ADB’s flagship Trade Finance Gaps Survey returns for its eighth edition, confirming expectations that the global trade finance gap – unmet demand for trade financing – has worsened, reaching  $2.5 trillion, an increase of 47% since the last stock-taking which pegged the gap at $1.7 trillion in 2020. 

The gap now represents about 10% of global merchandise trade and continues to adversely affect small and medium-sized businesses around the world.

Geopolitical and trade tensions, the Russian invasion of Ukraine, and factors such as inflationary pressure coupled with interest rate increases all combine to contribute to the worsening of the trade finance gap. Familiar factors such as financial crime (anti-money laundering and countering the financing of terrorism) compliance, along with customer and counterparty due diligence (Know Your Customer or KYC) requirements continue to be reported as obstacles to the provision of trade financing for SMEs.

This year’s survey sheds light on novel aspects that hold special relevance given the present market conditions. These include the emergence of innovative financing methods like Deep Tier Supply Chain Finance (DTSCF), designed to extend liquidity to the most distant parts of global supply chains. The report also highlights the potential of green, eco-friendly, and sustainable finance to reduce the trade finance gap.  76% of responding firms expressed interest in exploring such innovations.

In its inaugural examination of sustainable trade, financing, and Environmental, Social and Governance (ESG) factors, the ADB’s survey unveiled the following statistics:

  • 82% of respondent banks consider ESG and sustainability as strategic imperatives.
  • 74% of these banks have plans to transition towards ESG-aligned and sustainable financing.
  • In a similar vein, 70% of firms participating in the survey believe that aligning with ESG criteria could enhance their access to trade financing.

This data reflects a broad sense of priority and optimism regarding ESG considerations within the trade financing landscape.

The digitalisation of trade, including through digital documents and improved processes and interoperability, is likewise seen as a potentially important factor shaping the market, with 73% of firms expressing optimism that meaningful digitalisation can enable significant improvements in efficiency. 

Over 63% of banks see significant value in digitalisation, particularly around regulatory compliance and improved understanding of and engagement with SME clients. Both groups, however, acknowledge that the cost and complexity of digitising trade pose a significant challenge.

At the same time, key findings from survey respondents signal that awareness-raising and advocacy efforts may be generating a positive impact, with linkages between trade, financing, digitisation, sustainability, and sustainable finance presenting a series of areas that have the potential to narrow the trade financing gap, particularly given alignment in perspective on these issues between banks and their clients.

The 2023 survey indicates that there may be some notable developments in the views of businesses around the state of their supply chains. While policymakers, multilateral institutions and others remain concerned about supply chain resilience and transparency, survey respondents seem to be indicating that their supply chains have rebounded well from recent crises. Approximately 12% of responding firms indicated that they are concerned about visibility in supply chain operations and only 14% of firms are concerned about supply chain resiliency. This finding is notable and bears monitoring.

A blueprint for better trade financing

As with past editions of the ADB survey, some consideration is given to potential solutions aimed at narrowing the trade financing gap.

This edition focuses on a few categories of solutions, proposing that we collectively work to create more financing capacity by developing trade finance further as an investable asset class. Additionally, the significant interest in – and potential of – DTSCF should motivate focus on developing this form of financing, including all necessary enabling conditions such as legal frameworks and the actions of various stakeholder groups. 

The transformative attention around ESG and sustainability should also be the subject of proactive attention, in particular, to assure that ESG and sustainable trade, and all related market and regulatory requirements serve to attract more capital in support of trade finance – and not evolve to become an exacerbating factor to the gap because appropriate measures were not taken to align trade and financing with ESG and sustainability requirements.

Digitalisation, in particular, support of the ADB-funded Digital Standards Initiative (DSI), can also help narrow the trade financing gap. Furthermore, progress has been made in several regions towards adopting digital trade practices. This is notably due to governments aligning with the UNCITRAL Model Law on Electronic Transferable Records (MLETR), a trend that should be both encouraged and accelerated..

Finally, trade financing has proven its efficacy in times of crisis, including during COVID-19, and in country-specific crises such as the recent one which erupted in Sri Lanka. The imperative to assure adequate access to timely trade financing in times of local, regional, or global crisis is clear, and its value in maintaining control of the trade finance gap is clear.

In the end, the importance of tracking – and mitigating – the global unmet demand for trade financing hopefully helps ensure we do not lose economic value, are able to continue to drive trade-based international development, and can regain ground in trade-based poverty reduction from the progress reversed by COVID-19.

Trade is a powerful tool of economic growth, development, poverty reduction and prosperity. Much of it cannot happen without adequate, timely, and affordable financing. The ADB Trade Finance Gap Survey provides a barometer of the state of the market and explores solutions as well as emerging developments that can help drive trade financing to where it is most needed.