement
Survey respondents believe that fintech and digitization can be a solution to a lack of MSME finance, although awareness and usage of this technology has to be improved. And while fintech is reducing the cost of delivering finance to companies, there is no evidence it is reducing market gaps.
“More than reducing cost, fintech needs to deliver an enhanced capability for financial institutions to conduct due diligence on MSMEs before it can play a role in reducing gaps,” said Beck.
TFP, backed by ADB's AAA credit rating, provides guarantees and loans to over 200 partner banks to support trade, enabling more companies throughout Asia to engage in import and export activities. With dedicated trade finance specialists and a 24-hour response time, the program has established itself as a key partner in the international trade community.
TFP complements its financial support with a regular series of workshops and seminars to increase knowledge and expertise in trade finance products and operations, risk management, and fraud prevention.
Since 2009, TFP has supported more than 10,900 small and medium-sized businesses across developing Asia — through over 16,300 transactions valued at over $28.6 billion — in sectors ranging from commodities and capital goods, to medical supplies and consumer goods. ADB launched a Supply Chain Finance Program to complement its successful trade finance operations.