Introduction
One of the most pressing issues in recent years is the trade finance gap - the gap between the demand and available supply of trade funding. It is felt mostly by small and medium enterprises (SMEs), as banks often view them as too risky or not worth the extensive KYC efforts. In many developing economies, some banks also lack the capacity to provide financing and manage associated risks for all businesses. This leads to missed opportunities for banks, disrupted operations for companies, and slowed economic growth overall.
What is the Trade Finance Gap?
The trade finance gap, a term introduced by the Asian Development Bank in 2013, refers to the shortfall between the demand for trade finance and the available supply. While this issue exists worldwide, it is most acute in developing regions such as Southeast Asia, Sub-Saharan Africa, and Latin America, where the number of SMEs is growing, but access to trade finance remains limited.
In short, the gap arises when banks are either reluctant or lack the capacity to provide trade financing and financial products to businesses. This reluctance often comes from the perceived high risks associated with SMEs, accompanied by the increasing regulatory pressures on banks to comply with stringent AML/KYC requirements.
According to the ADB's 2022 Trade Finance Gaps, Growth, and Jobs Survey, the global trade finance gap stood at around $2.5 trillion in 2022, a staggering 50% increase from $1.7 trillion in 2020. This amounts to around 40% of SME trade finance requests being rejected by banks. Without financing, many SMEs are unable to engage in trade, limiting their growth opportunities and preventing them from entering global supply chains. Needless to say, this significantly affects global trade flows and stifles economic development.
Impact of the Trade Finance Gap on SMEs
Region-wise, the gap is felt the most in countries where SMEs make up a large portion of the economy. These are fast-developing countries such as Vietnam and Indonesia, where there is not enough capital to fund the rapidly growing SME sector. This limits the ability of SMEs to scale, stifling innovation and curbing the overall potential of the economy. As key exporters, slowed growth in these economies also impacts global trade flows.
The trade finance gap is also felt deep in Sub-Saharan Africa, where it is compounded by political and economic risks, limiting SMEs' access to global markets despite the region’s increasing participation in global supply chains. Similarly, SMEs in the region of Latin America face challenges in obtaining funds due to unstable currencies and limited access to international banking networks.
In essence, the trade finance gap means missed trade opportunities and slowed economic growth. According to the ADB, the gap leads to an estimated $2.5 trillion in missed trade annually. It is also estimated that around 131 million jobs could have been created or sustained had the gap been filled. These figures represent the lost potential for economic growth, employment, and development, especially in regions that depend heavily on trade.
Figure: Global trade finance gap, through the years
The gap also harms inclusivity in trade. Without access to trade finance, SMEs, especially those owned by women or located in remote areas, are less likely to benefit from global trade opportunities. This widens inequality and slows progress toward economic inclusion.
Drivers of the Gap
One of the most significant drivers behind the persistent trade finance gap is the broader macroeconomic landscape. Tightened credit conditions, economic uncertainty, and the lingering effects of the COVID-19 pandemic have all had a profound impact on global trade. With central banks maintaining cautious monetary policies and businesses facing higher costs of borrowing, many financial institutions are scaling back their risk appetite, particularly when it comes to extending credit to small and medium enterprises (SMEs). This is especially true in regions where regulatory pressures are more stringent, such as Europe and parts of Asia. As a result, access to trade finance for these smaller players remains restricted, exacerbating the trade finance gap.
In addition, SMEs often suffer from weaker credit ratings, making them a higher perceived risk for banks. However, this traditional way of assessing creditworthiness misses the nuance of their commercial performance. The ability to deliver on time, manage shipments efficiently, and maintain smooth cash flow are factors that indicate operational health and resilience.
For instance, banks in regions like Southeast Asia, where SMEs form the backbone of the economy, face unique challenges. The combination of fragmented trade corridors, varying regulatory frameworks, and currency risks add layers of complexity. In Vietnam, Thailand, and Indonesia, SMEs often struggle to provide the level of transparency or formal documentation that large corporates can. This makes them less attractive to traditional financiers, further widening the trade finance gap in these regions. Additionally, as banks tighten compliance to meet international financial crime standards, many prefer to disengage from markets where risk management can become cumbersome, further exacerbating the situation in emerging economies.
Efforts to Reduce the Gap
Realising the critical impacts of the trade finance gap on trade and economic growth, numerous efforts have been made over the years by leading financial institutions, in order to close the gap. Asian Development Bank (ADB)'s Trade and Supply Chain Finance Program (TSCFP), launched in 2009, has helped by offering guarantees and loans to the banks in developing countries. The program supports these regional banks by reducing the risks they face in trade finance transactions. This helps the banks to confidently offer trade finance services to their customers—especially SMEs—by expanding their risk appetite and capacity to handle more transactions. For banks like HDBank, a long-standing partner of ADB and beneficiary of the TSCFP in Vietnam, partnering with ADB under this program allows them to extend more trade finance services to their clients while relying on ADB's backing to mitigate risk.
Technology has also been called to the rescue. A whopping 73% of surveyed firms and 63% of surveyed banks have recognised that productivity and efficiency gains can be achieved through digitalization and paperless trade. As a result, digital solutions like TradeSpeed and FCRR have emerged, to simplify and speed up trade finance processes, for both the corporates and the banks.
On the one hand, we have TradeSpeed’s pre-documentary check solution for corporates, which helps to streamline the preparation and submission of documents, leading to faster approvals and easier access to trade finance, helping SMEs scale and enter new markets more efficiently.
On the other hand, FCRR’s enhanced risk assessments and credit scoring tools help make SMEs more “bankable”. By providing enhanced risk profiling and due diligence, FCRR enables banks to assess SME clients and their partners more effectively, increasing confidence in providing trade finance. By reducing the compliance burden for banks by automating AML/KYC processes, it makes banks more willing, and more comfortable, in financing trade.
To fully realise the benefits of technology and close the trade finance gap, several challenges still need to be addressed. One of the primary barriers to achieving paperless trade is the fragmented nature of global regulations and standards, which vary significantly across regions. This makes it difficult for banks and businesses to adopt fully digital processes, as they must still comply with local requirements that often mandate physical documentation. Additionally, legacy systems and infrastructure limitations in many developing countries can slow the transition to digital trade finance solutions, leaving SMEs in these regions underserved.
While technology has great potential to close the trade finance gap, concerns remain. Some banks, particularly in smaller markets, worry about the high upfront costs of adopting new digital platforms and the learning curve involved. There are also concerns about data security and privacy, as digital systems are more vulnerable to cyberattacks.
Overcoming these challenges requires more than just a welcoming attitude from regulators—they must actively incorporate tech solutions into their strategies and regulations. By adapting frameworks to support digital trade finance and promoting secure technologies, regulators can facilitate broader adoption. This will help reduce reliance on physical documentation and enable a more streamlined, efficient global trade finance ecosystem.
Conclusion
In conclusion, the trade finance gap remains a significant challenge to global trade and economic growth, particularly for SMEs in developing regions. While initiatives like ADB’s TSCFP and regulatory efforts to enable digital trade documents are crucial steps forward, they are only part of the solution. Banks must also take proactive steps by adopting automation solutions that streamline operational tasks such as document examination and compliance checks.
Digital trade documents will reduce some costs, but true progress comes from automating more complex, labor-intensive processes. Tools like Complidata allow banks to better manage risks and lower the cost to serve, enabling them to support the SME segment now, rather than waiting for regulatory changes to catch up. By combining regulatory advancements with innovative technology, we can create a more inclusive and efficient trade finance ecosystem that drives growth for SMEs and the global economy alike.
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