FINANCE & BANKING

The Trade Finance Gap Stands at U$1.5 Trillion. What Can CFOs Do?

Financial innovation through technology has been trickling into the trade-finance space over the last few years, but this has not compensated for the downward trajectory of business lending and of international trade. There was an estimated US$1.5 trillion trade finance shortfall last year, according to the Asian Development Bank’s 2017 trade finance survey, down only slightly from US$1.6 trillion in 2015.

When asked what the companies did next after their trade-finance application was rejected, 53% did not go on to look for other sources of finance

And now, 2017 is turning out to be another sluggish year for international trade, partly due to the lack of movement in Trans-Pacific Partnership agreements (US President Donald Trump has withdrawn from the pact), but also due to a general shift from globalization to localization (take Brexit and Trump’s policies as examples).

What is happening to global trade?

There are three forces driving the US$1.5 trillion trade finance gap:

  • High number of rejected trade finance applications from the Asia Pacific (APAC) region
  • High rejection rate of applications from SMEs and midcap organizations
  • Reduced lending by banks to SMEs due to perceived risk (Know-Your-Customer issues) and declining profitability in trade financing

Taking a deeper dive into the trade-finance shortfall, the ADB report says Asia and Pacific are continuing to drive this gap. The general lack of trade finance provision is due to a high number of rejected applications – against the backdrop of the largest number of proposals/requests made for trade finance (see chart below).

It’s likely to be the perceived risk of emerging market financing that is driving this shortfall.

Proposed and Rejected Trade Finance Transactions (by region)

The ADB trade finance survey also found that around 74% of rejected trade finance applications were lodged by mid-cap companies and micro- and small and medium-sized enterprises (see chart below), which is similar to the previous year.

What’s more worrying, however, is that when asked what the companies did next, 53% did not go on to look for other sources of finance, thus possibly foregoing potential growth opportunities for those businesses.

Proposed and Rejected Trade Finance Transactions (by firm size)

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