$1.6Tr finance gap hurts MSMEs most, says ICC
The International Chamber of Commerce (ICC) has welcomed the United Nations’ declared commitment to work on ensuring access to trade finance for small businesses and entrepreneurs, amid an estimated US$1.6 trillion trade financing gap.
The Economic and Social Council (ECOSOC), the UN’s principal body for the implementation of sustainable development goals, issued a call for full and equal access to trade finance for micro, small, and medium-sized enterprises (MSMEs).
ECOSOC’s call was made at its recent forum on financing for development, as it committed to look into the causes of the burgeoning trade finance gap.
In a statement issued May 24, ECOSOC underscored the importance of ensuring cost-effective trade financing for small businesses and entrepreneurs, as it officially acknowledged the $1.6 trillion trade finance shortage reported by the ICC and Asian Development Bank.
ECOSOC vowed to carry out an official review of the trade financing gap and its underlying causes, and release its findings and recommendations in a report at its next annual meeting in April 2018.
The council continued: “We note that many micro, small and medium-sized enterprises are not benefiting sufficiently from the international trading system, and have difficulties integrating into global value chains.”
It added that it will “promote policies that encourage access by micro, small and medium-sized enterprises to adequate and affordable trade finance at all levels.”
In its statement issued the same day, ICC said the decision to mandate an official UN review of the trade financing gap is “a welcome step in addressing this now chronic problem.”
It further said that small businesses face increasing difficulties accessing bank finance to support international transactions.
Lost opportunities
“This means lost opportunities to use the international trading system to support inclusive growth and job creation-particularly as the Internet opens up opportunities for many small businesses to trade internationally,” the council added.
ICC stressed that short-term financing is an essential tool to support small business growth and sustainability, and the growing trade finance shortfall “hurts companies and countries that need it the most.”
Access to trade finance is generally recognized to be key to both the future outlook of global growth and the fulfilment of the UN Sustainable Development Goals (SDGs). A shortage of trade finance hurts SMEs the most, which represent around 95% of the world’s companies and 60 percent of private sector jobs, said the chamber.
Recent studies point out that the shortfall in trade finance globally has grown since the peak of the 2009 financial crisis, with the biggest gap provision hitting developing and emerging economies in Africa and Asia.
Moreover, ICC research suggests that almost 60 percent of applications for trade finance turned down by banks come from SMEs, “suggesting that entrepreneurs and small business owners are particularly impacted by this trend.”
In the Philippines, surveys have shown that MSMEs often turn to relatives, friends, or loan sharks for funding due to their limited access to bank loans.
The now chronic trade finance shortfall is largely due to the unintended effects of global financial crime regulation, said the ICC.
“However, the complexity of global financial crime regulation-and associated regulatory and reputational risks-has resulted in banks adopting an extremely cautious approach to managing risk and as a consequence are reducing and exiting certain types of business,” it said.