Efforts to address tariff upheaval by diversifying supply chains could be held back unless the global trade finance gap narrows, the Asian Development Bank (ADB) has said.
The gap, defined as the difference between demand and supply of trade finance facilities worldwide, has stabilised at an estimated US$2.5tn since 2023, according to a landmark ADB report published this week. Its findings were first reported by GTR in September.
ADB’s survey of 110 financing providers, believed to represent around a third of the global trade finance market, found nearly 90% expected demand for trade finance to increase as companies seek out new markets and reconfigure supply chains.
And although nearly 75% also expected the supply of financing to grow, the ADB warned of structural challenges that could mean those opportunities are not realised.
“Banks noted recurrent constraints on their capacity to supply more trade finance,” the report said.
Some of these constraints, including know-your-customer issues, correspondent banking limitations and insufficient applications from SMEs, “appear survey after survey”.
“In this study, however, several new concerns arose, such as the possibility of an economic slowdown and the effects of policy and geopolitical uncertainty,” the ADB said.
“If higher demand materialises – as survey respondents suggest it will – and supply does not materially increase, large trade finance gaps would impede opportunities arising from trade diversification and supply chain reconfiguration.”
Uncertainty around policy continues to weigh on trade. Research published this week by DP World found the majority of senior supply chain and logistics executives expect to encounter ‘high’ or ‘very high’ political uncertainty this year.
The ADB found two-thirds of banks are already considering specific solutions aimed at helping clients navigate a more uncertain policy environment, but said other measures should be taken to reduce the trade finance gap.
Nearly 90% of respondents called for an increase in the capacity of multilateral development banks to provide guarantees, including longer tenors, and a similar number said that digitalisation of trade and reducing capital costs should be prioritised.
Other possible measures cited included providing training to mid-tier banks, non-bank lenders and SMEs to support the deployment of financing, as well as reducing compliance costs, attracting non-bank investment and scaling products such as pre-shipment and supply chain finance.
Local financing could also play a greater role in trade finance, helping banks in developing economies that struggle to access US dollars, the report said.
In Africa, more than a third of banks said limited foreign exchange liquidity is a “key challenge”, as repayments in US dollars can become much more costly if local currencies weaken.
The majority of respondents said they had already perceived a growing need for financing in local currencies, and the ADB noted that commercial lenders and multilaterals are already working to address the issue.
The report also focused on SME access to trade finance, with small businesses historically finding it more difficult to access facilities than larger corporates.
For the first time, it found that trade finance rejection rates for SMEs were almost the same as those for mid-cap and corporate companies, described as a “positive development” for the market.
Though too early to confirm a structural shift, the ADB suggested this could be because of improvements in how banks screen and support SME clients, as well as greater support from non-bank financial institutions, including fintechs.
More than 80% of banks reported having a strategy aimed at supporting SMEs, it added.
However, the ADB warned those figures “should be interpreted with caution”, as they could be influenced by discouraged demand, whereby SMEs that had previously been turned down stop applying for financing.
Reports from the African Development Bank have found that in Kenya and Tanzania, around 17% of SMEs did not apply for trade finance due to a fear of rejection, high collateral requirements or unfamiliarity with the process, despite expressing a genuine need for support.
“This ‘self-rationing’ effect suggests that a portion of unmet demand reflects not only rejected applications but also firms that exclude themselves from formal finance channels despite having a clear financing need,” the ADB said.
