by Zubair Faisal Abbasi
Trade finance is a financial facility designed to provide financial services to the exporters and importers in a manner that exporter is paid and importer gets her imported items. Behind the trade finance system there are calculations about risk assessments of firms and countries, credit ratings, financial situation of banks, and regulations such as anti-money laundering (AML) and know your client (KYC). Significant impediments to trade finance emerge from three sets of categories such as bank specific constrains, risk related constraints, and regulatory constraints.
In lieu of this, Asian Development Bank has been collecting information in the form of survey on trade finance gap, growth and jobs . The results of the survey conducted in 2015 have been released and portray and interesting picture. The survey results show that there is a gap of around USD 1.6 trillion in the international trade finance where as the market size is around USD 6.5 to 8 tr. The survey shared information about changes in proposals and rejections, effects of AML and BASEL III (“Basel III”is a comprehensive set of reform measures, developed by the Basel Committee onBanking Supervision, to strengthen the regulation, supervision and riskmanagement of the banking sector), reasons of decreased credits, the rise of digital finance, and also effects of trade finance on jobs.
We, in the blog, want to discuss the effects on SMEs (small and medium size enterprises) and how women-owned organizations are affected. We want to discuss it because in our understanding these are the organizations which really need handholding and have enormous potential to create better economies, jobs, and equitable societies. In fact one of the contributors at Forbes, Geri Stengel says that “what is good for women is good for economy”.
The key messages from the survey are shown below:
- 56% of SME trade finance proposals are rejected, while large corporates face rejection rates of 34% and multinational corporations are rejected only 10% of the time.
- Firms report that 25% more trade finance would enable them to hire 20% more people.
- Woman-owned firms face higher than average rejection rates.
It is interesting to note that SMEs generate about 44% i.e., the highest percentage of the total proposals for trade finance and more than half of them are actually rejected. So what happens when their proposal is rejected?
Resorting to the informal sector to bridge financial gap
It is also interesting to note that AML regulations are one of the major impediments in financing SMEs while SMEs globally facing “constraints in trade finance space”. Three type of responses have been provided. First that SMEs are not good at fulfilling the requirements; second, once rejected less than half of them try to contact alternative source of financing; third, those who are rejected SMEs contact the informal sector for financing. Interestingly, the women owned enterprises, are 1.5% more likely to contact alternative finance once their initial request is turned down and they are “twice more likely to contact the informal financial provider”.
Effect of additional trade finance on jobs appears positive. It shows that those who received more finance than previous years created more jobs and they show willingness to hire more if provided more trade financing. They also envisage that increased finance may help them at least 30% increase in production and 19% increase in new businesses.
The survey shows there is a need to create opportunities to bridge the trade finance gap specially for the SMEs and shows that fintech (financial technology) companies are coming up with new solutions.
A glimpse at the situation in Pakistan
The SME sector: According to a USAID report which the USAID Trade Project preparedfor Pakistan in the context of trade with Central Asia. The report argued, “banks in Pakistan provide almost a complete range of trade finance facilities, but have only limited credit facilities to support export finance (credit risk)”. While discussing the SME sector, the report claimed, based on the data from the State Bank of Pakistan that SMEs which “contribute significantly to Pakistan’s exports account for only 6.5% of total bank loans.” The is a sad story for Pakistan’s SME clients too.
Increase in domestic finance and the use of internet: However an interesting development is emerging in Pakistan. Recently, Mohiuddin Aazim , has written a brief on the rise of domestic trade finance. In this report, it is evident that due to slow down in the global exports market, the domestic trade finance has increased. He also argues, “the growing use of internet and smart phones for transferring funds has helped (banks) attract a large number of borrowers, not only in big cities but also in mid-size urban centers”. Talking about sectoral expansion of finance for the private sector, he says, “trade finance to growing segments of agriculture and manufacturing has also been on the rise”.