Tradefinsme e

Trade finance
and SMEs
Bridging the gaps in provision
Cover photo: Makaibari Tea Estate factory in
Kurseong, Darjeeling.
Trade finance
and SMEs
Bridging the gaps in provision
Disclaimer
This publication and any opinions reflected
therein are the sole responsibility of the WTO
Secretariat. They do not purport to reflect the
opinions or views of members of the WTO.
Contents
Foreword by WTO Director-General Roberto Azevêdo 4
Summary 6
Introduction 8
Chapter 1 – Trade finance in brief 10
Chapter 2 – The importance of trade finance 14
Chapter 3 – Quantifying the financing gap in developing 20

countries
Chapter 4 – C
urrent efforts to address trade finance 28
issues in developing countries
Recommendations 36
Bibliography 38
Abbreviations 40
TRADE FINANCE AND SMES | 3

Foreword by
WTO Director-General
Roberto Azevêdo
The availability of finance is essential for a The availability of trade finance is often cited
healthy trading system. Today, up to 80 per cent by businesses around the world – particularly
of global trade is supported by some sort of SMEs – as a major barrier to their capacity
financing or credit insurance. However, there are to trade. We should hear this call and act
significant gaps in provision and therefore many to improve provision. Indeed, I believe that
companies cannot access the financial tools there are a number of steps we can take.
that they need. Without adequate trade finance,
opportunities for growth and development This report looks at these issues in detail.
are missed; businesses are deprived of It brings together recent surveys and
the fuel they need to trade and expand. research to highlight the scale of the gaps
in trade finance provision, it considers the
Small and medium sized enterprises (SMEs) face actions that are currently being taken on
the greatest hurdles in accessing financing on this front, and it outlines some potential
affordable terms. This is of particular concern as future actions. Such actions could include:
SMEs are a leading driver of trade, employment enhancing existing trade finance facilitation
and economic development. Research shows programmes; helping local banking sectors
that SMEs face these hurdles in both developed to grow by improving training programmes;
and developing countries, but the challenges better monitoring of problems with provision;
are greatest in lower income countries. This and maintaining a closer dialogue with
tends to be due to their relatively small banking regulators. The report suggests that setting
sectors and the lack of appetite among global specific targets could be an effective way
financial institutions to do business in those of mobilising and coordinating efforts
countries – a problem which has increased towards closing the gaps in provision.
significantly since the financial crisis.
4 | TRADE FINANCE AND SMES

Inter-institutional partnership and dialogue
will be an essential ingredient for success
here – and we have a strong track-record of
cooperation on which to build. I pay tribute to
the work that many organisations are already
doing and look forward to enhancing our work
with a range of partners to step up our efforts.
Together we can ensure that trade finance
provision is no longer a barrier to trade but a
“
springboard to growth and development.
Today, up to 80
per cent of global
Roberto Azevêdo
trade is supported
WTO Director-General by some sort
of financing or
credit insurance.

Summary
• Up to 80 per cent of trade is financed by credit or credit insurance, but coverage is not uniform.
A lack of trade finance is a significant non-tariff barrier to trade, particularly (but not exclusively)
in developing countries.
• Small and medium-sized enterprises (SMEs) face the greatest hurdles in accessing affordable
trade financing. In some large developed countries, up to a third of SMEs face such challenges.
SMEs account for 20 per cent of US exports, and 40 per cent of EU exports.
• Globally, over half of trade finance requests by SMEs are rejected, against just 7 per cent for
multinational companies. Global liquidity tends to be concentrated within the biggest institutions
and their clients.
• SMEs in developing countries face even greater challenges in accessing trade finance. The
estimated value of unmet demand for trade finance in Africa is US$ 120 billion (one-third
of the continent’s trade finance market) and US$ 700 billion in developing Asia. Bridging these
gaps in provision would unlock the trading potential of many thousands of individuals and small
businesses around the world.
• Gaps in trade finance provision are highest in new “frontier” countries for trade, where trade
opportunities are increasing as global production patterns evolve.
• Trade financing gaps arise due to a mix of structural and development factors. The disinclination
of the global financial sector to invest in developing countries after the 2008-09 financial crisis
compounds this problem as local banking sectors are often not equipped to fill the market gap.

• With so many businesses deprived of the support that they need to grow, action is needed to
address these trade financing gaps. This was highlighted in the UN’s Financing for Development
agenda.
• Various steps are already being taken to tackle this issue on three fronts: first, to encourage
global financial institutions to remain engaged and to ensure that regulations are not
prohibitive; second, to increase the capacity of local financial institutions, and third, to provide
support measures to increase the availability of trade finance via multilateral development banks.
• A number of further steps could be taken, including:

- enhancing existing trade finance facilitation programmes to reduce the financing gap by
US$ 50 billion;
- reducing the knowledge gap in local banking sectors for handling trade finance instruments
by training at least 5,000 professionals over the next five years;
- maintaining an open dialogue with trade finance regulators to ensure that trade and
development considerations are fully reflected in the implementation of regulations; and
- improving monitoring of trade finance provision to identify and respond to gaps, particularly
relating to any future crises.
• A new effort to support SMEs’ access to trade finance, along the lines set out here, could have
a very significant, positive impact.
• Strong inter-institutional dialogue and coordination will be required to take this work forward,
building on a track-record of successful cooperation between the WTO and its partners in this field.

Introduction

Trade is an important driver of development problem can gradually be solved through local
– but, to be effective, adequate financing financial sector reform, as has been the case in
and capacity-building assistance is essential. emerging markets where the financial sector’s
Credit and credit insurance help to oil the ability to support the trade sector has gradually
wheels of trade by bridging the gap between increased. However, the development of the
exporters’ and importers’ differing expectations local financial sector would typically benefit from
about when payment should be made. It is the presence of global banks and other actors
therefore important to identify financing gaps and the transfer of pertinent knowledge – but
and address them wherever they may appear. in the post-financial crisis era global banks
are less inclined to invest in many developing
Trade financing is often taken for granted in counties. This harms the prospects for the supply
developed countries because importers and of trade finance in the very locations where
exporters are backed by mature financial the trade potential is the greatest. As a result,
industries. Still, even in these countries, small there are large financing gaps, particularly in
and medium-sized enterprises (SMEs) face Africa and Asia, which need to be addressed.
hurdles in obtaining financing because they
typically have less collateral, guarantees
and credit history than larger companies.
Hence, trade financing can be an important
factor in determining SME contributions
to economic growth and development.
Adequate provision
Trade finance may be a greater concern for of trade finance
SMEs in developing countries, and particularly
in emerging market economies as they account
is essential
for an ever-increasing share of global trade.
Developing country SMEs may face some
as developing
of the same obstacles as their counterparts
in developed countries, such as recognition
economies seek
of creditworthiness, but they also face new to benefit from the
challenges, such as smaller, more selective
and perhaps less advanced local financial trade opportunities
industries. A key challenge in many developing
countries is access to the knowledge and skills offered by
required for handling trade finance instruments.
shifting patterns
Adequate provision of trade finance is essential
as developing economies seek to benefit from of production.
the trade opportunities offered by shifting
patterns of production. Some argue that the

Chapter 1
Trade finance is
often described as
a lubricant of trade.

