Lowering the Trade Finance Gap to Drive Growth and Financial Inclusion
According to the World Trade Organization, 80-90% of world trade relies on trade finance. What happens if banks reject a great number of businesses requesting access to financing? We're left with a staggering trade finance gap that is currently at $1.5 trillion and is hampering economic growth and development.
To better understand the challenges facing trade finance and its effects on the global economy, we interviewed ConsolFreight's Chief Strategy Officer, Alejandro Gutierrez.
Alejandro has over a decade of industry experience in the supply chain, logistics management, and project leadership. He is applying his expertise to provide a game-changing solution that will create financial inclusion for businesses that can not access trade finance through traditional processes.
What are the main limitations for companies to access trade finance?
International trade relies on processes that have not changed in hundreds of years. Financial institutions are central to this model because they are the ones that are providing financing for transactions. When small to medium enterprises (SMEs) request funding for trade, they are often rejected. This is surprising as trade financing is one of the safest forms of financing with very low default rates.
SMEs are at a disadvantage and often unable to obtain financing because the current lending criteria does not accurately assess their ability to repay the loan. This means that financial institutions are incorrectly measuring the risks associated with lending to these companies.
In its annual report, the Asian Development Bank published that there was $1.5 trillion in rejected financing proposals in 2018 and an article in the Economist stated that banks cited “country risk” the reason for 52% of these rejections. The World Economic Forum predicts that by 2025, rejections could further increase to be worth $2.5 trillion. Why are these rejections occurring and how will this widening gap affect international trade / the global economy?
Many of these rejections occur in developing countries and banks are probably not taking into account the real characteristics that define the businesses. There are many factors contributing to the cited "country risk", such as local cultures and political landscapes, currency power and exchange, and unfair regulatory requirements.
The unfortunate part is that these rejections hinder economic growth and in turn, continue to place a barrier in the development of small and medium-sized businesses.
How would the logistics industry / global economy transform if access to trade finance increased for this unmet demand?
Trade drives the growth of economies. If the staggeringly large unmet demand was addressed, it would have a significant impact on the local economy of the business that gains access to trade. This is especially true in developing countries, which will experience job creation as a result of the growing trade industry. Trade finance is frequently referred to as the fuel for economies to grow.
Financial institutions are often unwilling to provide trade financing to small-to-medium enterprises in developing countries. Why might this change with the TradeForward™️ platform?
Financial institutions do not have a way of guaranteeing that their loans will not default. The banks can’t base their decisions on the credit history of the SME because it simply does not exist. There are also no collateral assets or the value of the assets is not enough for the bank to protect the loan. This makes loaning funds to SMEs very risky from a financing point of view.
TradeForward™️ allows banks to mitigate this risk by using the commodity being traded as collateral in the loan. This opens the doors for SMEs to obtain trade financing. With the current process, lenders see credit as a liability; with TradeForward™️, we bring real liquidity to the lender as opposed to a liability.
What benefits will freight forwarders and consignees see by joining the TradeForward™️ platform?
By joining our ecosystem, they will have access to a network of logistics providers, financial institutions, and insurers. Our platform streamlines the process of finding a trade partner, securing financing, and completing a transaction.
The biggest incentive of all is the chance to create a different level of relationship with existing clients; it is the chance for a logistics provider to shift from being the coordinator of trade to being the enabler of trade and subsequently a business accelerator for its clients. Finally, a new revenue stream will be created for logistics providers that are able to finance transactions.
By housing the process in one place, we are able to create an environment that fosters collaboration that is greater than what was possible before. Increased collaboration will allow a greater volume of trade. As more stakeholders join the platform, they will see decreased costs as the result of economies of scale.
Any last thoughts?
This is the right time to disrupt a business model that has been unchanged for centuries. The fact that we finally have the technology that can securely implement that change allows us to design an improved, streamlined version of the process. With these services, we will be able to provide financial inclusion for the SMEs.
We will generate technological inclusion for freight forwarders and the rest of the participants in the ecosystem.