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Challenges to Accessing Trade Finance

Published on 07 Jun,2021

Making sense of the tools in operation due to which trade financing can be conducted and the ease with which said tools allows for exporters, importers and companies alike to conduct business transactions has been discussed below. This article seeks to shed light on the challenges associated with being able access trade financing. 

Trade Finance: An Explanation

The term trade finance can be understood as one that holds within it the financial implements, instruments and products availed of by an expansive range of companies that do so such that global trade and commerce can be carried forth. By availing of the services on offer under trade finance, it is permissible for importers and exporters alike to run business transactions with great amounts of efficiency, and transparency. Readers must understand that trade finance has within its sphere a wide gamut of financial tools and services that companies and banks take advantage of in order to allow for their trade to take place.

Operations that Allow for Trade Financing to Occur  

Owing to the fact that trade financing is a broad term that includes a wide variety of services on offer, the more popular ones have been examined below along with an understanding of what field within trade financing is applied.

Services offered include but aren’t limited to currency protection, documentary collection, export financing, guarantees, inventory financing, letters of credit and vendor financing.

Trade financing can be applied to the realms of finance, energy, metals and non-metallic minerals, power generation, renewables and transport in addition to others.

Paramount to the facilitation of trade financing operating at both, the domestic and international level, is the inclusion of a third party that helps oversee transactions between the buyers and sellers of goods and services. Their inclusion is a must as they help mitigate risks pertaining to payment and supply.

Apart from banks, trade finance-oriented companies, export credit agencies, import and export agents, insurers, and service providers each partake in trade finance. 

Challenges to Accessing Trade Finance Services

While trade financing constitutes 80 to 90 percent of the global trade taking place, it isn’t without hiccups and challenges. There exist a number of challenges associated with being able to access and avail of the services provided under trade financing. 

Take for instance the issues experienced by exporters and importers who belong to countries that aren’t well developed. This community is more often than not lumped with having to make vast fee payments which cause their exchange costs to rise. Furthermore, the low interest rates and fees on offer by international banks pander to and favor traders hailing from developed countries. 

Next, if we consider intra-African trade, it has often been thought of as a pertinent tool in place to encourage and promote economic development in Africa. Yet African traders are challenged by the gap that exists in trade finance. This gap is most pronounced and challenging when set against the credit availability on offer to traders located in Africa. The primary reason this gap persists is due to the underdeveloped African banking sector which lacks superior quality risk assessment capabilities. 

The Coronavirus pandemic has brought with its own set of challenges that have resulted in governments of varied countries seeing out their Export Credit Agencies (or ECAs) to account for gaps in financing that are the result of the private market. Their aim here is to reduce the impact brought on by the pandemic by making use of both, short-term as well as medium and long-term trade finance. 

Short term trade finance presently faces problems pertaining to accessibility. The increased costs associated with short term financing that small to medium enterprises must face interspersed with high rates of applications being rejected are part of the accessibility challenges. 

In comparison, medium- and long-term trade finance appears to be more resilient however it too has witnessed a decrease in its volume which has fallen by 34 percent. The number of medium- and long-term trade financing operations focused on credit transactions too have witnessed a fall by 15 percent. 

Conclusion –

Governments of varied countries ought to reach out to their ECA’s as they might be able to improve short term trade finance by focusing their attention towards liquidity and expanding its present capacity. Trade financing is set to grow to a valuation of USD 10,426.67 billion by the end of 2026 which indicates that the barriers associated with accessing trade finance should be broken down by then.

References – 

https://www.hoganlovells.com/en/publications/challenges-faced-in-trade-finance

https://www.oecd.org/coronavirus/policy-responses/trade-finance-in-the-covid-era-current-and-future-challenges-79daca94/

https://www.prnewswire.com/in/news-releases/trade-finance-market-size-is-projected-to-reach-usd-10426-67-billion-by-2026-at-cagr-5-37-valuates-reports-876449882.html

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