Trade Finance and Economic Development | Asian Development Bank

At the forefront of growth and development in Asia and the Pacific

Trade Finance and Economic Development

Video | 16 February 2017

Alisa DiCaprio, research economist at ADBI, talks about her research which shows that SMEs lack access to finance on two levels. The first is the difficulty SMEs face in securing bank relationships. The second is that even among SMEs that already have banking relationships, rejection rates for trade finance proposals are considerably higher than those of the general firm population.

Transcript

Trade Finance and Economic Development

Description: Alisa DiCaprio, research economist at ADBI, talks about her research which shows that SMEs lack access to finance on two levels. The first is the difficulty SMEs face in securing bank relationships. The second is that even among SMEs that already have banking relationships, rejection rates for trade finance proposals are considerably higher than those of the general firm population.

Trade finance was working pretty well until the global financial crisis in 2008/09. At that time, both cross-border trade and trade finance spiked downward. Because we didn’t understand the relationship between trade and trade finance, policy makers were left without a clear understanding of how to respond.

As part of the subsequent call for action on better data collection, ADB started the Trade Finance Gaps, Growth and Jobs survey. Originally our goal was to understand where the gaps in trade finance existed. But we found some unexpected empirical regularities which led us to expand the granularity of the survey in subsequent rounds.

In 2016, we surveyed 337 banks in 114 countries and 791 firms in 96 countries. In this year’s survey we introduced additional detail about fintech and the behavior of women-led firms.

Our research aims to understand how firms – particularly SMEs - behave in markets where there is persistent unmet demand. Now we know that SMEs in the broadest sense lack access to finance. But our research highlights that there are 2 levels to this problem. The first is the difficulty SMEs face in securing bank relationships. The second is that we show that even among SMEs that already have banking relationships, rejection rates for trade finance proposals is considerably higher than that of the general firm population.

There are three other dimensions to challenges facing SMEs.

First, SMEs bear the negative impacts of the increasing cost and complexity of regulatory compliance. Since the global financial crisis, regulation of the financial sector has increased. As a result, financial institutions have consolidated their operations into the most profitable segments.

Second, women-led firms, as expected, are smaller and face higher rejection rates than the general firm population. They adopt the most problematic second best solutions after rejections- like turning to informal financial providers. However, they also employ more women overall and report higher rates of fintech uptake.

Finally, the positive impact of digitization in the financial sector has been largely limited to the most sophisticated economies. While regional and community banks – which are those most likely to service SMEs – report digitization rates below (xx%).

This underscores a final limitation that has been largely overlooked – the financial institutions which deal closely with SMEs are also those which report limited internal capacity to offer trade finance.

So what can we learn from all this?

Thinking forward, we know that firms are increasingly engaging with ecommerce to begin the export experience. When the most competitive firms among them begin to scale up, they will need trade finance to support their growth. This particularly true in Asia and the Pacific which is highly dependent on traditional forms of trade finance.

Its difficult to disentangle the impact of trade finance on employment and productivity. But this is where research can contribute most to the identification and targeting of policy instruments.