Mind the gap: call to reduce finance barriers
The trade finance gap remains an impediment to global trade, according to a report by investments firm BNY Mellon.
The report, based on a survey conducted between 2018 and 2019 among 100 global, regional and domestic banks as well as specialist trade providers, among others, found that the $1.5-trillion global trade finance gap is detrimentally impacting development and investment flows with many companies around the world battling to access trade finance.
CONSTRAINTS
The survey found that more than a third of trade finance applications were rejected during the period under review among participating banks. According to the report, more than 70% of respondents cited compliance constraints and the inability of applicants to provide quality Know Your Customer (KYC) information.
“As a result, banks have had to be more selective in who they do business with and subsequently move away from geographies and sectors that appear to hold greater risk for less reward,” says the report.
Africa is not exempt from this trade finance gap. The continent is estimated to have a trade finance gap of more than $100bn, despite efforts made to unlock intra-regional trade to boost economic growth.
Large corporates in Africa typically absorb the lion’s share of available trade finance via domestic and international banks which account for about 30% of the total trade transactions on the continent. According to the African Development Bank, bank inter mediated trade finance accounts for about 20% of Africa’s total trade. Small and medium-sized businesses, as well as first-time applicants for trade finance, typically battle to access trade finance credit facilities from banks.
African Development Bank has called for more efforts to reduce the barriers that prevent small and medium-sized businesses, and new entrants, from accessing trade finance services coupled with reforms and policies to reduce what it calls “information asymmetry” and facilitate credit information sharing.
INTEGRATED
In the foreword of the African Development Bank’s Trade Finance in Africa: Overcoming Challenges report, bank president Akinwumi Adesini wrote: “For Africa to improve its competitiveness, raise productivity and achieve robust and inclusive growth, it is essential that African countries become more integrated into the global economy and have a strong and well diversified export base. For this to happen, trade finance must be genuinely accessible and affordable to those who need it.”