The enabling of trade would not be possible without financing and infrastructure. However, this sector is overlooked by many and misconceptions regarding investment risk paired with regulatory pressures drive down prospects of investments.
Possible solutions for this would be by enabling investments into private capital to specialise in infrastructure investments. This, however, requires further coordination with the government and continuous innovation in infrastructure planning and development.
Yet many of these funds do not invest in infrastructure. This is due to the plethora of investment opportunities that are present, the lack of availability of marketable financial products as well as a history of failure, scandals and corruption.
With the uncertainty the COVID-19 pandemic brought onto trade and cross-border activities, the risk profiles commercial banks place onto trade financing has increased. Since the pandemic, commodity trading has suffered from low volume and high loan losses. Trade commodity finance revenues for banks globally dropped 40% year-on-year in the second quarter of 2020. ABN Amro, one of the world’s most active commodity trading financiers, announced that they would discontinue all commodity financing.
As with most cross-country industries, trade comes with a plethora of regulatory requirements. This proves to be a significant barrier; however, many more exist.
In reality, the risk of default in trade finance transactions is small. Generally at around 0.2% on average globally, with little variation across countries, however many still believe it as a risky investment.
Given the decline in network banking and international banking relationships, combined with the more risk-averse strategy pursued by many financial institutions today, overall access to trade finance products has decreased over the last decade.
60% of trade finance requests by SMEs are rejected, compared to only 7% of requests by multinational companies. Some estimates suggest that 75% of all trade finance rejections relate to SMEs.
Trade financing could greatly benefit from technological advances which may cause structural change within the industry.