Unmet demand for trade finance is holding back SMEs in developed and developing economies alike, according to a new study from the World Trade Organization (WTO).
Published on 4 May, Trade Finance and SMEs: bridging the gaps in provision notes that up to 80% of trade is financed by credit or credit insurance, but coverage is not uniform.
Indeed, it stresses, on a global level more than half of SME funding applications through trade finance avenues are turned down – far higher than the 7% rejection rate for multinationals.
This is despite ample evidence suggesting that trade finance is a low-risk form of funding – even when it operates from one territory to another.
As the study points out: “While the commercial risks involved in an international trade transaction seem in principle to be larger than in a domestic [one] – for example, non-payment, loss or alteration of the merchandise during shipment, fluctuating exchange rates – trade finance is considered to be a particularly safe form of finance since it is underwritten by strong collateral and documented credit operations.”
Dipping into the International Chamber of Commerce (ICC) Trade Finance Loss Register, the study quotes the conclusion of the 2013 edition that “the average transaction default rate on short-term international trade credit is no more than 0.021%, of which 57% is recovered through the sale of the underlying asset”.
Focusing on specific regions, the study highlights the work of Islamic Development Bank subsidiary the Islamic Trade Finance Corporation (ITFC) as one entity that is bucking the trend of low SME support in the trade finance arena.
It says: “The ITFC model is focused on providing direct financing to partner banks, institutions, governments and the private sector through Sharia-compliant structures. The programme is very effective in providing direct financial support, including pre-export financing.
“In 2013, trade transactions funded directly by the ITFC totalled $5bn, up from $3bn in 2011. In 2015, this amount was further increased to $6bn. The main beneficiaries are mainly SMEs in member countries across Africa, Central Asia and the Middle East.”
In those areas, the report adds, ITFC solutions fully complement programmes run by other development banks, contributing to vital networks of finance for local ventures. However, it says, more should be done to stimulate similar efforts on a wider scale.
Among its recommendations, the study urges multilateral development bodies such as the Berne Union and the ICC to work with the WTO over the next five years to train 5,000 trade finance professionals – specialists who will liaise with public- and private-sector decision-makers to improve the flow of funds to SMEs.
On the regulatory front, the report says: “KYC reporting requirements have been under discussion in the WTO Expert Group on Trade Finance for quite some time.
“It is vital that KYC requirements achieve their aim of greater transparency in financial relations while, at the same time, not creating unintended consequences for the trade opportunities of poor countries.”
As such, it adds, the WTO has “indicated its willingness to facilitate a dialogue – in this case with the Organisation for Economic Co-operation and Development Financial Action Task Force – with a view to improving the understanding between the two communities and avoiding such unintended consequences.”
WTO director-general Robert Azevêdo said: “Without adequate trade finance, opportunities for growth and development are missed and companies are deprived of the fuel they need to trade and expand.
“By working together with our partners, I believe we can further close the gaps in provision and ensure that trade finance is no longer a barrier to trade, but a springboard to growth and development.”