MANILA, PHILIPPINES — Global availability of trade finance improved in 2014 but gaps were increasingly pronounced in emerging economies, including in Asia, driven by banks’ decision to move away from high-risk markets, says a new Asian Development Bank (ADB) survey of banks and companies.
“The global trade finance gap was estimated at $1.4 trillion for 2014, of which around half was in developing Asia,” said Steven Beck, head of trade finance at ADB. “Trade continues to be the engine of growth and employment in the region, so addressing the financing gaps will be critical to promote growth and job creation especially in the more challenging markets.”
Banks highlighted the rising costs and complexity in complying with regulatory requirements to prevent financial crimes, including money laundering and terrorism finance, as a top impediment to trade finance, partly due to the lack of clarity on their implementation. The impact of this was felt most in Africa, the Russian Federation, Central Asia, and North America.
The study also found that small and medium-sized enterprises (SMEs) were consistently underserved by financial institutions and faced the highest rejection rates for trade finance. Companies noted that higher prices for trade finance accelerated in the second half of 2014. With compliance measures expected to tighten further, the study notes that this will put more pressure on economies already experiencing gaps in access to financing, with SMEs particularly affected.
Companies surveyed noted that if trade finance available to them was doubled they would significantly boost production and exports, hire more staff, raise salaries, and invest in other business, highlighting the critical importance of trade credit to economic growth.
With the Trans-Pacific Partnership and ASEAN Economic Community coming online over the next few years, demand for trade finance could rise and guarantees offered by export credit agencies, and multilateral development banks like ADB, will play a vital role in realizing maximum potential from these new opportunities for enhanced trade, growth and job creation, the survey said.
ADB’s Trade Finance Program (TFP) closes market gaps for trade finance by providing guarantees and loans to banks to support trade. Since 2009, TFP has supported over $20 billion in trade through more than 10,000 transactions. TFP operates in the most challenging markets throughout Asia and expanded to Myanmar last October 2015. TFP has supported over 6,000 SMEs since 2009.
The survey conducted earlier this year aims to understand where and why gaps in global trade finance exist and their impact on jobs and growth. It received responses from over 250 banks across 86 countries—more than double the previous year’s number. As the survey has been upgraded and amended since it first began in 2012, results are not directly comparable year-on-year.
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region. In 2014, ADB assistance totaled $22.9 billion, including cofinancing of $9.2 billion.