What makes trade finance essential?

Trade finance is considered an economic necessity due to the inherent time-lag between the production of goods, their shipment by an exporter, and the final receipt of payment by an importer. It facilitates international trade by mitigating key risks such as payment, delivery, and liquidity risk. Access to these financial tools is essential for countries to engage fully in the global economy, as reductions in access tend to amplify economic downturns through the trade channel.

Historical data underscores this importance; for instance, between 15 and 20 per cent of the sharp decline in trade during the 2008-2009 global financial crisis was attributed to trade finance shortages. Further evidence of its critical role in preventing trade collapse was observed during the COVID-19 pandemic. Despite its importance, a persistent gap remains, with unmet demand for trade finance amounting to approximately 7–10 per cent of global merchandise trade for at least a decade.

Bolstering the evidence base for the role of trade finance

Previous analyses of the relationship between trade and finance have been hindered by a lack of consistent global statistics. To address this, the IFC and WTO analysed a new dataset from the International Chamber of Commerce (ICC) Trade Register, comprising approximately 40 million observations from more than 100 countries. This data, collected from over 20 global banks since 2011, provides a detailed glimpse into the drivers of global trade finance.

The raw data reveals that trade finance usage is heavily concentrated in the Asia-Pacific region, which is the largest user both in terms of absolute US dollar value and as a share of trade. In this region, trade finance as a share of trade stands at 1.4 per cent, followed by the Middle East at 0.8 per cent, Africa at 0.6 per cent, and North America at 0.5 per cent. In regions such as Central and South America, Asia-Pacific, and North America, trade loans account for a significant portion of the total trade finance exposure.

Key takeaways

The research identifies a significant association between a country’s trade growth and bank-intermediated trade finance growth. Specifically, a 1 per cent increase in trade growth is associated with a 0.41 per cent increase in bank-intermediated trade finance. This indicates that trade finance supply is strongly driven by the demand for trade, a finding that is now supported by empirical evidence across a sample of 100 countries.

Furthermore, the pace of trade finance flows is closely linked to the level of financial development. A one-point increase in a country’s financial market development index is associated with a 10 per cent increase in trade finance growth. Large banks are more likely to accelerate their supply of finance in countries with stronger financial infrastructure. Conversely, global financial volatility impairs supply; a one-point increase in the VIX index—a proxy for global uncertainty—is associated with a 3.3 per cent decline in trade finance growth.

Conclusion

Financial conditions at both the global and national levels are critical for determining access to trade finance. The evidence suggests that developing regions are more negatively impacted by global financial uncertainty than regions like North America. Consequently, the report supports policy responses aimed at easing access to trade finance during crisis episodes and strengthening local capacity in the medium-to-long term. Improving shock resilience in emerging and developing economies is essential, as broader access to trade finance boosts a country’s capacity to access global markets and promotes long-term economic growth.

Dataset analysis

The underlying ICC Trade Register data covers between $1.6 trillion and $2.0 trillion in annual trade finance flows. This represents a portion of the total global trade finance market, which was estimated at $5.2 trillion in 2020, or approximately 6 per cent of global GDP. Developing countries are well represented in the data, accounting for half of the sample. The database categorises six short-term products: issued import letters of credit, confirmed export letters of credit, loans for import/export, performance guarantees, supply chain finance, and financial guarantees.

A notable feature of the dataset is a declining trend in total value reported by sample banks. This may indicate a reduced reliance on these specific banks, an increased market share for banks not included in the sample, or a shift towards alternative forms of finance such as open account financing, trade credit, and credit insurance. Evidence suggests the market share of local banks has grown significantly, with global banks now holding only a quarter to a third of the market compared to nearly the entire sector thirty years ago.