Trade finance in brief
Trade requires credit or ability of firms (i.e. large suppliers) to extend
credit to their trading counterparties (buyers)
payment guarantees is enhanced by opportunities to discount
Only a small part of international trade is their receivables (receiving cash immediately
paid cash in advance, as importers generally against documentation such as the export
wish to pay, at the earliest, upon receipt contract, a process called “factoring”), or to
of the merchandise in order to verify its mitigate payment risk by purchasing trade credit
physical integrity on arrival. Exporters, insurance. Long-standing relationships between
however, wish to be paid upon shipment. buyers and sellers may lead the two parties to
choose to settle transactions on “open account”,
In order to bridge the gap between the time at
meaning that the credit for delayed payment is
which exporters wish to be paid and the time at
automatically granted by one or the other party.
which importers will pay, a credit or a guarantee
of payment is required. Trade finance provides the
• Bank-intermediated finance
credit, payment guarantees and insurance needed
to facilitate the payment for the merchandise or Letters of credit are widely used in commodity
service on terms that will satisfy both the exporter trading, including between developing
and the importer. As such, trade finance is often countries. They are written commitments to
described as a lubricant of trade. Most trade pay typically issued by the bank of the buyer
credit, payment guarantees and insurance are (importer, company A) on its behalf to the
short-term, with a standard maturity of 90 days. seller (exporter, company B) or its bank (see
In certain cases, trade credit can be extended for Chart 1.1). The letter of credit provides the
longer periods of time, particularly for categories seller with a guarantee that the purchase will
of goods subject to longer production and delivery be paid, and carries a number of obligations
cycles such as aircraft and capital equipment. for the seller (delivery conditions, submission
of documentation) and the buyer (notably the
A key aspect of trade finance is that it helps guarantee that if the buyer is unable to pay,
mitigate the risk of cashless trade transactions. the bank will cover the outstanding amount).
There are two main forms of trade finance: Most letters of credit are governed by rules
known as Uniform Customs and Practice for
• Inter-company credit Documentary Credits, promulgated by the
The credit is directly accorded by the buyer to International Chamber of Commerce. Letters
the seller (“buyer’s credit”), or inversely by the of credit are typically used by importing and
seller to the buyer (“seller’s credit”), depending exporting companies for large purchases, and
on the ability of one or the other to extend will often negate the need for the buyer to pay
credit, and the moment at which the two parties a deposit before delivery. In effect, a letter
agree that the final payment is due. Such a of credit substitutes the creditworthiness of
simple transaction can nevertheless become a bank for the creditworthiness of the buyer.
complex given the shape of modern trade, Letters of credit are not the only form of bank-
characterized by large “eco-systems” of supply- intermediated trade finance. Outright lending by
chain relationships. In such supply chains, the banks can involve pre-shipment export finance

Chart 1.1: Letters of credit
Sales contract
Company A: Buyer/applicant Company B: Seller/beneficiary

Seller’s bank
Buyer applies for
authenticates
letter of credit
letter of credit and
credits Company B
Buyer’s bank
issues
Bank A letter of credit Bank B
and sends to
seller’s bank
either in the form of working capital for the As highlighted in the following section, it is difficult
exporter to purchase the raw material needed for to determine the exact share of the two main
subsequent manufacturing of final goods, or on forms of trade finance, inter-company credit by
a with-recourse basis, against either a confirmed open account and bank-intermediated finance.
export order from the buyer or a letter of credit. According to global surveys by the International
Monetary Fund (IMF) and the Bankers’ Association
for Finance and Trade (BAFT), the shares of these
Chart 1.2: Change in the composition
two forms are relatively comparable (see Chart
of trade finance business (percentage of
1.2); although some banking institutions argue
respondents), 2007-09
that the share of open account transactions is
dominant in global supply chain transactions.
100
80
19% 20% 22%
Estimating the size of
60 33% 35% 36% trade finance markets
40
The Bank of International Settlements (BIS) has
20 48% 45% 42% noted that there is no single, comprehensive
0 source of statistics allowing for an evaluation of
Oct. 2007 Oct. 2008 Jan. 2009
the exact composition and size of trade finance
Cash-in-advance transactions
Bank-intermediated transactions
markets (BIS, 2014b). However, it found that
Open account transactions the market for trade finance, considered in its
widest definition, is very large – certainly well
above US$ 12 trillion annually out of US$
Source: IMF-BAFT (2009), p. 10.

CHAPTER 1 | Trade finance in brief
18 trillion of exports (or imports).1 For bank- fluctuating exchange rates — trade finance
intermediated short-term trade finance, the BIS is considered to be a particularly safe form
determined that “a flow of some US$ 6.5-8 of finance since it is underwritten by strong
trillion (…) was provided during 2011, of which collateral and documented credit operations.
around US$ 2.8 trillion was L/Cs [letters of
credit]”. It added that “about a third of global The low risk nature of short-term trade
trade is supported by one or more bank- finance is supported by data collated in the
intermediated trade finance products”, and International Chamber of Commerce’s (ICC)
that “[t]he remainder was financed by inter- Trade Finance Loss Register, established
firm trade credit” (non-bank-intermediated). in 2011. According to the ICC’s “Global
Risks – Trade Finance Report 2013”, the
average transaction default rate on short-term
Trade finance and risk international trade credit is no more than 0.021
While the commercial risks involved in an per cent, of which 57 per cent is recovered
international trade transaction seem in through the sale of the underlying asset, the
principle to be larger than in a domestic merchandise.2 Table 1.1 provides more detailed
trade transaction — non-payment, loss or risk characteristics across specific categories
alteration of the merchandise during shipment, of short-term trade finance instruments.
Table 1.1: Risk characteristics of short-term trade finance products, 2008-11
Implied Defaulted Specific

Transaction Recovery
Category maturity transaction transaction-
default rate rate1
(days) loss rate2 level loss rate
Import letters of credit 0.020% 80 71% 42% 0.008%
Export confirmed
0.016% 70 40% 68% 0.011%
letters of credit
Loans for import 0.016% 110 45% 64% 0.010%
Loans for export:
0.029% 140 32% 73% 0.021%
Bank risk
Loans for export:
0.021% 70 51% 57% 0.012%
Corporate risk
Performance
0.034% 110 18% 85% 0.029%
guarantees
Total 0.021%* 90 52% 57% 0.012%**
1 Observed recoveries as a percentage of defaulted exposure across products.

2 Estimated economic loss rate as a percentage of defaulting exposure after discounting and costs.
* Over 2008-11, the average observed annual issuer-weighted corporate default rates for Aa-rated customers was 0.14%.
** The total average and the product-level annual transaction-level loss compare favourably with the average observed annual credit loss rate for Moody’s
customers over the same period of 1.49%.
Source: ICC (2013), pp v, 23.
1 The trade transaction would not be financed twice. In the case of an inter-company credit, there is a seller’s credit or a buyer’s credit,
not a credit on both the export and the import.
2 This would imply a transaction-level economic loss rate of approximately of 0.012% (i.e. 0.021% x 57%) for short-term trade finance
transactions. By comparison, the average level of non-performing loans for main banks in the US over the past 20 years has been 3 per cent
(World Bank data).

Chapter 2
Trade finance is
universal and vital
for trading activities.

The importance of trade
finance
Trade finance and the Despite the lessons of the Asian financial
crisis, in the heat of the 2008-09 financial crisis
trading system trade finance markets were subject to severe
Although trade finance is routine, it is universal shortages due to the contagion of crises in
and vital for trading activities. Until the financial other segments of banking. Even though the
crises of the 1990s and 2008-09, trade finance G20 implemented a package of US$ 250
was easy to take for granted. During the Asian billion (including US$ 130 billion for developing
and Latin American financial crises, credit countries) in the form of credit guarantees and
crunches at the country level affected both traders’ insurance, the situation did not return to
exports and imports to the point of stoppage, as normal in main trading routes until 2012, and it
experienced by Indonesia after trade credit supply appears to have deteriorated in poor countries
or confirmation had been suspended (WTO, ever since in part due to the downsizing of global
1998). This led the international community to bank networks (WTO, 2013). This message
reflect on issues related to the availability of trade has been consistently advanced by the Expert
finance during periods of crisis and beyond. Group on Trade Finance, a group of multilateral
The IMF (2003) and the WTO (2004) identified institutions and private sector banks which
elements of market failure, herd reactions by observes trends in trade finance markets. Their
banks, confusion of counterparty and country reports are made available to and discussed by
risks, gaps between perceived and actual credit WTO members (see in particular WTO, 2014b).
risk, as well as other disruptive behaviour.
The IMF recommended a number of measures Vulnerability of small
to help foster confidence between importers, businesses in accessing
exporters and their banks, notably the use of
trade finance
multilateral programmes to facilitate the financing
of trade during crisis and calm periods alike. Small and medium-sized enterprises (SMEs, i.e.
companies defined as employing 250 or fewer
During this period, WTO members reported to workers) constitute the vast majority of companies
the fifth WTO Ministerial Conference in Cancún registered in both developed and developing
in 2003 that “based mainly on experience countries. Their role in economic activity,
gained in Asia and elsewhere, there is a need generating growth and innovation cannot be
to improve the stability and security of sources overstated. According to the World Bank, SMEs
of trade financing, especially to help deal contribute to over 60 per cent of total employment
with periods of financial crisis. Further efforts in developed countries and 80 per cent in
are needed by countries, intergovernmental developing ones, including the estimated informal
organizations and all interested partners in the sector (World Bank, 2013). Also, according to
private sector, to explore ways and means to Organisation for Economic Co-operation and
secure appropriate and predictable sources Development (OECD) figures, SMEs account for
of trade finance, in particular in exceptional 40 per cent of exports of OECD countries,3 and a
circumstances of financial crises” (WTO, 2003). somewhat smaller share in developing countries,

