The challenge of the trade finance funding gap
The availability of trade finance is essential for a healthy and well-functioning trading system. Up to 80% of global trade is supported by some sort of financing or credit insurance.
The availability of trade finance is essential for a healthy and well-functioning trading system. Up to 80% of global trade is supported by some sort of financing or credit insurance. Global and regional surveys undertaken by the ICC, the African Development Bank and the Asian Development Bank, have pointed to the existence of relatively large gaps in provision, particularly in developing and emerging economies where trade is growing at the fastest rate. Total trade finance gaps are estimated to be $1.6 trillion, of which $700 billion is in developing Asia. Gaps exist in all continents, including in Europe.
Other surveys, emanating in particular from business organisations (World Economic Forum), emphasise that in regions such as Africa, the Caribbean or for Pacific Islands, lack of access to trade finance is viewed as the number one or two impediments to exporting. Without trade finance, opportunities for trade, growth and development are missed. Small and mediumsized enterprises are particularly affected, while larger companies are benefitting from the extra-liquidity provided by quantitative easing policies of many central banks.
This is a time to act: first, trade is a dynamic process, in which labour-intensive industries are regularly reallocated in new parts of the world, depending on comparative advantage. Garment factories relocate to countries such as India, Bangladesh, Vietnam, Myanmar and reaching to Ethiopia and Rwanda. The frontiers of international trade are expanding. New links involve new players, investors, and traders. It also requires trade finance.
At the same time, global financial institutions have shown less appetite to do business in developing countries since the global financial crisis of 2009. A large number of correspondent banking relationships have disappeared. Local banks and non-banks in developing countries are not always in a position to fill the gaps, although in the medium-run, one could expect markets to clear.
In the meantime, there is a particular concern that SMEs in developed and developing countries – particularly in the developing ones, face lasting challenges in their integration into global trade. SMEs are known to be leading drivers of trade, employment and economic development. In developing countries, the few alternatives to bank financing such as inter-company lending and factoring may simply not exist. Trade credit insurance may not be available, and the legal framework for factoring may not be in place. As a result, when a bank reject requests for trade finance, SMEs may be left with no alternative but to pay its trade cash, go informal, or find another second-best solution – sometime the transaction is just forgone.
Action is needed to address these financing gaps. This was highlighted in the UN's Financing for Development Agenda. The WTO Director-General has been issuing a report (Trade Finance and SMEs, available at www.wto.org) looking at these issues in detail. It brings together the recent surveys and research to highlight the scale and geography of the gaps in trade finance provision, considers the actions currently being taken and outlines potential future action.
These actions includes, along with WTO traditional partners in trade finance:
- Enhancing existing trade finance facilitation programmes to reduce the financing gaps, from $30 billion currently to $50 billion. Trade finance facilitation programmes were never designed to eliminate all market gaps, but they allow SMEs and their banks locally to engage in international trade, thereby building capacity and experience. The WTO director-general target is inspirational but achievable.
- Reducing the knowledge gap: we know that part of the financing gap reflects the knowledge gap which exists regarding the use and knowledge of trade finance instruments, be they funded instruments, guarantees, credit insurance. Local financial institutions may lack the human and risktaking capacity. Professional organizations from the private sector should step up their capacity-building activities. The Berne Union may support this effort – similar to Factors Chain International stepping up training in factoring, and multilateral development banks contributing courses to the newly established International Chamber of Commerce's (ICC) Academy. The objective in the WTO report is to train 5,000 qualified trade finance professionals, in particular in developing countries. Berne Union members may contribute to this objective, and develop courses and training reflecting the special needs of the credit and investment insurance professional. This collective effort is not about training bankers, company treasurers or any other category of operator, but about teaching the best practices (techniques, instruments, regulation, fintech, etc.) in each segment of the profession of supporting financially international trade.
- Maintaining an open dialogue with trade finance regulators to ensure that and development considerations are reflected in the implementation, and eventually design, or regulations.
- Improving the monitoring of trade finance provision. We need to improve the monitoring of trade finance provision to identify and respond to gaps, particularly relating to any future crisis. The WTO will continue to support ongoing efforts of the ICC and Asian Development Bank. The Berne Union may continue to work with other organisations in gathering data, facts and analysis, which may support policy decisions during crunch times.
Strong inter-institutional dialogue and coordination will be required to take such action/initiative forward, including with the Berne Union.
On trade finance, the WTO and its partners have the flattering reputation of being able to deliver. Since 2009, the various actors, including the private sector (Berne Union, ICC, Factoring International), multilateral development institutions, and the WTO have been meeting in a consultative group, the expert group on trade finance, to discuss areas of potential cooperation. Under this new WTO-led initiative, let us hope that the Berne Union keeps the same level of mobilisation and partners with the WTO with new ideas and projects.
Counsellor for Trade and Finance - WTO