The World Trade Organisation (WTO) has released a new study focusing on SMEs’ lack of access to trade finance, providing a list of recommendations to address the gap.
The WTO’s strategy focuses on three fronts: firstly, encouraging global financial institutions to stay engaged, ensuring that regulations are not prohibitive; then, enhancing local financial institutions’ capacity to supply trade finance to SMEs; finally, supporting multilateral development banks’ programmes increasing the availability of trade finance.
A six-point recommendation list tackles additional issues, from enhancing existing multilateral banks’ trade finance facilitation programmes, to closing the trade finance knowledge gap, strengthening training programmes, as well as maintaining a closer dialogue with regulators and improving monitoring of trade finance provisions. The report also suggests that setting specific targets could help in mobilising and co-ordinating efforts to improve SMEs’ access to trade finance.
The lack of trade finance access for SMEs is well known to the industry, and many institutions from the International Chamber of Commerce (ICC) to the Asian Development Bank (ADB) have highlighted the issue in the past. According to the WTO report, which collated and analysed previous studies, globally, more than half of trade finance requests by SMEs are denied, against just 7% for multinational companies.
The gap is particularly evident in Africa, where the estimated value of unmet demand for trade finance is US$120bn, equivalent to one third of the continent’s trade finance market, and US$700bn in developing countries in Asia. These gaps suggest that global liquidity remains concentrated within the biggest institutions and their clients.
The WTO study reports findings from the ICC Banking Commission survey in which respondent banks cited increasing compliance and regulatory burdens as well as low country and local bank credit ratings as obstacles. 70% of respondents also recognised a role for multilateral development banks in providing access to trade finance.
“Without adequate trade finance, opportunities for growth and development are missed and companies are deprived of the fuel they need to trade and expand,” says WTO director general Roberto Azevêdo. “By working together with our partners, I believe we can further close the gaps in provision and ensure that trade finance is no longer a barrier to trade, but a springboard to growth and development.”
The WTO’s six recommendations:
- Reduce limitations in existing multilateral programmes;
- Increase programme size where possible (ideally from US$30bn to US$50bn a year);
- Set a realistic objective for total trade coverage;
- Increase capacity building support;
- Maintain an open dialogue with trade finance regulators;
- Improve the capacity of the international community to read markets and predict problems.