The global trade finance gap widened to USD 2.5 tn in 2022, which accounts for 10% of global merchandise trade,according to an Asian Development Bank (ADB) survey (pdf). The gap — which jumped 47% from its 2020 level of USD 1.7 tn — came off the back of post-pandemic macro headwinds, increased rates of rejection of trade financing requests, as well as the Russia-Ukraine war.

The trade finance gap posed a major supply chain issue for companies: Inadequate funding and elevated transportation costs were voted as the two biggest supply chain challenges faced by firms in 2022, the survey added. Around 34% saw insufficient funding as a barrier to efficient supply chains, with 27% voting high transport costs as a reason and 12% raising concerns around the lack of visibility into supply chain operations.

Reliable logistics needs sufficient funding, firms say: Some 21% of firms highlighted access to sufficient funding as a solution to boost supply chain resilience and reliability of logistics providers, whilst 16% of firms see digitization as a fix.

Some of it is technical: Some 20% of banks said they rejected requests from companies for financial support to help sustain their import and export operations. They cited problems concerning know-your-customer compliance, inadequately presented documentation, and outlooks on high country risk. Some 54% of banks agreed that low company credit ratings were another major reason behind rejections, while 11% said they had limited risk tolerance, and 10% rejected applications from SMEs who lacked valuable assets.

But a lot of it is macro: Some 64% of banks cited the higher interest rate environment as a key barrier to providing trade finance, while 60% of banks voted economic uncertainty on the back of the war in Ukraine as another significant obstacle funding trade.

SMEs had it hard: The rejected applications had a bigger impact on SMEs as opposed to larger companies, the survey found. SMEs accounted for 38% of applications submitted to banks in 2022, and for 45% of the rejections.

And the outlook for 2023 + 2024 isn’t great: Some 23% of firms agree that economic uncertainty is set to worsen the gap in 2023 and 2024, according to the survey. Meanwhile, some 22% cited a lack of access to finance as another potential reason for the widening of the gap, and 16% cited changes in trade policies.

Narrowing the gap: Banks need to introduce additional capacity to further enhance trade finance as an investable asset class, through more SME-targeted credit programs, deep-tier supply chain finance, and attracting new pools of capital, ADB says.

Companies + banks both think digitization is also key: More than 63% of banks agreed that boosting digitization streamlines regulatory compliance checks while promoting enhanced client profiling and risk management for SMEs. Companies agree, with some73% of surveyed firms pointing out the substantial efficiency enhancements experienced due to digitization, including the standardization of digital trade documentation processes.

The caveats: A major obstacle to digitizing business and trade portfolios is attributed to the high costs associated with the process. Further cost-related issues include understanding and implementing technology, insufficiency of globally established laws and standards, as well as a lack of interoperability of existing platforms.

One silver lining: More banks are leaning towards sustainable trade financing. Around70% of banks claimed to have established a definition for climate and green trade finance transactions, with 74% of banks planning to shift towards sustainable and ESG-aligned financing. 82% of banks believe the shift to be a strategic priority, according to the survey.

But standardization is still needed: ADB highlighted the need to harmonize sustainability standards and enhance sustainability-related data collection and reporting mechanisms in order to boost sustainable trade finance.

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