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November 18, 2021

Report urges trade finance system overhaul to support SMEs

A new report is calling for a revamp of financial systems to offer greater support to small businesses.

By Hannah Abdulla

The report aims to raise awareness and address the challenges facing micro, small and medium-sized enterprises (MSME), particularly in the emerging markets, in accessing the trade finance needed to support their growth and the global recovery. According to the Asian Development Bank, the trade financing gap reached US$1.7 trillion in 2020, an increase to 10% of global goods traded, from 8% in 2018. MSMEs account for 40% of trade finance application rejections by banks.

The report from the International Chamber of Commerce, in collaboration with Fung Business Intelligence and supported by McKinsey & Company outlines a vision for the global trade finance ecosystem.

It argues today’s trade finance system is characterised by a complex web of decades-old manual processes, and more recent isolated “digital islands”— closed systems of trading partners formed to address specific pain points. The report, therefore, sets out a road map for digitally connecting and facilitating interoperation among existing networks through sets of shared standards, processes, protocols, and guiding principles.

The report is based on over 150 interviews with end-users and subject matter experts in 12 countries, and an ideation and review press covering leaders from trade, finance and technology.

Key to the vision is to drive access for MSMEs to these emerging digital processes by scaling innovations such as digital identity, paperless trade, and transaction-based credit assessment in addition to traditional balance sheet credit scoring.

John Denton, Sec-Gen of the ICC said: “The difficulties faced by small businesses in accessing trade finance have almost become an accepted facet of international commerce since the global financial crisis. Today’s report is a direct challenge to this status quo — setting out a roadmap for systemic change to address the root causes of the estimated $1.7 trillion trade finance gap. If we want to enable trade as a real vector of peace and prosperity in the wake of Covid-19, it’s time to stop applying sticking plasters and tackle the need for wholesale reform and effective digitalization of a market which is currently unable to serve the needs of the real economy.

Victor Fung, co-chair of the ICC ATF says: “With global trade under enormous strain, there is an urgent need to overhaul and modernise financial systems that support the lifeblood of the world economy. Buyers and suppliers would like to see more liquidity, lower costs, less transaction complexity, and greater availability to credit markets. The entire trade ecosystem has to become far more efficient and benefit from digital innovation.”

Bob Sternfels, global managing partner of McKinsey adds: “We are proposing real-world solutions, many of which already exist in some form, to address long-standing issues in global trade finance: the report sets out a global framework for existing and future standards, protocols, and principles, with the goal of connecting all those who participate in the global trade finance ecosystem to both present and future networks. This will be a complex project. But its benefits would be both wide and deep, with the prize being a global economy that is more sustainable and inclusive.”

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