SMEs face huge trade finance gap: ADB

AN ADB survey finds that 57% of trade finance requests by SMEs are rejected, compared with only 10% for multinational companies . . .

THE Asian Development Bank (ADB) has identified a gap of US$1.5 trillion in trade finance in the global market in 2016.

In its Trade Finance Gaps, Growth and Jobs Survey, the Manila-based multilateral institution found that the funding gap affected — and continues to affect — SMEs most.

This is because SMEs often lack collateral, a documented history of past commercial transactions, and sufficient knowledge of the financial industry and instruments on offer.

In addition, wrote ADB’s Steven Beck, Head of Trade and Supply Chain Finance, and his colleague, senior economist Benno Ferraini, banks in industrialised countries are cutting relationships with smaller banks in emerging markets.

Many SMEs in these markets are clients of these smaller banks.

In the survey, the ADB found that 57% of trade finance requests by SMEs are rejected, compared with only 10% for multinational companies.

The ADB Survey is appended to the ICC Trade Register Report 2017 (see below).  In it, Beck and Ferraini say that Asian economies in particular are highly dependent on SMEs, which account for 98% of all companies.

The lack of financing they encounter has an adverse impact on economic growth and employment in the region at the aggregate level.

Initiated in 2009 (in the aftermath of the global financial crisis), the ADB survey found that Asian governments have been implementing a range of policies and programmes to improve SME access to trade finance.

The Philippines’s central bank has set up a credit fund to guarantee bank lending to SMEs and co-operatives, and India and Thailand have established SME-focussed development funds.

Some countries in the region, including Japan, have set up public credit registries to help banks gather information to decide on SME loan requests.

And new technologies such as blockchain and lending platforms are starting to make a difference.

Global e-commerce players, Amazon and PayPal, have established their own lending operations, mostly to SMEs, and other platforms, such as Alibaba and eBay, provide training and advice especially targetted at smaller companies.

The minimum size of loans for SMEs is smaller than for regular bank loans, and access and disbursement times are considerably shorter.

While these new forms of lending have seen rapid growth in developed countries and China, they have yet to penetrate emerging markets where demand for SME financing and the potential for innovation is highest.

Blockchain, or distributed ledger technology, is also expected to make a real difference to trade finance, principally in helping to cut transaction costs significantly, the report says.

However, helpful as they are, new technologies have not been able to resolve some compliance barriers, like anti-financial crimes requirements.

The authors said that what is needed to overcome such barriers is establishment of basic infrastructure needs, standards and rules.

In addition, there are import regulatory obstacles to consider. For example, a textile producer in Asia can now get financing from their local bank to produce goods using an export letter of credit issued by a European bank as collateral.

The local regulator also allows that bank to use this L/C as collateral to calculate lower risk-weighted assets.

But it will take some time before regulators in all countries change their policies to enable banks to work with distributed ledger technology.

The authors suggest three recommendations in a move to close the funding gap.

First, leveraging the unique role of the International Chamber of Commerce (ICC) in creating rules for trade;

Second, promoting global adoption of a harmonised system of digital identities for companies; and

Third, diffusing global digital standards.