Opening remarks by Ashok Lavasa, ADB Vice President for Private Sector Operations and Public–Private Partnerships, at the Parallel Session 2, T20 Summit 2022, 5 September 2022, Bali, Indonesia
Distinguished speakers, ladies and gentlemen,
Welcome to this session on Driving Digitalization to Close Trade and Supply Chain Finance Gaps. On behalf of ADB, I sincerely thank the Think20 organizers for the opportunity to organize the session and distinguished speakers for being here to share their insights.
Persistent and large trade finance gap
International trade has been instrumental to economic growth and poverty reduction. More than 80% of trade relies on finance and trade finance plays a vital role in facilitating trade flow through financing such as letters of credit, trade credit, and export insurance. Yet, estimated trade finance gaps are persistently large, ranging around 8%–10% of global merchandise trade, according to ADB’s Trade Finance Gaps, Growth and Jobs Surveys over the last 10 years. Our latest survey shows that the trade finance gap increased from $1.5 trillion in 2018 to $1.7 trillion in 2020 in the wake of COVID-19. Nearly 40% of the gap is originated from the Asia and the Pacific region which accounts for 35% of global goods trade. Indeed, heightened economic and financial uncertainties suggest unmet demand for trade finance likely climbed higher in the past 2 years.
ADB’s role in mitigating the gap
To close market gaps, ADB’s Trade and Supply Chain Finance Program (TSCFP) works with its developing member countries through guarantees, loans, and knowledge products. Since 2009, the program has supported $57 billion in trade across 45,500 transactions, 60% of which are SME-related.1 During periods of economic crisis, its role is particularly relevant to the needs of many borrower countries to secure larger, more stable trade finance facilities to encourage trade and stimulate economic growth.2
Impact of the pandemic and lingering uncertainties
Global trade flows recovered in 2021 and are expected to increase this year. However, trade and supply chain disruptions persist, adding to trade uncertainties and costs. The world now faces overlapping crises from emergent variants of COVID-19, the war in Ukraine, broadening inflationary pressures due to high food and energy prices, and the adverse effects of climate change. In addition, as central banks raise interest rates to tame inflation, financial conditions are tightening, threatening to weaken economic recovery and trade activity and constrain trade finance markets.
Structural obstacles in trade finance markets
SMEs, which play an important role in inclusive growth, continue to face significant structural obstacles in access to trade finance. Compliance with regulatory requirements such as know-your-customer and anti-money-laundering regulations is often costly. Small firms also lack collateral and are put off by cumbersome documentation requirements. All of these lead to higher rejections of small firms’ trade finance applications than those of large firms. Our survey results also show that Asia and the Pacific has the highest share of trade finance applications and of rejected proposals among all developing regions. Innovative solutions to address such challenges in trade finance could help SMEs avoid missing trade opportunities.
Benefits of digitalization
Digitalization and financial technology can offer huge potential for reducing transaction costs for trade finance providers and borrowers. Despite the rapid progress and adoption of technology, especially during the pandemic, trade finance processes are still largely paper-based. This makes screening borrowers and verifying information costly and prone to fraud. For banks, technology solutions that enable end-to-end automated validation as well as critical compliance can facilitate know-your customer procedures.
For small borrowers, digitalization can offer cheaper, faster, and more reliable ways for confirming company identity and facilitating documentation. This makes the whole process more transparent and efficient. It can also spur the growth of alternative finance from fintech firms and increase trade finance access for small borrowers, helping to narrow the trade finance gap and promote more inclusive trade and development.
Need for common standards, environment-friendly trade finance
However, there is considerable room for improvement in making technology more accessible. International cooperation can contribute to creating an enabling environment. Digitalization remains low among banks in emerging and developing economies. And many smaller firms in Asia and the Pacific lack technical expertise, funds, and awareness of digital finance.
ADB’s Trade and Supply Chain Finance Program, is supporting its developing member countries in acquiring digital infrastructure and is working with multiple stakeholders to achieve common standards so various digital systems can communicate with each other. This includes support for the Digital Standards Initiative—supported by the International Chamber of Commerce and ADB to accelerate common standards and interoperability—and the UNCTRAL Model Law on Electronic Transferable Records, which serves as a standardized guide for governments in enacting laws pertaining to digital transfers of trade documents.
Digitalization can also help make supply chains more robust and resilient to pandemics and other emergencies by keeping trade participants connected to markets and each other.
Finally, in all of this, it is important to recognize that the threat of climate change calls for reducing our carbon footprint in international trade activities. As environmental, social, and governance criteria, or “ESG”, are increasingly factored into decisions across sectors, we need to incorporate these into trade practices, including trade finance. While these ESG criteria may add additional challenges for SMEs given their capacities and limited resources, those SMEs that can demonstrate the ESG commitments will have a competitive advantage in access to finance. It is therefore important to turn this into an opportunity by assisting SMEs in implementing ESG.
I look forward to constructive discussion this session.