TheInsiderStories (ADB)
Statistics Indonesia reported the country recorded a trade deficit  US$160million in September as export fell, said the official on Tuesday (10/15) - Photo by ADB

JAKARTA (TheInsiderStories) – The global trade finance gap remained around US$1.5 trillion hampering efforts to provide important jobs and growth amid ongoing economic uncertainty, according to the Trade, Growth and Employment Gaps, released by Asia Development Bank (ADB) today (09/3). It said, the small and medium enterprises (SMEs) face the biggest challenges in obtaining trade finance, report records, and companies led by women often face additional obstacles.

“The huge trade finance gap is a global challenge that is hampering economic growth and jeopardizing efforts to reduce poverty,” said ADB Head of Trade and Supply Chain Finance Steven Beck. “Given the uncertain economic outlook, it is very important that more efficient, stable and sustainable trade finance channels are created to spur global growth and development,” he added.

The Trade Disparities Trade, Growth and Employment is based on responses from banks, companies and export credit institutions globally and is a barometer of the health of the world’s leading financial trade. Its 6th edition finds that trade finance gaps continue to hamper progress towards the Sustainable Development Goals, especially targets relating to women’s economic empowerment, job creation, and inclusive growth.

According to the report, 45 percent of trade finance applications by SMEs surveyed were rejected, compared with 39 percent for medium and large companies and 17 percent for multinational companies.

Meanwhile, the rejection rate for women entrepreneurs is 44 percent compared to 38 percent for male-owned companies. Providing better access to trade finance for SMEs and entrepreneurs will not only narrow the gap but also empower them to contribute to inclusive growth and sustainable development.

More than three-quarters (76 percent) of the banks surveyed reported that anti-money laundering (AML) and know-your-customer (KYC) regulations were the main obstacles to expanding their trade finance operations.

Although these regulations are very important to ensure that 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.

“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,” said Mr. Beck.

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 adoption by governments of 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.

Backed by ADB’s AAA credit rating, the Trade Finance Program (TFP) provides guarantees and loans to over 200 partner banks to support trade, enabling more companies throughout Asia and the Pacific to engage in import and export activities.

Since 2009, ADB’s TFP has supported more than 15,000 SMEs across developing Asia—through over 21,000 transactions valued at over $36 billion—in sectors ranging from commodities and capital goods, to medical supplies and consumer goods.

In 2018, TFP grew almost 40 percent to support $6.2 billion in trade through 4,470 transactions. TFP complements its financial support with knowledge products, including a study that quantifies market gaps for trade finance, initiatives to increase the role of women in banking, efforts to enhance environmental safeguards, and initiatives to fight crime through greater transparency in the global financial system.

TFP also provides workshops and seminars to increase knowledge and expertise in matters related to finance, trade, risk management, and fraud prevention. For more information, visit the TFP website.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. In 2018, it made commitments of new loans and grants amounting to $21.6 billion. Established in 1966, it is owned by 68 members—49 from the region.

Written by Marcel Gual, Email: theinsiderstories@gmail.com