$1.5-T global trade finance gap frustrating efforts to deliver crucial jobs and growth

A stubbornly high $1.5 trillion global trade finance gap is holding back efforts to deliver vital jobs and growth amid ongoing economic uncertainty, according to the latest Trade Finance Gap, Growth, and Job Survey, released Tuesday by the Asian Development Bank (ADB).

Small and medium-sized enterprises (SMEs) face the biggest challenges obtaining trade finance, the report notes, and companies led by women often face additional barriers, the Manila-based multilateral lender said in an accompanying statement.

“The huge trade finance gap is a global challenge that shackles economic growth and harms efforts to reduce poverty,” said Steven Beck, the head of ADB’s Trade and Supply Chain Finance. “Given the uncertain economic outlook, it is critical that more efficient, stable, and sustainable trade finance channels are created to spur global growth and development.”

The survey is based on responses from banks, firms, and export credit agencies globally and is the world’s leading barometer of trade finance health. Its 6th edition finds that the trade finance gap continues to impede progress toward the Sustainable Development Goals, especially targets pertaining to women’s economic empowerment, job creation, and inclusive growth.

According to the report, 45% of trade finance applications by surveyed SMEs are rejected, compared to 39% for mid- and larger-sized firms and 17% for multinational corporations. The rejection rate for women entrepreneurs, meanwhile, is 44% compared to 38% for male-owned firms.

“Providing better access to trade financing for SMEs and businesswomen will not only narrow the gap but also empower them to contribute to inclusive growth and sustainable development,” ADB noted.

More than three-quarters (76%) of the surveyed banks reported that anti-money laundering (AML) and know-your-customer (KYC) regulations are major obstacles to expanding their trade financing operations.

While these regulations are crucial to ensure the global financial system is not used to fund terrorism or launder money, they can inadvertently cut off legitimate companies in less-developed markets from the financial support they need to grow, the bank noted.

“An extreme example is the Pacific islands, where some countries risk being cut off from the global financial system—including trade finance—due to correspondent banks severing relationships with local financial institutions,” Beck said.

Around 60% of responding banks expect the trade finance gap to increase over the next 2 years. Technologies such as blockchain and big data have the potential to narrow the gap, but their take-up is compromised by high cost and a lack of global standards for digital finance.

The report recommends that governments adopt common rules on digital trade and e-commerce to give firms and banks legal grounds to transact digitally.

“Legal Entity Identifiers would help address AML/KYC concerns by applying a unique electronic 20-digit identifier for legal entities participating in financial and commercial transactions,” the bank said. —VDS, GMA News