where concentration of exports is highest cross-border trade “burdensome”. Only 10 per
among the largest firms (World Bank, 2013). cent of large firms in the US manufacturing
sector and 17 per cent in the services sector
Recent research suggests that an absence
experienced the same difficulties. The USITC
of, or weak access to, finance can strongly
study also revealed that lack of access to credit
inhibit formal SME development, regardless
is the major constraint for SME manufacturing
of the level of per capita income of countries.
firms and one of the top three constraints for
Market failures, notably in financial markets
SME services firms seeking to export or expand
(be they financial crises or “information
into new markets (see Charts 2.1 and 2.2).
asymmetries”), fall disproportionally on SMEs,
resulting in more credit rationing, higher costs Even some sectors showing significant levels
of “screening” and higher interest rates from of creditworthiness and collateral (transport
banks than larger enterprises (Stiglitz and Weiss, equipment, information technology and
1981; Beck and Demirgüç-Kunt, 2006). professional services) considered that securing
finance was an “acute” problem (USITC, 2010).
Credit constraints are particularly reflected in
access to trade finance. A survey of 2,350 SMEs The USITC study also highlighted that while
and 850 large firms by the US International Trade US banks consider the SME market segment
Commission (USITC) showed that 32 per cent in general as possessing a large potential
of SMEs in the manufacturing sector and 46 per for profitability, SMEs are not their preferred
cent of SMEs in the services sector considered borrowers in view of the higher transactional
the process of obtaining finance for conducting and informational costs of dealing with such
Chart 2.1: US manufacturing SMEs cite obtaining finance as a leading impediment

to engaging in global trade
Visa issues
U.S. taxation issues
U.S. regulations
Unable to find foreign partners
Transportation/shipping costs
Preference for local goods in foreign market
Obtaining financing
Language/cultural barriers
Lack of trained staff
Lack of government support programs
Insufficient IP protection
High tariffs
Foreign taxation issues
Foreign sales not sufficiently profitable
Foreign regulations
Difficulty locating sales prospects
Difficulty in receiving or processing payments
Difficulty establishing affiliates in foreign markets
Customs procedures
0 5 10 15 20 25 30 35 40 45
Percent
Large firms SMEs
Source: USITC (2010), p 6-12. USITC staff calculation from questionnaire data.

CHAPTER 2 | The importance of trade finance
Chart 2.2: US services SMEs view obtaining financing as the third leading impediment
to engaging in global trade
Visa issues
U.S. taxation issues
U.S. regulations
Unable to find foreign partners
Transportation/shipping costs
Preference for local goods/services in foreign market
Obtaining financing
Language/cultural barriers
Lack of trained staff
Lack of government support programs
Insufficient IP protection
High tariffs
Foreign taxation issues
Foreign sales not sufficiently profitable
Foreign regulations
Difficulty locating sales prospects
Difficulty in receiving or processing payments
Difficulty establishing affiliates in foreign markets
Customs procedures
0 10 20 30 40 50 60
Percent
Large firms SMEs
Source: USITC (2010), p 6-11. USITC staff calculation from questionnaire data.
companies relative to larger corporations. In In less capital intensive or less-developed

turn, SMEs complain about banks’ excessive economies, or economies with lower savings
oversight, failure to meet their specific borrowing rates, local banks are even more conservative
needs, and lack of flexibility regarding the about supporting developing countries’ exporters
use of alternative financing sources. and importers. In developing countries, local
banks may lack the capacity, knowledge,
Other surveys found similar results in Europe regulatory environment, international network
and Japan. In a study covering 50,000 French and/or foreign currency to supply import- and
exporters during the financial crisis of 2008-09, export-related finance. Equally, traders may not be
credit constraints on smaller exporters were aware of the available products, or of how to use
found to be much higher than those placed on them efficiently. Other obstacles in developing
larger firms, to the point of reducing the range of countries include banking or country risk,
destinations for business or leading the SME to particularly in the context of regional and global
stop exporting altogether (Bricongne et al, 2009). financial crises. Exports from Asian countries, in
particular during the Asian financial crisis, suffered
In Japan, SMEs were more likely to be associated from the contagion of regional financial crises,
with troubled banks, hence exporting SMEs in certain cases causing interruptions of imports
were more vulnerable in periods of financial and exports due to the lack of trust of confirming
crisis (Amiti and Weinstein, 2011). In general, banks in letters of credit issued in crisis-stricken
credit-constrained firms — mostly likely to be countries (WTO, 2004). More recently, exports
found among SMEs — were also less likely to from sub-Saharan and other low-income countries
export (Bellone et al, 2010; Manova, 2013). have been particularly affected by the global

financial crisis because they are more dependent developing countries seeking affordable and
on bank-intermediated finance than other regions accessible trade finance through their own banks.
(German Development Institute, 2015). Chapter In view of the difficulties regularly reported by
3 of this report discusses recent multilateral the WTO Expert Group on Trade Finance about
development bank studies seeking to quantify a drying up of trade finance at the “low end” of
the shortage of trade finance required for all the markets – a coded phrase for SME financing
trade transactions in developing countries, where – since the end of the most recent financial
the risk capacity or likeliness to support SMEs crisis, some partner institutions have decided to
is even lower than in developed countries. quantify the financing gap in developing countries
to understand the lost opportunities, with a
Challenges stemming from particular focus on SMEs (see Chapter 3).
the concentration of global A case study illustrating the difficulties faced
trade finance markets by SME traders in new “frontier” countries for
The above-mentioned study by the Bank of trade is shown in Box 2.1 It describes the above-
International Settlements (BIS, 2014b) revealed mentioned challenges: international banks’
that a large share of international trade is supplied unlikeliness to approach new and promising
by a relatively small group of globally-active markets; local banks’ lack of ability and knowledge
international banks. This group of about 40 banks to support new traders; and resorting to second-
accounts for some 30 per cent of international best solutions that either keep producers and
trade finance, with local and regional banks traders downstream or carry significant opportunity
supplying the remainder. In a seminal article, Amiti costs in terms of using scarce cash resources.
and Weinstein (2011) demonstrated that bank Still, thousands of SMEs have integrated in
health influences the trade finance conditions global value chains, not only as suppliers of
offered to companies, and thus their export growth. components in vertically integrated manufacturing
Hence, the availability of trade finance is largely networks, but also as innovative partners in bio-
influenced by the strength of international banks agriculture, electronics and high-value services.
at any point in time (WTO, 2013; BIS, 2014b). Bank-based instruments are complemented
The main trade finance banks are also dominant or replaced by other arrangements such as
in other segments of financial services: as such, inter-company loans, including open-account
they have been both responsible for and victims payment and factoring. Still, these alternative
of the recent global financial crisis. Since then, techniques require costly or complicated risk
they have been subject to more stringent capital management by SMEs. Usual risk mitigators
and lending rules, and have had to recalibrate for inter-company lending such as trade credit
their balance sheets accordingly. As a result, insurance or factoring is most often unavailable
their ability to provide trade finance globally and in the poorest countries. Lack of contract
locally has been affected (WTO, 2013). In other enforcement does not make things easier. This is
words, the downsizing of global banks after the why bank-intermediated finance remains popular
financial crisis has probably had a negative effect in developing countries, although the rate of
on the ability of traders in developing countries to use of letters of credit varies from country to
receive credit, have their letters of credit confirmed country: it also depends on the distance between
and access US dollars, the most widespread traders, the type of goods traded and availability.
currency in international trade (BIS, 2014b). The existence or absence of an appropriate
regulatory system is important. Collateral
International bank deleveraging is therefore adding requirements, which may be up to 100 per cent
to the structural difficulties faced by traders in of the value of the good, could be major hurdles.

