Trade Finance Market
International trade is the exchange of goods and services between countries. Since countries are endowed with unique assets and natural resources, such as land, labour, capital, technology, etc., global trade allows them to use their resources more efficiently, expand their markets, and access goods and services that may not be domestically available. Consequently, international trade results in a more competitive market with more competitive pricing, ultimately bringing a cheaper product home to the consumer.
Trade finance is vital to facilitating global trade. The WTO estimates that between 80% and 90% of world trade relies on trade finance, primarily short-term (trade credit and insurance/guarantees). Lenders and liquidity providers include banks, non-banks, and insurers, who use various methods and products to help enterprises and traders finance their domestic and international trade flows. Trade finance reduces trade risks for companies and improves their cash flow, allowing them to access new markets. Furthermore, according to World Economic Forum (WEF) research, lack of access to trade finance was one of the top domestic barriers limiting a country's trading capacity, alongside transportation and logistics. As such, without trade finance, many small businesses cannot trade and compete. Thus, better access to trade finance in the least developed countries could equip businesses with the financial tools needed to participate in national, regional, or global trade.
Small- and medium-sized businesses (SMEs) are the backbone of global international trade. The primary source of SME funding is the traditional banking system. Banks in developed countries focus on supply chain finance for large countries, and banking systems in developing markets are underdeveloped. So companies in the SME segment are often unbanked. Moreover, financing rejection rates for such businesses run at 40%, with a World Bank study indicating that 65 million micro-SMEs (MSMEs) were credit constrained.
Globalisation and the technological development of cross-border trade have been growing every year. According to the United Nations Conference on Trade and Development (UNCTAD), the total yearly global trade volume reached a record level of $28.5 trillion in 2021. That's an increase of 25% in 2020 and 13% higher than in 2019 before the COVID-19 pandemic.
After the recent financial crisis and global meltdown, trust levels have degraded between trade finance market participants, and risk levels have skyrocketed. As a result, deserving businesses and individuals worldwide are denied or delayed access to trade finance due to the limitations imposed by increased regulatory and compliance standards within traditional financing systems. In essence, there has been a growing gap between increasing trade needs and available trade finance.
Accenture research has shown that SMEs currently face a total global financing gap of $3.6 trillion, expected to rise to $6.1 trillion within three years.
While SMEs conduct more than a quarter of international trade, they have historically struggled to access financing, severely restricting their growth potential8.
Furthermore, according to recent research from the Asian Development Bank, the global trade finance gap increased to an estimated $1.7 trillion in 2021 due to the COVID-19 crisis, up from $1.5 trillion in 2018. This increase in the trade finance gap has disproportionately affected the world s poorest countries, and the limited access to trade finance has particularly hard hit small businesses.
Resolving this issue is critical for all participants in the global trade finance system. The MSMEs sector accounts for roughly 6% of global GDP, so its performance affects the health of the future world economy. An improved global trade finance ecosystem could add many of the 600 million new jobs needed by 2030 to absorb the growing global workforce and enable progress toward financial inclusion, which is particularly needed in developing economies.