The impact of the trade finance shortfall is particularly significant for small and medium-size enterprises.
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According to the Asian Development Bank’s 2014 report, 50% of trade finance applications by SMEs were rejected in 2013, compared with 7% of requests by multinational corporations. SMEs were also less aware of certain products. “In the 2014 trade finance gaps survey, SMEs reported low levels of familiarity with different types of banking products relative to larger firms,” says Dr Alisa DiCaprio, regional cooperation specialist at ADB’s economic research and regional cooperation department. “For example, only 39% were familiar with factoring, while more than 58% of larger firms were.”
In both Africa and Asia, programs are under way that focus specifically on the issue of unmet demand for trade finance. DiCaprio says that the bank’s Trade Finance Program addresses gaps in the market by providing guarantees and loans to banks in order to support trade. Over 80% of the TFP’s transactions support small and medium-size enterprises. The TFP has also played a central role in supporting the African Development Bank in starting a similar trade finance program in Africa.
Notable initiatives include the Pacific Business Investment Facility. Supported by ADB, this is an $11 million trust fund providing business advisory services to SMEs based in the Pacific. Another is the International Finance Corporation (IFC)’s Global Trade Finance Program (GTFP), launched in 2005.
“Through the GTFP, the IFC has issued credit guarantees, which have provided essential liquidity for trade flows through its global network of more than 500 FI [financial institution] partners,” says Vinod Madhavan, head of transactional products and services, South Africa, at Standard Bank. “This has helped SMEs in markets in Africa join the global trading system.”
Declan O’Brien, CEO of Barak Fund Management, adds that although development agencies are having a very positive impact, the timelines associated with evaluating trade and funding arrangements can take even longer than those associated with a traditional bank—“which is still not ideal for the SME, or any borrower, for that matter.”