CHAPTER 2 | The importance of trade finance
Box 2.1: Case study: trade finance challenges in Myanmar
Myanmar is a new “frontier” country for trade. According to the local garment industry association,
two new garment factories financed by an array of local, Chinese and Indian investors open each
day. New export-oriented investors have also appeared in the agro-food and consumer products
sectors. Still, SMEs face difficulties in financing their imports and exports, resulting in lost
trading opportunities. They are symptomatic of constraints found in countries with similar levels
of development. Such constraints may include: reduced capacity for the local banking sector to
support the trade sector; a dearth of information about trade finance products offered by the local
banking sector; and a lack of awareness by local regulators about appropriate regulation for trade
finance products. For example, in Myanmar, outdated regulations prohibit importers from paying for
foreign goods with cash in advance, or local exporters from being paid after export. Moreover, many
foreign banks have shown limited interest in penetrating the domestic market, in part due to the
current re-sizing of their global networks. Under local law, those willing to do so have been confined
to dealings with foreign-owned customers.
In such a difficult environment, Myanmar’s main traders have thus far resorted to second best
solutions, mainly circumventing local laws by paying imports from bank accounts located overseas,
or by opening letters of credit through brokers in offshore centres such as Singapore and Hong
Kong, China. Still, only the largest companies can afford to do so. New small garment exporters do
not hold off shore cash reserves with which to pay their suppliers, nor do they have sufficient credit
records for brokers to find foreign banks to open letters of credit. They can only rely on Myanmar’s
local banks, which have limited risk management capacity, still charge a US$ 1,500 fee for opening
letters of credit, and require a minimum of 30 per cent collateral. No open account facility is available
in Myanmar, and trade credit insurance is not allowed. The lack of efficient and affordable trade
financing tends to relegate new exporters of garment and food products to downstream operations
that do not require purchase of imports or credit on export receipts. Being limited to accepting
service fees for assembly operations means that companies cannot move up the value chain and
access better quality and better paying jobs.
The Government of Myanmar is reform-minded. Reforms in the financial sector are gradual, and it
might indeed take some time for trade finance regulation to change, as well as for local banks to
take more risks and propose a wider range of competitive trade finance products to local clients.
Externally, the Myanmar trading and financial sectors suffer continuing negative effects from prior
international financial sanctions which have now mostly been lifted. Many global banks are in the
process of reducing international networks and correspondent relationships, deleveraging balance
sheets and reducing costs. As compliance efforts increase, the perception of reputational risk is
highest on “know-your-customer” (KYC) and anti-money laundering rules. Despite efforts to upgrade
standards, the local financial sector is still regarded as lagging behind requirements, which does not
help with its international integration.
Myanmar currently receives technical assistance on upgrading its trading and financial systems
from the international community. Recently, the diagnosis for trade finance has improved, with joint
missions and reports by several international organizations, including the International Trade Centre,
the World Bank and the Enhanced Integrated Framework.
Source: WTO Secretariat, input chapter, DTIS of Myanmar, Enhanced Integrated Framework (forthcoming)
3 Data is available at http://www.oecd.org/std/its/trade-by-enterprise-characteristics.htm.

Chapter 3
Financing gaps are the

greatest in the poorest
countries, notably in Africa
and developing Asia.

Quantifying the financing
gap in developing countries
Converging quantitative but could have been higher had a significant
share of the financing requests from traders
estimates not been rejected. Based on an estimate of
Determining the quantitative gap in trade finance rejected requests, the conservative estimate for
is difficult because global, regional or country the value of unmet demand for trade finance
trade finance statistics are limited or partial, even in Africa was US$ 110 billion in 2011 and
in developed countries. Most of the evidence US$ 120 billion in 2012 (AfDB, 2014).4
is survey-based and hence of a qualitative
The main reasons for rejecting financing requests
nature. Nevertheless, surveys provide useful
were a lack of creditworthiness or credit history,
information about trends, notably when they are
insufficient limits granted by endorsing banks
conducted on a regular basis. Annual surveys
to local African issuing banks, small balance
are conducted by the ICC, the World Economic
sheets and limited capital of African banks, and
Forum (WEF) and the Centre for the Promotion
insufficient US dollar liquidity (see Chart 3.1).
of Imports from developing countries (CBI),
Some of these constraints are structural and can
which is part of the Netherlands Enterprise
only be addressed in the medium-to-long run: the
Agency and commissioned by the Netherlands
African banking sector is not very concentrated,
Ministry of Foreign Affairs. These studies are
hence limiting the financing capacity of individual
methodologically rigorous and benefit from a
banks; the lack of US dollar availability is chronic;
large and global coverage (almost 300 banks
and many African banks are risk-adverse in view
in over 100 countries for the ICC; thousands of
of the limited collateral guarantees presented
small and medium-sized exporters for the CBI).
by small traders. In the light of such constraints,
Financing gaps are the greatest in the poorest the survey argued that the African Development
countries, notably in Africa and developing Bank’s Trade Finance Facilitation Program, as
Asia. There are two recent surveys covering well as those of other development finance
the African continent, the most recent and institutions, are needed and are particularly well-
“conservative” from the African Development
Bank (AfDB, 2014). The other study was
funded by the European Union for the African,
Caribbean and Pacific group of states (ACP),
The estimated value
and is on the higher end of gap estimates
(ACE International Consultants, 2013). The
of unmet demand
results of both studies are described below. for trade finance in
In the recently released report “Trade finance in
Africa”, the African Development Bank surveyed
Africa was US$ 120
the trade activities of 276 African commercial
banks operating in 45 African countries. It found
billion in 2012.
that the market for bank-intermediated trade
finance was between US$ 330-350 billion,

Chart 3.1: Reasons for African banks’ rejection of letters of credit applications
16% Client credit worthiness

Capital constraint
40%
Balance sheet capacity constraint
13%
Insufficient limits from confirming banks
Limited foreign currency liquidity
9%
Product or instrument limits
9% 9% Other
4%
Source: AfDB (2014), p 29.
suited to addressing some of these obstacles. firm in trade finance restructuring – a large
number of African countries have encountered
The 2013 ACP survey is on the higher end of extremely high spreads on trade financing,
the financing gap estimate in Africa. The study consistently high over the years as evidenced
sought to estimate the unmet demand for trade in Table 3.1. For instance, in 2014, interest
finance. The trade finance gap in sub-Saharan rates on trade loans peaked at 49 per cent per
countries was evaluated at US$ 225 billion annum in Kenya and 70 per cent in Angola.5
a year unmet by the financial system (part of Apart from a few countries for which political
this gap may have been met by informal trade risk may be the main factor, such prohibitive
financing). The study concluded that the main terms on African countries reflect disconnect
constraints in filling such gaps are the cost and between perceived and actual commercial risk.
maturity of facilities, notably during the periods
of crisis; a strong dependency on external Using both a survey and econometric
sources of trade finance; a vulnerability to calculations, the Asian Development Bank
external shocks; the limited institutional capacity
of local suppliers; and limited financial inclusion
stemming from a limited use of bank accounts Unmet global
(ACE International Consultants, 2013).
demand for trade
Prices for trade-related lending provide
another useful proxy for the trade financing finance may have
gap. Just as market prices reflect supply and
demand, evidence of gaps in certain regions been as high as
is logically translated into the price of trade
finance instruments. Based on the spreads
US$ 1.4 trillion
for emerging market trade credit instruments
published by Omni Bridgeway – a leading
in 2014.
CHAPTER 3 | Quantifying the financing gap in developing countries
estimated that unmet global demand for of awareness and familiarity among companies
trade finance may have been as high as US$ – particularly smaller ones – about the many
1.4 trillion in trade in 2014 (ADB, 2015).6 types of trade finance products and innovative
In Asian developing economies alone, the alternatives such as supply-chain financing,
estimated shortage might have been as high bank payment obligations and forfaiting. Indeed,
as US$ 700 billion combined for the largest a large majority of firms stated that they would
countries – such as China and India – and the benefit from greater financial education. Finally,
poorest developing countries: Bangladesh, firms cited price constraints as the key systemic
Cambodia, Indonesia, Malaysia, Myanmar,
bottleneck to obtaining trade finance. The survey
Nepal, Pakistan, Sri Lanka and Viet Nam.
confirms that multilateral development bank
Small and medium-sized enterprises (SMEs) trade finance programmes help fill persistent
are the most credit-constrained: estimates trade finance gaps in Asia and elsewhere.
project that half of their trade finance requests
are rejected, compared to only 7 per cent for Converging qualitative
multinational corporations. With 68 per cent of
surveys
surveyed companies reporting that they did not
seek alternatives for rejected requests, trade Qualitative surveys can help position the lack
finance gaps appear to be exacerbated by a lack of trade finance relative to other structural
Table 3.1: Africa trade credit pricing (annual interest rate)
Country Price range as of May 2011 Price range as of April 2014

LOW HIGH LOW HIGH
Angola* 60% 65% 65% 70%
Cameroon 14% 20% 18% 24%
Congo 22% 26% 22% 26%
Democratic Republic
of the Congo 16% 20% 22% 27%
Ghana 78% 82% 74% 78%

Kenya* 39% 49% 39% 49%
Mozambique 20% 26% 20% 26%
Senegal 12% 16% 12% 16%
Sudan 15% 19% 9% 14%
Tanzania 10% 13% 25% 35%
Uganda 14% 16% 16% 18%
Zambia 13% 20% 13% 20%
Note: Trade credits and their documentation differ from case-to-case and price ranges should therefore be considered as benchmark only. Price ranges
are based on a monthly compilation of sources and analytics. Liquidity on most instruments is very limited and trading may not have taken place
for some time.
*Spreads are corrected for inflation.
Source: Omni Bridgeway (2011, 2014).

