Ensuring that more trade finance provisions reach small and medium-sized enterprises (SMEs) is an essential component of boosting the global economy, according to a report from the World Trade Organisation (WTO).
Trade finance and SMEs: Bridging the gaps in provision particularly focuses on the important role that SMEs play in global exports (one-fifth of US exports and two-fifths in the EU) and the difficulties these businesses face in securing financing. These difficulties are even greater for businesses in developing countries. The report found that half of all requests for trade finance from SMEs are rejected.
Some of the report's key findings include:
- up to 80 per cent of trade is financed by credit or credit insurance;
- small and medium-sized enterprises (SMEs) face the greatest hurdles in accessing affordable trade financing;
- SMEs account for 20 per cent of US exports, and 40 per cent of EU exports;
- globally, more than half of trade finance requests by SMEs are rejected, compared with just 7 per cent for multinational companies;
- the estimated value of unmet demand for trade finance in Africa is US$120 billion (one-third of the continent’s trade finance market) and US$700 billion in developing Asia.
With regards to developing economies, the WTO argues that one of the main ways to boost access to financing is through development of local financial sectors, which benefit when banks with global expertise invest. This has been happening less since the financial crisis, as global banks are disinclined to invest in certain developing markets. The report states: “As a result, there are large financing gaps, particularly in Africa and Asia, which need to be addressed.”
The report also states that, while there is no single, comprehensive source of statistics on the size of the trade finance market globally, the Bank for International Settlements (BIS) has estimated that it could be worth $12 trillion annually. This is roughly two-thirds of the global exports market ($18 trillion). The BIS further stated that roughly one-third of global trade is supported by one or more bank-intermediated trade finance products.
Financing is barrier to business for SMEs and large corporates
US companies cited 'obtaining finance' as one of the leading impediments to their global trade business (based on 2010 data, see graph below).
The graph shows that the top six impediments for US SMEs in the manufacturing sector are as follow:
- unable to find foreign partners;
- transportation/shipping costs;
- preference for local goods in foreign market;
- high tariffs;
- difficulty in receiving or processing payments; and
- obtaining financing.
While for SMEs in the services sector, obtaining financing is the third biggest impediment, after 'insufficient IP protection' and 'foreign taxation issues'.
Why LC requests in Africa are rejected
The report also lists the main reasons why banks in Africa reject requests for letters of credit:
- client credit worthiness (40 per cent);
- capital constraint (16 per cent);
- balance sheet capacity constraint (13 per cent);
- insufficient limits from confirming banks (9 per cent);
- limited foreign currency liquidity (9 per cent);
- product or instrument limits (4 per cent);
WTO recommendations for bridging trade finance gap
The WTO finally recommended six courses of action to help bridge the trade finance gap that exists for SMEs globally:
- reduce limitations in existing multilateral programmes;
- increase programme size where possible (ideally from US$30bn to US$50bn a year);
- set a realistic objective for total trade coverage;
- increase capacity building support;
- maintain an open dialogue with trade finance regulators;
- improve the capacity of the international community to read markets and predict problems.
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