The Future of Trade Relies on Global Trade Finance and Infrastructure

The enabling of trade and 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.

The Lack of Investment in Infrastructure

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.

COVID-19’s Effect on Trade Financing

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.

A recent study (April 2020) surveying 700 executives at medium to large-sized businesses in the UK, the US, and China found that over 80% were considering switching from traditional banks to alternative lenders for trade finance.

Unique Barriers in Trade 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.

Perceived Risk

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.

Financing Product Availability

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.

Competitive Application

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.

Technology to cause structural change

Trade financing could greatly benefit from technological advances which may cause structural change within the industry.

Artificial Intelligence

AI enables the reduction of barriers between small businesses to financing. The current credit-score checking and background check is insufficient to make informed decisions for smaller companies. With AI and systemic research, the system can come with a better decision for all clients.

Blockchain

Blockchain has the potential to create a seamless, paperless, transparent, and safe ecosystem for trade. This can help drive down costs which introduce smaller businesses to come into the industry as well as increase efficiency.

Big Data

Big data helps increase efficiency for trade financing. A simple implementation of optical character recognition (OCR) which converts text from trade documents to digital, can increase efficiency by 50% by eliminating the use of human operators.

Recommendations

Business

  • Streamline access to technology to manage the regulatory burden and boost the availability of trade finance products especially for SMEs.
  • Partner with small fintechs and local players to get finance to wider groups of traders.
  • Work with DFIs and governments to get private finance into the system for infrastructure spending.
  • Cooperate further with other private sector organisations on regulatory frameworks.

Government

  • Enable private capital into public infrastructure projects by ensuring ease of access for private investors.
  • Work with the private sector to build inclusive regulatory frameworks.
  • Streamline compliance frameworks to encourage greater private sector involvement in trade finance.
  • Make a stronger case for businesses on the low risk of investment in infrastructure.

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