Chart 3.2: The extent to which access to trade finance forms an obstacle to a company’s
exports, broken down by region
Africa 17.0% 66.0%
Asia 40.1% 31.6%
Eastern Europe 41.5% 26.8%
Latin America 35.0% 41.6%
0% 25% 50% 75% 100%
Minor obstacle Major obstacle
Source: CBI (2013), p 23.
supply-side problems faced by exporters in traders in Africa, but also in other regions.
poor countries. Unsurprisingly, lack of access
to finance is the primary concern when The Netherlands’ Centre for the Promotion of
operating in international markets. A variety of Imports from Developing Countries took stock
sources indicate that it is a major obstacle for of the difficulties faced by 3,000 SME exporters
Chart 3.3: The most problematic factors for exporting in Africa
Access to trade finance
Identifying potential markets and buyers
Difficulties in meeting quality/quantity requirements of buyers
Inappropriate production technology and skills
Burdensome procedures and corruption at foreign borders
High cost or delays caused by domestic transportation
Access to imported inputs at competitive prices
High cost or delays caused by international transportation
Tariff barriers abroad

Sub-Saharan Africa
Technical requirements and standards abroad North Africa
Landlocked sub-Saharan Africa
Rules of origin requirements abroad
0 5 10 15 20
Score
Note: From the list of factors above, respondents were asked to select the five most problematic ones for trading in their country and to rank them
between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings.
Source: WEF (2013), p 54.

in 52 countries in accessing trade finance. it was a larger obstacle, though for more than
Respondents considered the lack of access to half the situation was unchanged (CBI, 2013).
trade finance to be troublesome, particularly for
As shown in Chart 3.2, the extent to which
SME exporters. Trade finance shortages affected
access to trade finance deteriorated differed
both exports and turnover, as a result of foregone
across regions. Africa remains the most affected
sales to foreign customers. Respondents noted
region in the world, followed by Latin America
that local financial sectors were often unable to
and Asia. The survey is currently being updated.
support modern international transactions such
as trade receivable financing. SME exporters These results are corroborated by the 2014
were asked whether access to trade finance WEF Global Enabling Trade Report. Published
was a more serious, equally serious or less every two years, the report assesses the quality
serious obstacle than three years earlier. The of institutions, general infrastructures and
results showed that for one-third of exporters services available for trade. In this and other
Chart 3.4: Impediments to trade finance according to respondent banks
Anti-money laundering/
9.0% 6.3% 15.3% 27.9% 41.4% (3.9)
know-your-customer requirements
Basel regulatory requirements 14.0% 15.9% 29.0% 27.1% 14.0% (3.1)

4.6%
Low country credit ratings 8.3% 34.9% 30.3% 22.0% (3.6)

3.8%
Issuing bank's low credit ratings 9.4% 27.4% 31.1% 28.3% (3.7)
Previous dispute or unsatisfactory

12.5% 13.5% 19.2% 26.9% 27.9% (3.4)
performance of issuing banks
Constraints on your bank's capital 21.6% 16.7% 27.5% 18.6% 15.7% (2.9)
4.9%
Lack of dollar liquidity 32.7% 20.2% 21.2% 21.2% (2.5)
High transaction costs

5.8%
22.3% 35.9% 26.2% 9.7% (3.1)

or low fee income
2.8%
Low company/obligator credit rating 17.6% 27.8% 32.4% 19.4% (3.5)
Insufficient collateral from company 9.4% 14.2% 25.5% 28.3% 22.6% (3.4)
Other 18.8% 18.8% 25.0% 12.5% 25.0% (3.1)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
1 2 3 4 5
Very insignificant Very significant
Note: Numbers in brackets are weighted averages of ratings. The closer the average rating is to 5, the higher the level of significance. An average rating
close to 1 indicates a low level of importance.
Source: ICC (2014), p 97.

Chart 3.5: Public views of the main barriers in connecting firms to value chains
(percentage of responses)
Inadequate domestic infrastructure
Limited access to trade finance
Standards compliance
Lack of comparative advantage

Donors and providers of
Market entry costs
South-South assistance
Structure of value chains
Partner countries
Lack of labour force skills
Cumbersome border procedures
Inability to attract foreign direct investment
Trade restrictions
Burdensome documentation
0% 10% 20% 30% 40% 50% 60% 70%
Source: WTO-OECD (2013), p 24.
reports, the WEF ranked the lack of access to

trade finance as one of the most problematic
Among the main
factors for exporting in Africa (see Chart 3.3).
obstacles limiting
The ICC Global Survey 2014, based on data
from 298 banks in 127 countries, confirms SME access to
such findings. Forty-one per cent of respondent
banks acknowledged the existence of a
trade finance are
shortfall in global trade finance supply, with
an emphasis on SMEs and Africa. Among
the increasing
the main obstacles limiting SME access to compliance and
trade finance are the increasing compliance
and regulatory burdens as well as low country regulatory burdens.
and local bank credit ratings (see Chart 3.4).

Seventy per cent of respondent banks

recognized a role for multilateral development
Lack of access to
banks in providing access to trade finance.
trade finance is a
Finally, with regard to the issue of financing
trade in the context of global value chains: key obstacle to low-
a survey conducted by the WTO and the
OECD in 2013 as background for the Fourth
income countries
Global Review of Aid for Trade concluded
that lack of access to trade finance was a key
participating in
obstacle to low-income countries participating global value chains.
in global value chains (see Chart 3.5).
4 Multilateral development banks are working to improve survey methodologies, in particular concerning the question of credit rejection as a
proxy of the trade finance gap. There are many reasons why credit can be refused, so refusal alone is not necessarily an indicator of market
failure. Follow-up survey questions may help clarify the link between rejected credit and trade foregone. On-going progress in methodology
is applied to these large and extensive surveys to improve the quality and granularity of results.
5 In addition to high interest rates, requirements may include up to three years of financial statements and collateral requirements covering
from 30 to 50 per cent of the loans’ present net value.
6 This figure represents an upper limit since responses do not distinguish the quality of proposals for trade finance and the methodology
requires extrapolation from partial data. Precisely, the estimated value of the global gap was calculated in two steps: first, the surveyed banks’
rejection rate is drawn from the bank’s responses to their approximate total value of proposed transactions and to the average percentage
of rejected transactions; and second, this reported gap from the surveyed population is then projected to the global banking environment,
obtained by weighting surveyed banks' assets as a proportion of global assets.

Chapter 4
Multilateral trade finance

facilitation programmes
helped facilitate over
US$ 30 billion in trade in 2014.

