Around half of trade finance applications from smaller businesses are rejected by lenders, and facilities that are granted can cost more than double those provided to larger companies, the World Trade Organization (WTO) has found.
The latest edition of the WTO’s annual World Trade Report finds that a high level of trade relative to countries’ GDP is “significantly correlated to faster growth in low and middle-income economies”.
In a case study of the West African and Mekong regions, the report finds that increasing the share of cross-border sales supported by trade finance to 40% – the level found in Egypt, Morocco and South Africa – would trigger 8% growth in trade flows.
But currently, only 20% of trade in Nigeria and Vietnam is supported by trade finance. The figure for Senegal is 15%, and just 3% for Cambodia and Laos, the report finds.
In particular, micro, small and medium-sized enterprises (MSMEs) face a litany of challenges in accessing trade finance instruments. The roughly 50% rejection rates they face are “a stark contrast” to the 7% experienced by multinational businesses, the WTO says.
“A part of these rejections can be justified on grounds of lack of creditworthiness of firms, a motive that can also be found in developed economies; but another part of these rejections can be attributed to supply and demand factors more specific to developing economies,” it says.
“These include poorly documented applications, lacking or insufficient correspondent banking relations and lines of credit, insufficient access to foreign currency and lack of scale for local banks, preventing them from financing higher value trade transactions, and shortages of low-cost funding.”
Even more significant, the WTO says, is that banks are more likely to request traded merchandise as collateral for trade finance in lower-income economies, due to doubts over legal enforcement mechanisms in the event of default.
A high perception of company risk and a lack of such collateral “top the list of banks’ motives for rejections of trade finance applications in West Africa”, it finds.
Even where trade finance is available, the report adds that in Côte d’Ivoire and Senegal, smaller businesses typically pay premiums of 7% to 9% over refinancing rates, compared to 4% to 5% for large companies.
Costs are driven in part by compliance and risk management processes, and can be exacerbated further by foreign currency shortages in emerging markets.
As a result, trade finance prices “significantly exceed global emerging market benchmarks in low-income economies”, the WTO says.
The report also finds that women-owned businesses face a 50% higher rejection rate for traditional trade finance applications compared to those owned by men.
Development finance institutions have historically played a vital role in bringing trade finance to challenging markets, providing risk mitigation tools and local expertise to encourage lending activity.
However, the WTO report says traditional development finance “is under stress”.
“In a post-pandemic world with geopolitical tensions, rising debt burdens and a need for urgent climate action, governments, international organisations and financiers are increasingly navigating budgetary constraints as they mobilise funds to address these multifaceted crises,” it says.
The report calls for greater deployment of innovative financing mechanisms, such as blended finance through public-private partnerships, as well as development impact bonds and guarantees.
Challenges in increasing emerging markets’ participation in trade – particularly those with high commodity dependence – means some have been “left behind”, the WTO finds.
Director-general Ngozi Okonjo-Iweala says the report affirms trade’s role in increasing prosperity, “contrary to the currently fashionable notion that trade, and institutions like the WTO, have not been good for poverty or for poor countries, and are creating a more unequal world”.
“There is much more we can do to make trade and the WTO work better for economies and people left behind during the past 30 years of globalisation,” she says.
