The inability of financial institutions to provide US $ 1.6 trillion in support to buyers and sellers of goods across countries resulted in forgone growth and job creation in 2015, according to an Asian Development Bank (ADB) Brief released today. Developing Asia’s share of the global trade finance gap was US $ 692 billion, including India and the People’s Republic of China.
In its new study, 2016 Trade Finance Gaps, Growth and Jobs Survey, the ADB quantifies market gaps for trade finance and explores their impact on growth and jobs through a survey of over 337 banks in 114 countries and 791 firms in 96 countries. The annual survey is now in its fourth year.
“The trade finance gap is clearly a drag on trade and its ability to create growth and jobs,” said ADB Head of Trade Finance Steven Beck.
“The survey shows that both globally and nationally, regulators and policymakers should increase support for trade finance through smarter banking regulations, more transparent and comprehensive credit ratings systems and capacity building for local banks. ADB’s Trade Finance Programme works to reduce market gaps for financing of trade.”
According to the brief, trade finance gaps persist in part due to the cost and complexity of compliance with banking regulations, with 90 percent of surveyed banks citing anti-money laundering and know-your-client requirements as impediments to their ability to expand trade finance, especially for small businesses. Basel III banking regulations, which set liquidity requirements for bank finance, are also cited by 77 percent of respondents as a major barrier to finance new trade.
The report notes small- and medium-sized enterprises (SMEs) face the greatest obstacles in accessing affordable trade financing. Globally, 57 percent of trade finance requests by the SMEs are rejected, against just 10 percent for multinational companies. High rejection rates lead many firms to turn to inefficient informal financing.
Financial technology or Fintech can help bridge the financing gap for businesses left out of trade finance, according to the brief. But awareness of digital finance by small businesses remains low, with 70 percent of responding companies indicating that they are unfamiliar with these tools. Among firms that were familiar with digital finance, peer-to-peer lending had the strongest uptake rates in developing countries.
Since 2009, ADB’s Trade Finance Programme has supported more than 8,200 SMEs across the region, with about 11,800 transactions valued at over US $ 23.6 billion, in sectors ranging from commodities and capital goods, to medical supplies and consumer goods.
The ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth and regional integration. Established in 1966, the ADB in December 2016 will mark 50 years of development partnership in Asia. It is owned by 67 members—48 from the region. In 2015, ADB assistance totalled US $ 27.2 billion, including cofinancing of US $ 10.7 billion.