Current efforts to address
trade finance issues
in developing countries
Supporting multilateral Corporation (ITFC), and the IFC operate
relatively similar programmes. In early 2013, the
development banks in African Development Bank (AfDB) opened a
establishing a global permanent programme and has already financed
network of trade finance close to US$ 1 billion in trade transactions
in Africa and expects to support more than
facilitation programmes
US$ 10 billion over the next four years. The
In 2011, the WTO Director-General and various institutions often work in partnership:
World Bank President, along with the heads for example, the ADB has worked with the IDB
of multilateral development banks (MDBs), and the AfDB to include member banks in each
drew attention to trade finance issues. The other’s trade finance programmes, in order to
G20 Seoul Summit Document indicated that: encourage direct cross-continental relationships
between banks and alleviate part of the financing
To support LIC [low-income country] gap in trade between developing countries.
capacity to trade (...) [w]e note our
commitment to (…) support measures to Taxpayers do not incur costs from the expansion
increase the availability of trade finance in of trade finance facilitation programmes and
developing countries, particularly LICs. In similar schemes. These are risk-mitigation
this respect, we also agree to monitor and instruments run on a private sector demand
assess trade finance programs in support basis, with a focus on clients in the poorest
of developing countries, in particular their developing countries. All institutions operating
coverage and impact on LICs, and to such programmes run net operating profits
evaluate the impact of regulatory regimes while facilitating trade in places where private
on trade finance. (G20, 2010, para. 44) markets do not operate. These programmes
strengthen financial and trade inclusion in
In the context of the G20 mandate, the WTO low-income countries. In effect, they provide
Secretariat has reviewed the efforts already risk mitigation capacity (guarantees) to both
deployed by regional development banks and issuing and confirming banks and allow for
the World Bank Group (through the International rapid endorsement of letters of credit, the main
Financial Corporation (IFC), its private sector instrument used to finance trade transactions
arm) to support trade finance. These efforts between developing countries, and between
are significant, as summarized in Table 4.1. The developed and developing countries. The MDB
Asian Development Bank (ADB), the European guarantee ensures that the bank (typically the
Bank for Reconstruction and Development bank of the exporter) agreeing to confirm a letter
(EBRD), the Inter-American Development Bank of credit (typically issued by the bank of the
(IDB), the International Islamic Trade Finance importer) will be paid even if the issuer defaults.

The guarantee ensures that the exporting bank directly by the ITFC totalled US$ 5 billion,
is paid. Such guarantees are rarely activated, but up from US$ 3 billion in 2011. In 2015, this
are valuable because they reduce the perceived amount was further increased to US$ 6 billion.
risk of conducting trade operations in low- The main beneficiaries are mainly SMEs in
income countries: they close the “confidence member countries across Africa, Central
gap” between perceived and actual risk. Demand Asia and the Middle East. The ITFC’s trade
for these programmes increased during the finance programme is a growing and very
2008-09 financial crisis and has remained high. effective tool to support trade in those regions,
and it fully complements the programmes
In addition, the Islamic Development Bank, of other multilateral development banks.
though its trade finance subsidiary, the
International Islamic Trade Finance Corporation All-in-all, multilateral trade finance facilitation
(ITFC), supports trade finance transactions programmes helped facilitate over US$ 30
among Organization of Islamic Cooperation billion in trade in 2014 in the markets with the
member countries. The ITFC model is focused biggest gaps in provision. Almost one-third
on providing direct financing to partner banks, of IFC’s total operations took place in sub-
institutions, governments and the private Saharan Africa and the ADB’s risk-mitigation
sector though Sharia-compliant structures. support mainly caters to the poorest regions
The programme is very effective in providing in Asia, inter alia Pakistan, Bangladesh, Viet
direct financial support, including pre-export Nam, Sri Lanka, Nepal and Uzbekistan.
financing. In 2013, trade transactions funded
Table 4.1: Overview of the main MDB trade finance facilitation programmes
EBRD IFC IDB ADB

Trade Global Trade Trade Finance Trade Finance
Facilitation Finance Facilitation Program
Programme Program Program (TFP)
(TFP) (GTFP) (TFFP)
Number of countries
in operation 23 96 21 18
Programme
commencement 1999 2005 2005 2004
Number of transactions
since commencement 15,508 31,600 4,457 8,338
(year ending 31.12.2012)
Value of transactions
in 2013 EUR 1.2 billion US$ 22 billion US$ 1.21 billion US$ 4.03 billion
Number of
confirming banks 800+ 1,100 297 124
Claims to date 2 – no losses zero zero zero
Source: ICC (2014), p 75.

CHAPTER 4 | Current efforts to address trade finance issues in developing countries
Creating new initiatives Warehouse receipt financing, a collateralized

commodity transaction, is a particularly relevant
to meet the needs of form of pre-export trade finance for emerging
low-income countries market agriculture. It is a lending technique
that extends bank loans to farmers, producers
A 2014 WTO-OECD survey found that the
and traders of agricultural commodities by
lack of integration of low-income countries
pledging their warehouse receipts issued
into global value chains is a major obstacle
against commodities deposited in licensed
to development. In such countries, the local
warehouses. There are a number of prerequisites
financial sector’s ability to provide for supply
for a thriving warehouse receipt market: an
chain finance arrangements is limited. Local
appropriate legal and regulatory environment,
access to factoring is almost non-existent
support from local banks and commodity
and SMEs are largely excluded from private
firms, as well as a well-functioning commodity
supply chain financing systems. To address
exchange that guarantees price transparency.
this challenge, MDBs are extending receivable
Chart 4.1 describes the operation of the IFC’s
financing arrangements through local banks
Global Warehouse Finance Program and Global
to help integrate small manufacturers from
Trade Supplier Finance. Since 2011, the Global
promising countries into international supply
Warehouse Finance Program has financed over
chains. As part of its Global Trade Finance
US$ 7.5 billion worth of commodity finance
Program, the IFC recently developed two types
transactions in more than 41 countries, including
of trade financing products. Warehouse finance
Burkina Faso, Ethiopia, Ghana, Guinea Bissau,
products extend working capital to small farmers
Kenya, Malawi, Senegal, Tanzania and Uganda.
and agricultural producers in food supply chains
by leveraging their production, and supply Private markets are also innovating to make
chain products provide short-term financing to trade finance more readily available to SMEs.
exporters in emerging markets that sell to large Factoring is the fastest growing source of
international companies on open account. The short-term financing for SME suppliers. It
ADB and the EBRD also operate similar supply allows suppliers with weak credit ratings to
chain products. These welcome developments access funding based on the value of their
have the potential to spark greater private receivables (confirmed invoices), different from
sector involvement in extending receivable traditional lending relationships. According
financing as well as in mobilising additional trade to the 2014 ICC Global Survey, supply chain
financing and facilitating the integration of SME finance is one of the innovations most likely
exporters or producers into supply chains. to change the trade finance industry, with
66 per cent of bank respondents underlining
its increasing importance for their institutions.
Private markets Several developing countries are promoting

the use of factoring facilities to further bring
are innovating to the benefits of supply chain finance to smaller

suppliers. In Mexico, the “Cadenas productivas”
make trade finance (production chains) programme delivers cash
against receivables via a secure online platform.
more readily The Reserve Bank of India recently announced
a “Trade Receivables Discounting System” or
available to SMEs. “TReDS”, akin to the Mexican programme.

Chart 4.1: IFC’s supply chain solutions
Global Warehouse Finance Program
IFC Program partners

3. IFC channels funding Program partners
or guarantees for up to co-finance with funding or
50% on portfolio of counter-guarantees
warehouse receipts
Bank
2. Warehouse receipts
issued by warehouse
4. WHR facility
1. Commodities
stored in thirdparty
warehouse
Agricultural Storage
producers company
Global Trade Supplier Finance
1. Buyer
uploads 2. Supplier views invoices and
invoices requests early payment
(automated of approved
process) invoices Emerging
SCF
Buyer market
platform
suppliers
3. Financier accepts
early payment
requests
5. Financier pays discounted
invoice amount
Bank
6. Buyer pays full invoice
amount on due date
(automated transfers 4. IFC provides funding or
established) guarantee coverage
IFC Program partners

Mobilization
Source: IFC (2012), pp 8, 10.

