Bridging the Gap: Sharing knowledge and best practices to fill the two trillion-dollar trade finance gap

The ability of credit-worthy businesses to access trade financing is essential to international trade, and in turn, the growth and development of economies around the world. However, despite its importance, experts believe there will be a trade financing gap of over $2 trillion in 2022 (Kim et al., 2021). To put this number in perspective, if this financing gap, defined as the sum of rejected trade finance applications by businesses globally, was an economy, it would be within the top ten largest economies in the world (OECD, 2021). Troubling still, it would be the fastest growing by a significant margin, with the gap increasing from $1.1 trillion in 2015 to $1.7 trillion in 2020 (Kim et al., 2021)

As is often the case with commercial financing challenges, studies show this issue disproportionately affects small and medium-sized businesses (SMBs), particularly those owned by women and those in developing economies. A global survey conducted by the Asian Development Bank (ADB) found that 40% of SMBs’ trade finance applications were rejected in 2020. Furthermore, they found that women-owned businesses were significantly more likely to be rejected, with 70% of their applications being totally or partially rejected in the same period (Kim et al., 2021). While these issues are present in developed countries, they are felt greatest in emerging markets around the world (WTO, 2016). For example, the World Trade Organization estimates that a third of Africa’s demand for trade finance goes unmet.

Experts believe awareness and understanding of trade financing products by both the financial institutions and SMBs in these developing countries may be a possible explanation for the discrepancy between developed versus developing countries vis-a-vis access to trade finance.

On the demand side, SMBs’ awareness of the range of trade finance solutions available to them may be low among SMBs in developing countries (Kim et al., 2021). Upon their initial trade finance request being rejected, SMBs are more likely to use their own funding (i.e., retained earnings) rather than seek out an alternative trade finance solution, suggesting a limited understanding of what is available in their markets.

On the supply side, providing trade finance solutions, such as letters of credit or purchase order financing, can be a complex process. In recent years, developed markets, such as the UK, have seen innovation in the trade finance space to reduce this complexity, as evidenced by new and innovative financial technology companies, such as Neotrade – a start-up applying machine learning to reduce the complexity of trade finance in order to serve SMBs (Khairnar, 2022). However, the knowledge and innovative solutions found in developed countries, such as the United Kingdom, may not yet have spread to emerging economies.

To begin filling the trade financing gap more should be done to identify local solutions to the trade financing challenges in developing countries. To support this effort, policymakers and development finance institutions should aim to reduce the knowledge and capability gap that persists in developing countries as it relates to trade finance by creating mechanisms to share tools and best practices.


References

OECD (2021) ‘Gross domestic product (GDP) (indicator)’, Organisation for Economic Co-operation and Development (OECD).Available at: https://data.oecd.org/gdp/gross-domestic-product-gdp.htm

Khairnar, S. (2022) ‘New trade finance bank Neotrade launches in the UK’, Fintech Futures. Available at: https://www.fintechfutures.com/2022/06/new-trade-finance-bank-neotrade-launches-in-the-uk/.

Kim, K. et al. (2021) ‘2021 Trade Finance Gaps, Growth, and Jobs Survey’, Asian Development Bank (ADB) Briefs. Available at: https://www.adb.org/sites/default/files/publication/739286/adb-brief-192-trade-finance-gaps-jobs-survey.pdf.

WTO (2016)Trade Finance and SMEs: Bridging the gaps in provision’, World Trade Organization (WTO). Available at: https://www.wto.org/english/res_e/booksp_e/tradefinsme_e.pdf.


Ian Townsend (MBA 2024) spent five years in management consulting before coming to LBS. During his time in consulting, he focused primarily on advising private and government-backed financial institutions across a range of topics, from growth strategy to product innovation. He is passionate about driving sustainable and inclusive growth, particularly as it relates to supporting small and medium-sized businesses.

The Wheeler Institute for Business and Development Outreach Internship programme is an opportunity for London Business School students to assist in amplifying the role of business in tackling some of the hardest challenges in social and economic development. The interns contribute to the Institute’s outreach activities by writing articles, supporting the production of digital content from events, and creating engaging multi-channel content in support of our wider initiatives.


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