SMEs face significant financing gap, ICC tells high-level WTO Aid-for-Trade review
Speaking at the World Trade Organization Annual Aid-for-Trade Review yesterday, ICC Banking Commission Senior Policy Manager Thierry Senechal said that trade finance intermediation is crucial today as it provides real-time risk mitigation, while improving liquidity and cash flow of the trading parties.
It also gives localized small- and medium-sized enterprises (SMEs) much needed access to credit and working capital to finance exports and imports.
Between 80-90% of global trade depends on some sort of trade finance yet structural access issues, related to factors such as poorly-developed banking sectors or perceived country credit risk, continue to act as bottlenecks. A panel session examining the issue, entitled ‘Trade Finance and Value Chains – Overcoming Structural Access Issues’, featured representatives from ICC, WTO, African Development Bank, Asian Development Bank (ADB), International Finance Corporation, Centre for the Promotion of Imports from Developing Countries and the United Nations Economic and Social Commission for Asia and the Pacific.
In closing remarks WTO Director-General Pascal Lamy said: “Overcoming existing skills gaps in developing countries can help them draw enhanced benefits from their participation in the multilateral trading system. These discussions have brought some key areas into focus, including access to finance — and trade finance in particular.”
Panellists concurred that SMEs face disproportionate barriers to finance, especially in developing countries. They also face a significant financing gap. A recent ADB study indicates that the total value of trade finance requests received in 2011 by commercial banks responding to a survey amounted to approximately US$4.6 trillion. Of this more than US$1.6 trillion was rejected, suggesting a global, unmet demand (or gap) of US$1.6 trillion (of which US$425 billion in unmet demand was in developing Asia).
When asked to name the most severe obstacles to growth, panellists pointed to financing constraints as one of the most severe obstacles to trade. They said that the economic crisis of 2009 had underscored the multilateral trading system’s dependence on trade finance for its effective functioning and still today the financial crisis is casting a long shadow with trade finance facing headwinds that may completely upend the global landscape in which it operates in the next five years.
“There are game-changing events taking place at both the macro- and business levels. Recent ICC research shows that in recent months, merchandise trade has slowed in most major economies, contracted in Europe and fallen in the BRICS. By contrast, economic opportunity is expanding in eastern and southern regions of the globe, with new champions emerging in terms of growth, including in Indonesia, the Philippines, Nigeria, Ghana and many others,” Mr Senechal said. “South-South trade is also on the rise. Just 20 years ago, South-South represented barely 10% of world trade. By 2020, a third of global trade is likely to be South-South re-arranging the global trading system in coming years.”
Several panellists argued that there was considerable evidence to support the contention that SMEs face a number of obstacles and problems in accessing finance, mainly related to their limited resources and perceived risk by lenders. Mr Senechal noted that the banking model was severely constrained on a global level with high deleveraging taking place in Europe, poor access to US dollar funding for non-US banks, greater selectivity in risk-taking in many emerging markets and a welter of new regulations.
“The future of trade finance may look quite different in coming years: Regulations will become more complex, reducing the capacity of financial institutions to provide lending. A two-speed economic and financial system may also emerge, with developed markets in slow gear and developing markets in higher gear. Finally, new SME entrants are being starved of trade finance in many countries due the prevailing trade finance gap,” he said.
Closing the three-day review, Mr Lamy said: “This has not just been three days of numbers, reports and analysis but three days of experiences. By any metric, we achieved the objectives we set ourselves over the past three days and all with one aim in mind: making trade work for development”.
For more information visit the Fourth Global Review of Aid for Trade: “Connecting to value chains”
Download the ICC Global Survey on Trade Finance
Visit the ICC Banking Commission