Avoiding the unintended low-risk character and absence of leverage

in the industry. The aggregate data delivered
consequences of Basel III covered more than 20 major international
on trade finance, particularly banks, over 5 million transactions and revealed
for developing countries less than 1,150 defaults. Since 2011, the
WTO and the World Bank have continued to
Traditionally, trade finance – mainly letters of hold discussions with the Basel Committee.
credit and other self-liquidating instruments
of payments for trade – received preferential Since then, the BCBS has made three
treatment from national and international revisions reflecting the low risk of trade finance
regulators on grounds that it was one of and improving its regulatory treatment:
the safest, most collateralized and self-
• On 25 October 2011, the BCBS agreed
liquidating forms of finance. This was reflected
to reduce the excessive risk-weighting
in the low credit conversion factor (CCF)
requirements on low-income countries, and
determined under the Basel I framework for
to waive the one-year maturity floors for
the capitalization of these instruments, which
letters of credit and related instruments.
was set at 20 per cent, i.e., five times lower
Both measures are of great importance
than any on-balance sheet loan. However,
in removing obstacles to trade finance
as the banking and regulatory communities
in developing countries (BIS, 2011).
moved towards internal ratings-based and
risk-weighted assets systems under the • On 6 January 2013, the new Basel III
successor Basel II framework, issues regarding guidelines on liquidity (concerning the
maturity structure and country risk emerged. liquidity coverage ratio) proved to be
favourable to short-term self-liquidating
After the 2008-09 financial crisis, in the
trade finance instruments. In its Decision,
context of prudential re-regulation of the
the Committee allowed national
financial system under Basel III, some
regulators to set very low outflow rates
requested that trade finance, which had
– between 0 and 5 per cent, significantly
suffered casualties by contagion from other
below previous levels – for contingent
segments of the financial industry, not be
funding obligations from trade finance
penalized. The unintended consequences of
instruments. Banks are allowed to hold
increased prudential requirements were to
fewer liquid assets against contingent
be avoided, notably in respect of the ability
trade liabilities, thereby increasing the
of developing countries to access affordable
availability of trade finance (BIS, 2013).
trade finance. At the end of 2011, the G20
asked that the WTO and World Bank on •
On 12 January 2014, the BCBS reduced
the one hand, and the Basel Committee on the leverage ratio on trade letters of credit
Banking Supervision (BCBS) on the other, and other self-liquidating trade-related
engage in discussions aimed at improving a instruments from a 100 per cent CCF to
common understanding of trade finance and a 20 per cent CCF for capital purposes
identifying any unintended consequences of and 50 per cent CCF for trade guarantees
prudential regulation. This dialogue proved (BIS, 2014a). The 2014 modification
extremely useful. The data collected by the was hailed by the WTO Director-General:
ICC under the pilot trade finance register “[this is] of particular significance for the
allowed prudential regulators to improve their availability of trade finance in the developing
understanding of trade finance and verify the world, where letters of credit are a key

instrument of payment. This is good news Enhancing the capacity
for developing countries, for the expansion
of their trade and for the continued growth
of the local banking
of South-South trade flows” (WTO, 2014a). sector to support trade
The situation on the prudential front looks While global lenders tend to focus on their
better than it did a few years ago, thanks to the main customers, there are opportunities for
institutional dialogues opened by the WTO and local and regional banks to step in when they
the Basel Committee, and the data support have the capacity to do so. Tier 1 and 2 banks
provided by the ICC. There is no doubt that in the Asia-Pacific region (China, Republic of
such initiatives have contributed to improving Korea, Chinese Taipei, Indonesia and Malaysia),
the policy coherence between the prudential in Latin America (Brazil and Columbia) and
and central bank community on the one hand, in the Middle East and Eastern Europe are
and the trading community on the other. increasing their market shares in trade finance.
Yaw Kuffour, lead trade finance specialist at
Other non-prudential regulatory issues described the African Development Bank, noted that:
as “know-your-customer” (KYC) requirements
have been subject to discussion within the “Some of the big players from Nigeria, Kenya
WTO’s trade finance community. The debate and South Africa are trying to do more …
does not focus on regulatory requirements, to mobilise resources and channel them
which legitimately aim to increase transparency to this market… [However] African banks
in financial relations (including various still lack the critical mass and muscle to
informational requirements to combat illegal provide the necessary credit so there is a
financing and tax evasion), but rather on the need for [development finance institution]
various ways that they are being structured, intervention (Whitehead, 2013).”
defined and implemented by and in different
According to the AfDB’s “Trade finance in
countries and regions. It was argued, albeit not
Africa” survey (2014), the vast majority of
always proven, that the accumulation of these
African commercial banks invest in trade
requirements (very detailed information varying
transactions, contributing on average for 17 per
across jurisdictions about a customer’s identity
cent of their earnings. While a large number
and the end use of money lent) led banks to
of confirming banks are based outside Africa,
terminate banking relations, including trade
the study acknowledged the growing role of
finance, with developing countries. Therefore
Africa-based confirming banks, though banks
more clarity is needed to determine whether
in Northern Africa are significantly larger than
a lack of harmonized regulatory requirements
those of other sub-regions. Yet, African lenders
discourages trade, particularly in developing
are still constrained by the relatively small size
countries. Some have suggested that the trade
of African banks’ balance sheets. For instance,
finance industry needs more fact-based evidence
the African Export-Import Bank (Afreximbank),
of trade foregone, lost correspondent banking
saw demand for products in excess of US$
relations and other criteria before it can assess
23.8 billion in 2014, but could only process
the impact of lack of regulatory harmonization
US$ 2.68 billion worth of transactions.
in this area (WTO, 2014c). Dialogue on this
issue should of course take place within the Efforts are therefore needed to strengthen
appropriate governance structures, such as the developing countries’ capacity to finance their
OECD’s Financial Action Task Force (FATF). The trade and build knowledge for handling trade
WTO remains ready to engage in such dialogue. finance instruments. From that perspective, trade

finance facilitation programmes can increase Export credit agencies (ECAs) have also been
capacity for small local commercial banks as well very active in institution-building. For example, the
as connect them with global confirming banks. Berne Union ECAs (such as the Nippon Export
To this end, donor technical assistance funds and Investment Insurance (NEXI) in Japan, the
are being used to train bankers in developing Export-Import Bank of the United States (EXIM),
countries through seminars or in situ training Euler-Hermes in Germany, the Compagnie
(in particular through the EBRD and IFC française d’assurance pour le Commerce
dedicated trust funds for trade finance training). Extérieur (COFACE) in France, and various
Donors including Austria, France, Ireland, ECAs from Nordic countries) have provided
Israel, Japan, the Netherlands, Spain, Sweden technical assistance to set up counterpart
and Chinese Taipei have provided funding to ECAs in least-developed countries. Some ECAs
such trusts. Under IFC’s training programmes, have actively supported the creation of regional
over 2,800 participants from 360 developing ECAs in Africa, and provided in situ training.
country banks received courses and on-site
advisory services. The EBRD also trained a
large number of participants and teamed up
with the ICC to open an e-learning platform.
The ICC is in the process of creating an ICC
Academy to provide trade finance qualification
and certification for up to 2,000 trainees per
annum in the medium term. The WTO also has
integrated a full trade finance module in the main
curriculum of its popular e-training platform.
Efforts are needed

to strengthen
developing
countries’ capacity
to finance
their trade.
7 Trade finance facilitation programmes carry a maximum “limit” of guarantees and financing for trade that each institution is willing to extend
at any point in time. However, these guarantees and direct financing only apply to short-term trade transactions with typical maturities of 60
to 90 days. Hence, within a year the value of trade transactions financed and guaranteed by these institutions is larger than the overall limit,
since, for example, guarantees for 90-day transactions can be used four times per annum (90 days multiplied by four equals 360 days).

Recommendations
1. Reduce limitations in existing multilateral programmes

Multilateral development banks should examine institutional limitations in existing trade finance
facilitation programmes to provide remedies for geographical disadvantages or working with certain
operators. Though each institution’s Board of Directors retains sovereignty over its programmes, it
could be valuable to review such limitations against a needs test assessing whether relaxing some
limitations could help reduce the identified trade finance gaps. Of particular concern is that large
developing countries are not eligible for trade finance facilitation programmes. In such countries,
available liquidity for trade may only be apparent at the aggregate level, particularly if liquidity is
concentrated in the country’s main banks, hence benefitting the main traders but not the second-
and third-tier banks and companies.
For other programmes, one limitation may be related to the type of operators that are eligible.
State-owned banks are common in low-income countries and fulfil an important role in imports
and exports. In Ethiopia, for example, a large share of trade finance is handled by the state-owned
Commercial Bank of Ethiopia, which cannot be supported by some programmes. With trade
expanding rapidly, including via new supply-chain trade in the garment industry, the African banking
sector is also rapidly evolving, although some remain state-owned.
2. Increase programme size where possible

Some of the largest programmes face pressure to increase trade financing limits when the
current ones are reached. There may be scope for programmes – particularly newly established
programmes in Asia and Africa – to do more.
3. Set a realistic objective for total trade coverage

A realistic yet ambitious objective would be to increase the trade volume supported by all existing
multilateral trade finance facilitation programmes from US$ 30 billion to US$ 50 billion per annum.
This could be achieved through a shared effort between all relevant bodies – and of course how
to share the increase would be for MDBs to determine. Though this target would only eliminate a
portion of the estimated financing gap, focusing on a specific target would be an effective way of
mobilising and coordinating efforts. As such it would be an important and constructive step in the
right direction.

