As global supply chains shift, banks start to go green, and China’s Ant Financial launches a digital trade finance platform, what is the trade finance outlook for small to medium businesses?
When people think about supply chains and trade they usually think about China, which joined the World Trade Organization (WTO) in 2001.
Back then, China had annual exports of around US$266bn and imports of US$243bn, according to the World Bank. By 2018, those numbers were US$2.4tn of exports and US$2.2tn of imports. China is now central to global trade.
Even Covid-19, which brought many parts of the global economy to a hard stop, has arguably not dented China’s trade position. Global supply chains have held up better than the headlines suggest. There is, however, a political shift that may have major impact.
Mark Williams, Chief Asia Economist at Capital Economics said in a September 2020 research note:
“The rift between China and the major developed nations…[will mean] new opportunities for countries that are able to position themselves as alternative manufacturing bases to China…This decoupling will ultimately have a much bigger impact on the distribution of global supply chains than the pandemic.”
Why small companies in emerging markets need trade finance
But it might not be easy for companies in low-income economies to take up that slack. They may lack the skills to replicate all aspects of China’s exports.
Perhaps more importantly, smaller companies often lack access to funds, including trade finance.
Even before the 2020 pandemic, small to medium enterprises (SMEs) in emerging market struggled to get trade finance. The World Economic Forum (WEF) estimated in February 2020 that the gap between demand and supply could reach US$2.5tn by 2025 “as supply chains move away from China to poorer developing countries”.
What could help SMEs access trade finance?
Alexander R Malaket is President of Opus Advisory Services International. He says: “A combination of factors must be brought together to solve this critical issue, including:
- education of SME founders around financial literacy and developing ‘bankable proposals’ the application of technology to address the KYC [‘know your customer’], client onboarding and client management
- and servicing costs, which tend to be highest with MSMEs [micro-, small and medium-sized enterprises].”
Malaket adds that “fundamental reconsideration” of traditional credit adjudication will be important. This is because SMEs do not have the cash or the assets typically required of traditional lenders. Similarly, channels that facilitate simple and efficient access to funds will be important.
Ant Group, the Chinese BigTech, launched Trusple in September 2020. Trusple stands for ‘trust made simple’ and its a platform that aims to do all of the things Malaket would like to see. Ant Group says that SMEs, in particular, will benefit from using Trusple.
Traditional banks may struggle to compete with solutions like Trusple, at least in the near term. Some trade finance banks have taken a battering over the past few months. The market for commodity trade finance is the particular pain point – thanks to a storm of fraud losses, the pandemic, and low margins.
Jean-Francois Lambert, at Lambert Commodities says: “When you have to make choices about how you deploy your capital as a bank, you don’t prioritise SMEs. Doing international business is going to be more challenging for SMEs right across the piece, not only in commodities.”
SMEs need to go green
But the problem for small companies – with a limited trading history and trading network, and limited ability to absorb losses – is that the more uncertain the economy, the more they need trade finance.
The International Chamber of Commerce (ICC) has set up a high-level advisory group to work on helping SMEs access trade finance. It’s co-chaired by Victor K Fung, Chairman of the Fung Group, and Marcus Wallenberg, Chair of Skandinaviska Enskilda Banken (SEB).
The aim is to “help build a new multilateral global economy that is more sustainable and inclusive”.
Can the market make that happen?
Lambert says: “In a few years from now, banks will only be able to do green financing.” Lambert argues that SMEs need to go green faster than other firms.
“If they embrace that, they will be able to get support from multilateral companies, from government investment firms and from banks. If they miss that boat, that will be a further complication for them.”
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