Trade finance gap hit SMEs hardest

Kathmandu, September 7

A latest Asian Development Bank (ADB) report has warned of the risks of many firms possibly resorting to inefficient informal financing due to lack of access to affordable trade financing.

According to ADB’s ‘2016 Trade Finance Gaps, Growth, and Jobs Survey’, small- and medium-sized enterprises (SMEs) face the greatest obstacles in accessing affordable trade financing. Globally, 57 per cent of trade finance requests by SMEs are rejected, against just 10 per cent for multinational companies, according to the report.

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, as per an ADB brief released today. To put this in context, in 2014, the Bank for International Settlements estimated the global market for trade finance at between $6.5 trillion and $8 trillion.

“Developing Asia’s share of the global trade finance gap was $692 billion, including India and China.”‎

Merchandise trade volumes fell by 13 per cent in 2015, commodity prices fell by 30 per cent and yet gaps are not closing, according to the ADB. “Without the underlying support of trade finance, trade opportunities that create growth and jobs are foregone.”

According to the brief, trade finance gaps persist in part due to the cost and complexity of compliance with banking regulations, with 90 per cent 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 per cent of respondents as a major barrier to finance new trade.

“The growth of the trade finance gap in 2015 continues to be a drag on trade, and SMEs are the most affected,” Steven Beck, head of ADB’s Trade Finance Programme, has been quoted as saying in a media release issued today.

Financial technology, or Fintech, could 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 per cent of responding companies indicating that they are unfamiliar with these tools.”

Among the firms that were familiar with digital finance, peer-to-peer lending had the strongest uptake rates in

developing countries.

In its new study, ADB quantified market gaps for trade finance and explored their impact on growth and jobs through a survey of over 337 banks in 114 countries and 791 firms in 96 countries.

“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. We are ready to assist member countries and our client banks in all of these areas,” Beck said.