Report by the Asian Development Bank (ADB) recognizes the increasing importance of Digital Transformation in managing supply chains.
Tech providers, banks and governments are urged to collaborate in scaling up the use of supply chain finance and other innovative financing solutions to close the global trade finance gap.
A new report by the Asian Development Bank (ADB) has found that the global trade finance gap has widened to the highest on record – topping $2.5 trillion in 2022.
ADB says this gap highlights the unapproved demand for finance to facilitate international commerce.
Tech-enabled solutions, partnered with traditional banks and lenders, combined with deep financial services expertise, are seen offering hope for the future.
Supply chain finance – and specifically payables finance – is a type of financing that provides companies with access to early payment for the goods or services they sell, using financial institutions to fund these confirmed payment obligations from their customers.
Payables Finance has grown rapidly into an industry with estimated outstandings of more than $500B globally, growing in excess of 25% per annum.
Titled the 2023 Trade Finance Gaps, Growth, and Jobs Survey – the ADB report emphasizes digital technology as reflecting the increasing importance of Digital Transformation in enhancing visibility and efficiency in managing supply chains.
The majority of surveyed firms (73%) recognize significant productivity and efficiency gains that can be achieved through digitalization and standardization of trade documentation processes, including increasing rates of paperless trade.
This sentiment is echoed by banks with over 70% of respondents planning to increase their support for SMEs by leveraging technology.
This is in line with the perceived benefits of digitalization indicated by banks.
Over 63% of banks concur that widespread adoption of digitalization facilitates regulatory compliance checks while enabling better client profiling and risk management for SMEs.
The high cost of digitalization is cited as the primary barrier to digitalizing business and trade portfolios.
Additional cost-related issues include understanding and implementing technology, a lack of globally established laws and standards and insufficient interoperability of existing platforms – all of which contribute to increased costs.
Banks and firms alike acknowledge the potential in digitalizing trade while understanding the cost and complexities involved.
As context, the surveyed firms included businesses involved in various stages of the supply chain, including raw material sourcing, manufacturing, warehousing, logistics, wholesale and retail.
The top two supply chain challenges in 2022 cited by the firms are insufficient financing and high transportation costs.
Around 12% of responding firms indicated concerns around visibility in supply chain operations. This finding, coupled with the observation that only 14% of firms are concerned about supply chain resiliency, suggests that companies and their supply chain ecosystems have recovered from disruption due to geopolitical factors and the COVID-19 pandemic.
This finding appears to be at odds with widely expressed views among other stakeholders, including policymakers and multilateral institutions, that supply chain reconfigurations and resilience remain priority issues post-pandemic.
Firms identified access to adequate financing (21%), reliable logistics (17%) and the use of digital technology (16%) as the three most crucial factors for resilient supply chains.
In a separate question, 76% of responding firms expressed interest in exploring deep-tier supply chain financing options. These are financial solutions that leverage business relationships within the supply chain to make financing accessible for small suppliers in the most remote and underserved parts of global supply chains.
The emphasis on digital technology reflects the increasing importance of Digital Transformation in enhancing visibility and efficiency in managing supply chains.
Overall, the ADB report reveals the global trade finance gap as widening to has widened to the highest on record to $2.5 trillion in 2022 – a gap said to highlight the unapproved demand for finance to facilitate international commerce.
This gap – affecting businesses of all sizes including large organizations – is described as driven by a number of macroeconomic factors, including the COVID-19 pandemic, rising interest rates and ongoing geopolitical tensions.
Respondents recognized a lack of collateral, insufficient credit history and unfavourable market conditions as the main reasons their applications for trade finance were rejected.
“The top reason cited for rejected trade finance applications was insufficient collateral or guarantee. This is where supply chain finance can help,” said Maurice Benisty, Chief Commercial Officer at supply chain finance platform Demica.
“Supply chain finance can help businesses, to get the financing they need to grow their businesses and create jobs – technology is enabling the solution to push deeper into the supply chain to smaller suppliers which is helping to address the global trade finance gap,” he said.
