Despite their significant role in facilitating trade, small and medium-sized enterprises (SMEs) are struggling to access funding.
Indeed, the ICC's latest Global Survey on Trade Finance – which surveyed 482 banks across 112 countries – shows that SMEs are finding it significantly more challenging to access trade finance than their large corporate counterparts. Specifically, 53 percent of SMEs' trade finance proposals are rejected – contrasting large corporates that have 79 percent of their proposals accepted.
This is especially disconcerting given that SMEs account for as much as 45 percent of total trade transactions submitted globally, while large corporates account for 39 percent and multinationals, 14 percent.
Asian SMEs are having the most difficulty securing funding. In fact, the rejection rate of trade finance proposals in Asia is the highest globally – standing at 31 percent.
Undoubtedly, the funding gap can largely be attributed to the 2008 global financial crisis, and the following banking regulation, such as Basel III, which has resulted in many banks retrenching core markets and restricting lending.
But, over the past few years, we are also witnessing the impact of more stringent compliance standards, which are forcing banks to further reassess their trade finance businesses. This is having a disproportionately negative impact on funding available to SMEs globally – but especially in the emerging markets, where the cost of compliance is at its highest.
But, what is the significance of this funding gap on SMEs? Moreover, what steps can be taken to mitigate the situation?
SMEs are the engine of global trade
The lack of funding for SMEs is troublesome, as they play a critical role in the global economy – comprising over 95 percent of global businesses and employing approximately 60 percent of the global workforce. Moreover, they are crucial drivers of economic growth by bringing diversity, innovation, and support to international supply chains.
This is especially true in emerging markets – such as those in Asia – where SMEs are responsible for the vast majority of growth and employment opportunities. Indeed, SMEs contribute an average of over 42 percent of GDP across Asia, which is a vital region for global economic growth.
Indeed, 39 percent of global trade in 2015 has been driven by the Asian market, according to the Global Survey.
Alternative sources of funding to boost trade
In order to bolster trade in Asia, SMEs must therefore secure the necessary funding.
Three alternative sources of funding are crucial in this respect: export credit agencies (ECAs) and multilateral development banks (MDBs), specialist financiers, and partnerships between local and global banks.
Certainly, ECAs and MDBs act as a lifeline for emerging market SMEs by facilitating economic growth and development. Indeed, over 70 percent of respondents to the Global Survey felt that ECAs and MDBs respectively help narrow the trade finance gap. In fact, the Asian Development Bank (ADB) has assisted in over 11,000 transactions in Asia worth US$21.7 billion since 2004.
The second option is specialist financiers. Their appeal lies in the flexibility they provide from being subject to less regulation than global and regional banks. They are also recognised for developing close relationships with clients and for their local knowledge – allowing them to provide customised solutions.
Third, creating partnerships between global and local banks is becoming a more viable option. Indeed, this solution combines local banks' familiarity of SMEs and their business environment with the extensive resources of global banks. By sharing the funding and compliance burden, such partnerships are increasingly freeing up funding for SMEs.
Certainly, the funding gap has long stifled the growth of SMEs, particularly in Asia. However, alternative sources of funding are emerging to provide SMEs with the capacity to expand into new territories – where opportunities abound.
Compliance and KYC have always been important and today they are more important than ever. The good news is that the key stakeholders in developing international trade are taking ownership of the challenges involved.
Continuing dialogue and harmonisation of standards for compliance is the key. Otherwise, good trade business, a key driver of economic development, especially for SMEs will be frustrated with continuing negative unintended consequences.
Progress is being made but the process must be accelerated.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Vincent is Chair of ICC Banking Commission Market Intelligence. He has been actively involved in trade finance for more than a quarter of a century and has delivered technical trade finance assistance in more than 70 countries.