In many challenging markets, there is limited access to finance for trade. This creates a gap between the funding needs of entrepreneurs and small business owners and what they are actually able to obtain in the market. Trade finance can fill this gap and facilitate global commerce at all stages of the supply chain, especially in developing countries.
Trade is the lifeblood of economic development: countries import and export food, raw materials and finished products, capturing the value of their financial, economic, and human capital in the process.
When companies trade, they grow. And when they grow, they reinvest in the communities around them by hiring new employees. But in many challenging markets, access to finance for trade can be hard to come by, leaving a gap between the funding needs of entrepreneurs and small business owners and what they are actually able to obtain in the market.
Without adequate financing to support their international trade, the small and medium enterprises that account for as much as 99 percent of jobs in many emerging markets face serious working capital limitations, challenging their growth—and even their survival.
Why trade finance?
In the developed world, most goods and services are paid for after delivery. However, in emerging markets, exporters demand third-party verification of creditworthiness and payment up front as soon as goods are shipped. Too often, though, banks are hesitant to provide financing to little-known companies in distant, riskier markets.
“When you are in Africa, no one wants to work with you without a confirmed letter of credit,” says Ashu Gulati, group finance director at Synarge Group, an auto-parts importer in Dar es Salaam, Tanzania. The reluctance of banks to extend credit to successful businesses like Synarge dampens trade volume and stifles opportunities for expansion—both at the firm level and throughout the entire economy.
Emerging market businesses that locate new customers overseas and find themselves short of export financing often have difficulty filling large orders and paying for international shipments because of their working capital constraints. Many local commercial banks have limited or no tailored financial products for suppliers and exporters to finance sales not backed by letters of credit.
IFC has stepped in to fill this gap through its Global Trade Finance Program, which since 2005 has grown to include nearly 500 confirming and issuing banks in its global network. Through this initiative, which issued $5.9 billion in trade guarantees in fiscal year 2012, IFC is expanding access to financing for emerging market firms to promote job creation and spur economic development.
Developing countries, especially those with less-diversified economies, face growing threats to the supply of credit provided by global banks. A recent International Monetary Fund report noted that European banks, which provide almost 80 percent of global trade finance for commodities, may sell off as much as $3.8 trillion in assets by the end of 2013 to meet stricter capital requirements under Basel III. As belts are tightened, trade loans and emerging market portfolios are among the first assets cut, separating local firms from opportunities abroad.
But while European banks are withdrawing, economists and politicians are looking at these same markets to lead the way back to sustained global growth. The most effective way to stimulate these economies is to ensure the continued availability of trade finance.
As a group, developing countries have led global trade growth in each of the past three years – in many cases by looking to one another as trading partners. The World Bank projects that within 10 years, goods shipped from one emerging market to another will represent up to half of all global trade, up from less than a quarter of global trade in 1997.
Trade finance is the engine of an estimated $14 trillion in annual global commerce and is fundamental to the movement of goods at all stages of the supply chain, especially in developing countries. Trade helps increase the size of the economic pie, providing the most direct route to growth and prosperity—whether for individual firms or for entire economies. Trade finance is essential to make that happen.