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Trade finance banks have blamed high interest rates and Russia’s invasion of Ukraine for rejecting a growing number of financing requests, as a key barometer shows the shortfall in supply has ballooned to US$2.5tn.  

The “trade finance gap”, which measures the value of financing applications rejected by 137 banks worldwide, has jumped by almost 50% from the US$1.7tn recorded in 2021, during the worst of the Covid-19 pandemic, according to a survey released on September 5.   

It is the steepest increase since the Asian Development Bank (ADB) began publishing a biennial estimate of the trade finance gap in 2014. However, the worsening of the shortfall also comes after two years of strong trade growth, meaning the financing gap accounts for roughly the same percentage of global exports as in 2021 – around 10%.  

Demand outstripping supply has been a perennial feature of the global trade finance landscape, although it is worse in some regions such as Africa, with the ADB’s estimate of the global supply shortfall hovering between US$1.4bn and US$1.7bn between 2014 and 2020.  

Many non-bank trade finance suppliers have in recent years attempted to service companies hit by the gap and hoover up business spurned by large or traditional lenders, including by using technology and leveraging data to process requests more efficiently.  

The ADB says it surveyed 137 banks in 54 countries and 185 firms in 43 countries, representing around 60% of the global trade financing market.   

The ADB’s director-general for private sector operations, Suzanne Gaboury, says the “growing gap strangles the potential of trade to deliver critical human and economic development through jobs and growth”.   

In addition to the overall widening of the financing gap, the survey shows SMEs faced  45% of the rejections compared to the previous period, while large corporations saw an improvement in application success rates.  

Banks attributed 18% of rejections to the economic volatility caused by Russia’s invasion of Ukraine and the Covid-19 pandemic, 11% due to the applicant being from a perceived high-risk country beyond the lender’s risk appetite and 10% due to the firm’s high credit risk or lack of collateral. Almost a third of rejections were for unspecified reasons.  

Failure to validate the ESG credentials of an applicant or supplier accounted for just 1% of rejections, and 2% were attributed to ESG reporting that missed regulatory standards.  
Asked to nominate barriers to providing trade finance more generally, lenders chiefly blamed credit tightening due to higher interest rates, “general economic uncertainty” following Russia’s invasion of Ukraine, and the Covid-19 pandemic.   

In the 2021 survey, almost three-quarters of respondent banks nominated anti-money laundering and know-your-customer requirements as barriers to providing trade finance, but this year that figure fell sharply to 54%. Capital requirements stemming from the Basel framework, nominated as a barrier by 62% of bank respondents in 2021, was not listed as a reason in the most recent survey.  

Around half of the lenders surveyed also nominated the low credit rating of the applicant, the low credit rating of a bank issuing a letter of credit, low country credit ratings and lack of US dollar liquidity.  For SMEs, the biggest perceived obstacles to accessing trade finance were being unable to furnish collateral demanded by banks, the absence of transaction histories and relationships with banks, insufficient credit history and poor market conditions.  

 

Future optimism  

Merchandise trade growth has stalled since the staggering advances seen in the aftermath of the Covid-19 pandemic. Global exports declined by around 3% in value in the year to April 2023, the ADB says.  

The effects are already being felt by trade finance lenders, with Singaporean and Asia-focused UK banks attributing flat or declining trade finance income in the first half of the year to a general slowdown in trade. 

But the ADB’s survey also shows optimism about the future of the market, with 71% and 76% of banks tipping growth in supply and demand, respectively, of trade and supply chain finance over the next two years.  

“It is clear that demand for trade finance is growing globally driven by many of the issues that this report identifies,” says Maurice Benisty, chief commercial officer of supply chain finance provider Demica.  

Benisty says banks are boosting investment in technology to increase their capacity and tips that further demand will be mopped up by growing interest in the trade finance market from private credit providers, “where we now estimate capacity has grown from almost zero five years ago to in excess of $30bn from trade focused funds operating globally”.  

The survey results also suggest that firms are now less worried by supply chain resilience, in contrast to during the pandemic, when freight movements were snarled and tensions between the US and China spiked. More firms instead nominated a lack of financing and high transportation costs as significant supply chain issues.  

Looking ahead, just under half of respondent banks said that financial technology and trade finance digitalisation would trim the rejection rates on financing requests by SMEs, with more saying that digital gains would instead be seen in faster compliance procedures and enhanced data mapping.  

The influence of ESG factors was mixed. While accounting for only a small fraction of rejections, a quarter of banks surveyed said that “non-alignment with ESG policies and/or ESG regulatory requirements” are barriers to the servicing of trade finance clients. The ADB said lenders’ nomination of ESG alignment as a hurdle “is notable and requires monitoring as the sustainability and ESG spaces mature”.  

There is no global regulatory standard of what constitutes ESG lending, but some regulators have recently started probing the veracity of how banks structure sustainability-linked products as they seek to curb so-called greenwashing, where lenders and borrowers inflate the environmental benefits of products or deals. 

A majority of respondent banks said that increased ESG alignment could help trim the trade finance gap in the future, agreeing with the notion that it would facilitate “easier, cheaper, [and] quicker credit approval process for SMEs”.