4. Increase capacity building support
Economies will graduate from trade finance facilitation programmes as the capacity of local financial
sectors to support SME traders grows. Technical assistance must be therefore enhanced with the
support of donors – both MDBs and the private sector – to build capacity in the local banking
sector, including via training a new generation of trade finance specialists. From this perspective,
the ICC Academy’s new curriculum on trade finance will be an important complement to the
e-learning portals operated by multilateral institutions active in trade finance, including the WTO.
More can be done in this respect, notably to reduce the information and knowledge gap between
developing and developed countries. This includes improving: awareness of what trade finance
products are available; the ability to select the best products; and the training of trade finance
specialists. Multilateral development banks and the ICC already receive donor funding for their
capacity-building initiatives, but such donor efforts could potentially be further leveraged.
The WTO Expert Group on Trade Finance can track the progress achieved by the associated
institutions’ training efforts. A realistic objective would be for all multilateral institutions (MDBs, the
WTO, ICC and the Berne Union, to name a few) to train 5,000 professionals worldwide in basic
trade finance over the next five years.
5. Maintain an open dialogue with trade finance regulators

It will be important to enhance dialogue with financial regulators so as to share experience in each
domain, leading to improved knowledge and experience for all parties. Know-your-customers (KYC)
reporting requirements have been under discussion in the WTO Expert Group on Trade Finance
for quite some time. It is vital that KYC requirements achieve their aim of greater transparency in
financial relations while, at the same time, not creating unintended consequences for the trade
opportunities of poor countries. The WTO has therefore indicated its willingness to facilitate a
dialogue – in this case with the OECD Financial Action Task Force (FATF) – with a view to improving
the understanding between the two communities and avoiding such unintended consequences.
6. Improving the capacity of the international community

to read markets and predict problems
Disruptions in trade finance markets are typically sudden, and there is a lack of aggregate information available.
Following the 2008-09 financial crisis, the WTO Expert Group on Trade Finance resolved to improve market
intelligence by pooling as much information as possible. In the absence of a complete set of hard statistics
collected by public institutions, the ICC has been tasked to pool various sources of information and surveys
available in the annual ICC Global Surveys. Multilateral development banks have also begun undertaking
large surveys, in part using the ICC network of banks, to quantify the financing gaps mentioned in this report.
These efforts are worthwhile, but could be enhanced and better integrated. First, surveys of financial gaps
should be harmonized in order to provide a view of gaps by region. Second, as many MDBs as possible should
support these surveys through their own networks of issuing banks, which are often well-grounded in local
markets. Third, it is hoped that methodological improvements will follow from increased and better interaction
between public institutions, and between multilateral organizations and the private sector. It is imperative to
improve early warning and analytical indicators for trade finance before any future financial turmoil.

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Abbreviations
ACP African, Caribbean and Pacific group of states

ADB Asian Development Bank
AfDB African Development Bank
BAFT Bankers’ Association for Finance and Trade
BCBS Basel Committee on Banking Supervision
BIS Bank of International Settlements
CBI entre for the Promotion of Imports from developing
C
countries, Dutch Ministry of Foreign Affairs
CCF credit conversion factor
EBRD European Bank for Reconstruction and Development
ECA export credit agency
FATF Financial Action Task Force (OECD)
ICC International Chamber of Commerce
IDB Inter-American Development Bank
IFC International Finance Corporation
ITFC International Islamic Trade Finance Corporation
IMF International Monetary Fund
KYC know-your-customer(s)
LIC low-income country
MDB multilateral development bank
OECD Organisation for Economic Co-operation and Development
SME small and medium-sized enterprise
USITC United States International Trade Commission
WEF World Economic Forum
WGTDF Working Group on Trade, Debt and Finance (WTO)
WTO World Trade Organization

A publication of the World Trade Organization
Designed by: Triptik
Printed by the WTO Secretariat
© World Trade Organization 2016
Photo credits:
Cover: Panos/Sanjit Das
Page 8: iStock/idealistock
page 10: iStock/StHelena
Page 14: iStock/MickyWiswedel
Page 20: iStock/MickyWiswedel
Page 28: iStock/ShutterWorx
Trade finance plays a key role in helping
developing countries participate in global trade.
Following the 2008-09 economic crisis, small
and medium-sized enterprises (SMEs) have
found it increasingly difficult to access this
vital form of credit. The poorer the country, the
greater the challenge. The lack of adequate
trade finance is particularly acute in Africa and
developing Asia. Easing the supply of credit in
regions where trade potential is the greatest
could have a big impact in helping small
businesses grow and in supporting the
development of the poorest countries. This
publication takes a detailed look at these
issues and emphasises the importance of
multilateral agencies working together in
response. It provides recommendations for
addressing the gap in trade finance provision.
This includes bolstering existing trade finance
programmes, enhancing the trading capacity
of developing countries and improving
communication between all parties involved
in trade finance.
World Trade Organization

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CH-1211 Geneva 21
Switzerland
Tel. +41 (0)22 739 51 11
Fax +41 (0)22 731 42 06
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Trade finance

Foreword by WTO Director-General Roberto Azevêdo 4

Chapter 1 – Trade finance in brief 10

Chapter 2 – The importance of trade finance 14

Chapter 3 – Quantifying the financing gap in developing 20

TRADE FINANCE AND SMES | 3

4 | TRADE FINANCE AND SMES

TRADE FINANCE AND SMES | 5

6 | TRADE FINANCE AND SMES

• A number of further steps could be taken, including:

TRADE FINANCE AND SMES | 7

8 | TRADE FINANCE AND SMES

TRADE FINANCE AND SMES | 9

10 | TRADE FINANCE AND SMES

TRADE FINANCE AND SMES | 11

Company A: Buyer/applicant Company B: Seller/beneficiary

12 | TRADE FINANCE AND SMES

Table 1.1: Risk characteristics of short-term trade finance products, 2008-11

Implied Defaulted Specific

1 Observed recoveries as a percentage of defaulted exposure across products.

TRADE FINANCE AND SMES | 13

14 | TRADE FINANCE AND SMES

TRADE FINANCE AND SMES | 15

Chart 2.1: US manufacturing SMEs cite obtaining finance as a leading impediment

16 | TRADE FINANCE AND SMES

companies relative to larger corporations. In In less capital intensive or less-developed

TRADE FINANCE AND SMES | 17

18 | TRADE FINANCE AND SMES

Box 2.1: Case study: trade finance challenges in Myanmar

3 Data is available at http://www.oecd.org/std/its/trade-by-enterprise-characteristics.htm.

TRADE FINANCE AND SMES | 19

Financing gaps are the

20 | TRADE FINANCE AND SMES

TRADE FINANCE AND SMES | 21

16% Client credit worthiness

Source: AfDB (2014), p 29.

Table 3.1: Africa trade credit pricing (annual interest rate)

Country Price range as of May 2011 Price range as of April 2014

Ghana 78% 82% 74% 78%

TRADE FINANCE AND SMES | 23

Africa 17.0% 66.0%

Asia 40.1% 31.6%

Eastern Europe 41.5% 26.8%

Latin America 35.0% 41.6%

0% 25% 50% 75% 100%

Minor obstacle Major obstacle

Source: CBI (2013), p 23.

Chart 3.3: The most problematic factors for exporting in Africa

Access to trade finance

Identifying potential markets and buyers

Difficulties in meeting quality/quantity requirements of buyers

Inappropriate production technology and skills

Burdensome procedures and corruption at foreign borders

High cost or delays caused by domestic transportation

Access to imported inputs at competitive prices

High cost or delays caused by international transportation

Tariff barriers abroad

24 | TRADE FINANCE AND SMES

Chart 3.4: Impediments to trade finance according to respondent banks

Chapter 3 – Quantifying the financing gap in developing 20

• A number of further steps could be taken, including: