April 6, 2018

SME trade finance gap can be filled by institutional investors

Year after year, the Asian Development Bank’s (ADB) Trade Finance Gaps, Growth, and Jobs Survey comes to the same damning conclusion: Small and medium enterprises (SMEs) are still facing a significant trade finance gap. In 2016, it stood at US$1.5tn.

Meanwhile, the International Chamber of Commerce’s annual ICC Trade Register also sings a repetitive tune - that of trade finance as a low-risk asset class. The 2017 register, published last month, found (once again) that the expected loss of trade finance products continues to compare favourably against other similar asset classes.

This song and dance has been going on for almost a decade, yet very little has been done to connect these two pieces of the puzzle. But this year, the landscape is shifting, and it’s all because of technology.

Already, the 2017 ADB report found marginal progress, which it pegged on fintech developments. In particular, e-commerce providers such as Amazon, PayPal, eBay and Alibaba have made great strides in offering less cumbersome loans to SMEs, while providing them with targeted training and advice. Distributed ledger technology (DLT) advances are also expected to broaden SMEs’ access to trade finance by automating processes and cutting costs on financiers’ side.

Both reports point to two other obstacles that haven’t yet been removed by technological developments: performance risk assessment, and financial crime regulation compliance - issues that need basic infrastructure standards and rules to be addressed.

And while the SME trade finance gap was reduced by US$1mn between 2015 and 2016, its first drop in three years, much more could be done if institutional investors were brought into the equation.

With the low risk profile of trade finance already well-established, all investors need to add liquidity to the market is the right technology platform - one that gives them transparency and predictability over their investments. This added layer of distribution can help banks and other trade finance providers to free up capital and risk appetite to reach smaller and smaller corporates.

This is what Tradeteq provides: an efficient cloud-based platform where originators can present their trade finance portfolios for distribution, and institutional investors can have visibility over a low-risk asset class they tend to be unfamiliar with - all with standardised reporting processes and maximum transparency.

In order to close the SME trade finance gap, technology needs to focus not only on corporate-facing platforms, but also on the distribution side, connecting originators and investors to essentially allow corporates of all sizes to tap into the trillions-worth of assets under management for their financing needs.