Trade Insights
29 May 2023 • 14 min read
Trade Finance Gap Needs Urgent Attention
Download Full Blog
Trade financing gap, which was $1.5 trillion in 2018, has now grown to $2 trillion. However, technology has the potential to significantly address the trade finance gap, which refers to the lack of access to financing for businesses engaged in international trade.
The financial tools and goods that businesses employ to support global trade and commerce are referred to as trade finance. Importers and exporters conduct business through trade finance, which makes it possible and simpler for them to execute a transaction.
Sunil Barthwal, Secretary, Department of Commerce, stressed the need for trade finance cooperation among member nations to reduce the expanding trade financing gap during the opening of the inaugural G20 Trade and Investment Working Group (TIWG) meeting under India's Presidency.
The gap in trade financing is growing. Speaking at the International Conference on "Trade Finance," which was organised by the Export Credit Guarantee Corporation of India (ECGC) and the EXIM Bank of India, Mr. Barthwal remarked. He continued, "According to ADB estimates, the gap, which was $1.5 trillion in 2018, has now grown to $2 trillion.
Trade Finance: Lubricant for the Wheels of Commerce
What steps are involved in getting products from the farm or factory gate to your neighbourhood shop? Of course, there are trucks, ships, and aeroplanes involved, as well as sophisticated logistics. Trade credit and finance are also important components. Without them, business would end abruptly, just as it did during the 2008 global financial crisis.
Trade credit and finance can be used in a variety of ways, such as just as a short-term loan like using your credit card to make grocery purchases. Customers that purchase goods or services from sellers are given trade credit. Sellers also require money to give credit to their clients. This can take the shape of a trade credit from their own suppliers or a loan from a family member or bank. Buyers may occasionally provide financial assistance to suppliers to help them finance manufacturing.
Does Trade Finance Gap Matter?
Trade finance provides financial tools to merchants to help them lower unforeseen instalment risks and get goods to the market. Trade finance helps Small and Medium Enterprises (SMEs) make sure that customers receive their orders on time and that suppliers are paid for the goods they have delivered. In 2020, the SMEs accounted for 90% of all organisations, 41% of trade finance applications, and 52% of rejected trade finance applications. The difference is more pronounced in organisations managed by women, where 70% of applications were either partially or entirely rejected.
The need to digitize trade is urgent. Carrying trade into the digital age would allow for the treatment of the full range of problems. Transparency and a development of information are brought about by digitization. Data can provide the information needed to support the SMEs and enhance the identification of financial wrongdoings.
Reasons for Trade Finance Gap
Banks and other financial institutions are willing to offer businesses worldwide financial services, but for a variety of reasons they are unable to meet the rising demand for financing. For instance, they are restricted by legal requirements, the applicant's weak creditworthiness, and compliance restrictions.
Due to the perceived high risk of default, developing nations are particularly susceptible to disruptions in trade finance. The main cause of insolvency for small and medium-sized businesses is delayed payment from clients.
Trade Finance Gap and Technology
Technology has the potential to significantly address the trade finance gap, which refers to the lack of access to financing for businesses engaged in international trade. Here are several ways technology can help solve the trade finance gap:
-
Digitalization of Trade Documents: Traditionally, trade finance has relied on paper-based processes, which are time-consuming and prone to errors. Technology enables the digitalization of trade documents, such as invoices, bills of lading, and letters of credit, making them easily accessible and shareable. This streamlines the verification and processing of documents, reducing delays and increasing efficiency.
-
Artificial Intelligence (AI) and Machine Learning (ML): AI and ML technologies can analyse vast amounts of trade-related data, including credit histories, market trends, and supply chain information. By leveraging these technologies, financial institutions can assess creditworthiness more accurately, mitigate risks, and make faster and more informed lending decisions. AI-powered chatbots can also help and support throughout the trade finance process, improving customer experience.
-
Supply Chain Finance Platforms: Technology platforms that connect buyers, suppliers, and financial institutions can facilitate supply chain finance. These platforms provide real-time visibility into the supply chain, allowing financiers to assess the creditworthiness of suppliers based on their transactional data. This enables suppliers to access financing based on the creditworthiness of the buyer, even if they have limited financial history or collateral.
-
Mobile and Digital Payments: Mobile and digital payment solutions enable faster and more secure cross-border transactions. By leveraging mobile money systems and digital wallets, businesses can receive payments more efficiently, reducing the need for traditional paper-based methods. This improves liquidity and cash flow for businesses engaged in international trade.
-
Data Analytics and Risk Assessment: Technology enables sophisticated data analytics, which can help financial institutions better assess and manage risks associated with trade finance. By analysing historical trade data, market trends, and credit information, predictive models can be developed to identify potential risks and fraud patterns. This improves risk management practices and allows lenders to offer trade finance solutions to a broader range of businesses.
Overall, technology-driven innovations have the potential to streamline processes, reduce costs, enhance transparency, and improve access to financing, thus narrowing the trade finance gap. However, it is important to note that while technology can be a powerful enabler, addressing the trade finance gap also requires collaboration among financial institutions, governments, and international organizations to create supportive policies and regulatory frameworks.
In the next blog post, you will get to read about the Trade Knowledge and Execution Gap.
Back to blog page
Schedule a personalized 1:1
Step into the future of freight forwarding with Cogoport. Experience a demo tailored to revolutionize your logistics, offering:
- Innovative Solutions: Peek into cutting-edge features redefining freight management.
- Expert Guidance: Direct insights from our seasoned pros, tailored to your business needs.
- Real Answers: Interactive session to address your unique challenges.
Blog comments