Access to credit continues to be a cause for concern for businesses, resulting in a global trade finance gap of $1.5 trillion in 2016, says an Asian Development Bank (ADB) brief released on Tuesday.
The brief followed publication of fifth in a series of the ADB’s annual studies titled Trade Finance Gaps, Growth, and Jobs Survey.
In 2016, Asian and Pacific region firms accounted for almost half of trade finance requests made to banks across the globe. Most of the rejected requests (40%) were also from firms in the region.
A third of these were micro, small and medium-enterprises (MSMEs). Compared to their 74 percent share in rejected requests in 2016, the MSMEs’ share in rejected requests in 2015 was 57%, the study notes.
“This high rejection rate means foregone trade, which is a drag on overall economic growth,” it says. A 10 percent increase in trade finance globally is expected to boost employment rate by one percent.
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Despite recent attention received by the Fintech sector as a potential solution to MSMEs’ financial needs, the ADB study finds the trend still hasn’t taken on as only about 20 percent of firms studied reported using Fintech platforms.
The low usage of Fintech possibly reflects the small size of the sector outside of the United States, United Kingdom and the People’s Republic of China, the study notes.
Though, the sector seems to be set for exponential growth in other countries as well since around 70 percent of firms expect that technology platforms will reduce trade finance gaps in future. An overwhelming majority hopes that digitization of financial processes will help cut cost of compliance with regulatory requirements and due diligence, leading to provision of credit to a greater number of firms.
An interesting trend observed in the study is that women-led firms are more likely to use Fintech than men-led firms. Around 62 percent of those who report using Fintech say that it is their only source of financing and the rest are relying on both Fintech and conventional banking channels.
The study concludes with four policy recommendations. Firstly, it urges stakeholders concerned to invest in identity solutions to address challenges in Know Your Customer (KYC) due diligence. “The Legal Entity Identifier (LEI) can address the issue at a global level. LEI will verify who’s who, who owns whom, and who owns what. This will serve to simplify the challenges financial institutions face in conducting key portions of KYC due diligence,” it states.
Second, it seeks scaling up of new methods of credit risk assessment and proposes that supply chain finance (SCF) should be used as an alternative to traditional methods that focus on financials and collateral – weak areas for MSMEs.
Thirdly, the study suggests harmonization of digital standards in the financial and trade sectors.
“The lack of interoperability limits the ability to scale solutions. Regulators, banks, customs, shipping, logistics, and Fintech companies need to work together to inform new regulatory, legal and technical standards,” it says.
Lastly, it seeks accelerated measures for data collection and analysis so that evidence-based solutions can be devised for making trade finance more accessible.
