How does ADB's Trade Finance Program work and what role does it play in boosting economic growth in Asia and the Pacific?
Trade is critical to economic growth, job creation, and ultimately, poverty reduction. But without financial backing, the full potential of trade to deliver growth and the millions of jobs Asia needs is not being realized.
Financing trade, or trade finance, consists of the loans and guarantees provided by financial institutions such as banks and insurance companies that are essential to enable buyers and sellers to do business.
So without trade finance, there’s very little trade.
The lack of trade finance in developing countries seriously impedes growth, employment, and poverty alleviation. Studies show that Asia and the Pacific face a shortfall of trade finance of around $1 trillion. The main reasons for this huge gap are low country credit ratings and underdeveloped banking sector in many countries and unintended consequences of bank regulation.
So boosting trade finance can result in significant benefits for the economy. For instance, a 15% improvement in access to trade finance is estimated to increase employment by 17%.
ADB is working hard to close the gaps in trade financing with its Trade Finance Program, or TFP, which provides guarantees and loans through banks to support trade. With a team of dedicated specialists and a response time of 24 hours, the TFP has established itself as a key player in the international trade community – providing fast and reliable trade finance support to fill market gaps.
Since 2009, the TFP has supported over 10,000 transactions across the region. That’s worth more than $20 billion! 8 out of 10 of those deals have supported small and medium businesses – the employment engines in emerging economies.
The Program currently operates in 18 developing member countries, with the most active markets in Bangladesh, Pakistan, Viet Nam, and Sri Lanka. In line with ADB’s regional mandate to reduce poverty, the TFP also operates where others fear to tread – often in some of Asia’s most challenging and poorest economies, such as Myanmar, Cambodia, and the Kyrgyz Republic.
The TFP promotes confidence where it is active, some private sector partners have taken the plunge and entered Asia’s more challenging markets for the first time, thanks to the TFP. And the TFP has mobilized over $10 billion in cofinancing from its private sector partners since 2009.
In addition to closing market gaps by providing guarantees and loans to support trade transactions, the TFP also stimulates access to trade finance by creating and sharing information.
The Trade Finance Program has created the Trade Finance Register. It’s housed at the International Chamber of Commerce, which now publishes annual reports detailing defaults and loss rates on global trade finance transactions. This helps bank regulators and financial institutions understand and calibrate risk for trade finance. Initiatives like the Trade Finance Register help reassure financial institutions that trade finance is low risk, hoping to attract billions of dollars of new money for trade.
Going forward, the TFP is expanding into Pacific countries and will be rolling out a new trade finance product in 2016.
Closing market gaps to maximize the potential of trade to create growth, jobs, and reduce poverty is what the TFP is all about.