TRADE FINANCE TALKS
5.2
Innovating to close the trade finance gap TFG heard from Iain MacLennan, VP Trade & Supply Chain Finance, Finastra on how technology can help close the trade finance gap experienced by SMEs.
IAIN MACLENNAN
VP Trade & Supply Chain Finance Finastra
The trade finance gap facing SMEs is an estimated $1.5 trillion, according to the Asian Development Bank, with the majority of these SMEs being in the developing world. This was prior to the uncertainty caused by the Covid pandemic. The World Economic Forum estimates this gap could reach $2.5 trillion by 2025, preventing trade and growth. Since the 2008–09 global financial crisis, international banks have been reducing the banking relationships used to clear cross-border payments and guarantees. From over a million such relationships before the crisis, 200,000 have disappeared, affecting trade finance flows to Africa, the Caribbean, Central and Eastern Europe and the Pacific Islands. The trade finance gap particularly affects microbusinesses: the MSME finance gap in developing countries is estimated to be approximately $5 trillion – 1.3 times the current level of MSME lending. Significantly impacted are female entrepreneurs,
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according to research from the Asian Development Bank, women-owned firms fared the worst when accessing trade finance, with 44% of requests for financial backing to support their exporting or importing needs rejected. Once rejected, these firms are less likely to seek alternative finance. This is troubling when you consider that women lead 6.6 million SMEs and 39 million micro-businesses in emerging markets. Quite simply, the trade finance gap debilitates those communities we most need to flourish. Post the 2008 banking crisis, procedures were put in place to make trading and transacting safer, with more robust customer authentication for example. Ironically this has led to financial institutions being far more restrictive with how they do business. A major operational complexity for financial institutions is regulation: more than three-quarters (76%) of the Asia Development Bank’s surveyed banks reported that anti-money laundering (AML) and know-your-customer (KYC) regulations are major obstacles to expanding their trade financing operations. These regulations put in place for the best of reasons, have inadvertently made it harder for SMEs, particularly in emerging markets to access funds. This can be because many SMEs lack tradefinanceglobal.com
