A Realistic Approach To Trade Finance Growth

Trade finance is vital for cross-border trade, allowing businesses — especially SMEs — to secure the funds they need for global growth. While trade finance is vital for any corporation, small businesses can struggle to secure the funds and credit insurance necessary for success. But small businesses in developing nations are especially challenged with securing these tools, according to the World Trade Organization (WTO) in its most recent trade finance report.

Small and underdeveloped banking industries, coupled with a lack of demand for top financial institutions to conduct business within these markets, mean that some of the best tools to promote SME success and global growth are hard to come by in the markets that need it most.

And while economies around the globe are enjoying some recovery from the 2008 global financial crisis, these problems persist for SMEs in developing markets, the WTO said.

While 80 percent of global trade is facilitated by some kind of trade finance or credit insurance tool, the report noted, that service is not uniform or universal.

In developed markets, up to one-third of small businesses struggle to access affordable trade finance; that problem balloons when examined within developed countries.

According to the WTO, there is as much as $120 billion in unmet trade finance need within Africa, for instance. In Asia, it’s as high as $700 billion.

The inability for SMEs to access affordable trade finance is highest in markets on the cusp of global growth and expansion, analysts said.

Taking Action

The World Trade Organization is urging top global financial institutions to fill this trade finance gap. According to the group, this can happen in three ways.

The first is to encourage these FIs to engage proactively with the market and to work with regulators to ensure that barriers are lifted as SMEs in developing markets seek trade finance and related services.

The second is for these FIs to expand their trade finance capacity within the local banking sectors. The third is to do the same for multinational, multilateral banks.

According to the WTO, expanding trade finance programs already in place can boost the availability of this financing by up to $50 billion.

The Private Sector Steps In

On a positive note, analysts at the organization found that the private financial services sector now plays a vital role in filling the global trade finance gaps. Factoring firms, for example, can be a solution for small businesses with weak credit performance; supply chain finance was cited as the alternative finance space most likely to change the trade finance sector, according to a 2014 ICC Global Survey.

In response, the public sector of developing markets has embraced this evolution. The WTO pointed to the recent Trade Receivables Discounting System from the Reserve Bank of India, as well as a production chains program in Mexico, with similar efforts to provide financing to small businesses against their outstanding receivables.

The World Trade Organization notes that setting realistic goals to improve access to trade finance may be one of the most important strategies for the global market.

“A realistic yet ambitious objective would be to increase the trade volume supported by all existing multilateral trade finance facilitation programs from $30 billion to $50 billion per annum,” the report concluded, adding that regulators and FIs need to collaborate to make that happen and figure out how to do so.

“Though this target would only eliminate a portion of the estimated financing gap,” the report added, “focusing on a specific target would be an effective way of mobilizing and coordinating efforts.”