The global trade finance gap grew to an all-time high of US$1.7 trillion in 2020, representing an increase of 15% from two years earlier, as the Covid-19 pandemic heightened economic and financial uncertainties and devastated global trade. As a percentage of global goods trade, the gap increased to 10% in 2020 from 8% in 2018.
According to the latest trade finance survey released on October 12 by the Asian Development Bank (ADB), small and medium-sized enterprises (SMEs) were the hardest hit as trade finance dried up with the spread of the coronavirus, accounting for 40% of the rejected trade finance requests. SMEs owned by women found it particularly difficult to secure financing, with a reported 70% of their applications totally or partially rejected. The gap, which represents the difference between requests and approvals for financing to support imports and exports, was US$1.5 trillion in 2018.
Commenting on survey, ADB trade and supply chain finance head Steven Beck notes that trade is critical for the global economy to recover from the pandemic, but the financing shortfall makes it much harder to create jobs and growth. “The challenges of trading businesses may be even steeper than our survey indicates, as many of them were deterred by the economic uncertainty from even applying for trade finance,” he says. “Higher prices for food and energy will exacerbate the gap, eating into country and counterparty finance limits in place to support trade.”
The survey says banks have introduced various measures to support SMEs impacted by Covid-19 with 27% of the responding banks offering a moratorium on debt payments; 23% have increased capital availability and limits to SMEs; 23% created pandemic-related products for affected clients; 13% made compliance procedures easier, quicker and cheaper; and 8% reduced the rejection rate of SME proposals. Meanwhile, the banks cited the high cost of technology (56%) as the major constraint in maximizing their potential to engage SMEs.
The survey, according to ADB, is the world’s leading barometer of trade finance health. The seventh survey includes 79 banks and 469 firms, covering all regions of the world.
Weaker balance sheets and macroeconomic uncertainty during the pandemic widened the gap. Regulations designed to curb money laundering and fraud continued to inadvertently pose obstacles to servicing trade finance needs. Banks took extra measures to support SMEs, with 27% reporting that they offered debt moratoriums and 23% increasing capital availability levels. More than 40% of the firms expected their revenues to return to pre-pandemic levels in 2022.
Closing the gap for firms owned by women could be helped by attracting, retaining and promoting more women in finance, the survey says. Further digitalization of trade will also help through new efficiencies, but much more public sector support and global standards are required to realize this potential.
“To close the gap, we need to bring trade fully into the digital world through greater coordination with the private sector as well as global agreement on common standards, practices, and legislation,” adds Beck.
The survey also shows the take-up of digital finance remains low at 1%. Around 18% of companies were unable to find an appropriate financing alternative, which is suggestive of either a knowledge gap or a financing product gap. Firms which sought informal finance resorted mostly to business partners (33%), and family members and relatives (22%) before seeking out other informal sources of financing.
Backed by ADB's AAA credit rating, the trade and supply chain finance programme (TSCFP) provides loans and guarantees to more than 200 partner banks to support trade, creating import and export opportunities for enterprises across Asia and the Pacific. TSCFP transaction numbers increased by 50% in 2020 to fill enlarged market gaps left by a retrenching private sector. In 2021, TSCFP will support over 7,000 transactions valued at over US$6 billion in markets where the private sector has most trouble operating.
