Trade finance gap — What are we doing wrong?
It has been well documented through detailed studies by various multilateral organizations that the yearly gap for financing of trade globally is well above USD1.5 trillion dollars and it has been consistent at this level for the past 5 years.
Many schemes have been initiated by these multi-laterals including Credit Guarantee of banks in emerging markets, Risk Participation Agreements and many more such schemes. However, none of these have been able to reduce this gap partly because of lack of information available to traders and potential borrowers in these geographies.
Hence,
The small to medium enterprises find it the most difficult to access trade finance, representing 74% of total rejections. This high level of rejection means low job creation and hence, low economic growth. One ADB study suggests that a 10% increase in trade finance globally could boost employment by 1%.
So, why are these various schemes working to reduce the trade finance gap not working?
Trade finance instruments have been around for many years now but still do not find their usage in Emerging markets of Asia. There are many reasons for this and mostly its linked to the basic infrastructure and landscape under which trade finance can flourish.
First and foremost reason is the trust factor and ability to know/find out the background of the buyer and the seller. Lack of digitization of banks and other government lending institutes hinders any kind of central credit database to better understand the credit risk scenarios of borrowers.
In parallel, there is a large gap in the training/education tools provided and access to information to better understanding trade finance processes and instruments to various participants including customers, bankers, legal practitioners and regulators. There seems to be a big gap in the knowledge required to use, advice and regulate these instruments compared to what is available.
Lastly, lack of legal advice available to SMEs also hinders their ability to understand their obligations and rights under a contract. High costs of such advice due to limited access to experienced legal practitioners in their respective countries also de-motivates many from using traditional trade finance instruments.
Any reduction in trade gap needs to address the above basic gaps in a structured and systematic manner before we will see any meaningful change in the trade finance gulf and any improvement in job creation and employment.
