SINGAPORE — While large businesses have resumed international trade at levels seen before the financial crisis, small- and medium-sized enterprises (SMEs) have not fared as well. For these firms — the backbone of economies everywhere — growth is impeded by the limited availability of bank loans to finance trade.
The problem is especially acute for SMEs in Asia, the world’s largest trading region and the one most reliant on trade finance. Asian SMEs generate up to 50 percent of Asia-Pacific GDP and employ up to 50 percent of the labor force. Proposed treaties — including the Trans-Atlantic Trade and Investment Partnership, the Trans-Pacific Partnership and the Trade in Services Agreement — promise to make trade easier. But experience has shown that the impact of trade liberalization on countries’ growth is short-lived unless it is accompanied by regulatory reform to expedite the flow of capital to SMEs.
The Milken Institute report “Trade Finance: A Catalyst for Growth in Asia,” published today, points out the major impediments to financing in the region and recommends regulatory and procedural changes.
The problems facing SMEs, and their consequences for the region, are significant. In its latest survey on trade finance, the Asia Development Bank (ADB) reports a growing rejection rate of funding requests from Asia, especially among those submitted by SMEs. ADB estimates the unmet global demand for trade finance in developing Asian nations may have been as high as $1.1 trillion in 2013. The lack of access to funding is often identified as the reason why SMEs account for 35 percent or less of direct exports— instead of the greater share suggested by their role in economies.
“Asian trade is highly dependent on bank-intermediated financing,” says Claude Lopez, director of research at the Milken Institute and lead author of the trade finance report. “But because banks naturally focus on creditworthiness, too often they are unable to accommodate a large percentage of SME requests, especially in the less developed countries.”
Bank funding has been more difficult to obtain since the financial crisis prompted new regulations for U.S. and European banks. The restrictions have led to the banks to do less business in Asia, reducing, at least temporarily, the flow of needed capital. Local banks have entered the trade finance market to fill the void, but differences in the infrastructure and support systems (in banking, insurance, advice, and networks of relationships with partners) among Asian nations are among the main concerns of lenders when considering funding requests from SMEs in less-developed countries. To help meet the needs of SMEs engaged or eager to engage in international trade, several alternatives are becoming popular, These include inter-firm credit (for example, when an exporter extends credit to the importer by shipping and delivering goods before payments are due), or global and regional value chains that reduce the funding needs of an individual company (these are quite common in automotive and electronic sectors, among others, and include the contribution of components or activities from various countries to complete a product or service).
“Trade Finance: A Catalyst for Growth in Asia” assesses the state of trade finance in Asia, paying particular attention to the ASEAN countries and the needs of SMEs. It emphasizes that to succeed, regional efforts to integrate trade law and procedures must be combined with the replacement of paper documents with electronic transactions, as well as standardized procedures across countries.
“Along with improving procedures, we hope policymakers will work together to create international criteria to streamline the trade finance process,” says Lopez. “These steps will help widen the pool of lenders and investors, making capital available to smaller businesses and improving prospects for their millions of employees.”
For investors, the use of trade receivable assets, through securitization or direct investment, could be an attractive alternative in an environment of low interest rates. They offer appealing alpha yields, consistent returns, low volatility, “real economy” investment, and lower default rates than other interest-based assets. Also, the behavior of these assets can be uncorrelated to the market, offering portfolio risk diversification.
“Trade Finance: A Catalyst for Growth in Asia,” by Claude Lopez, Stephen Lin and Jakob Wilhelmus, is available for download at no charge at http://www.milkeninstitute.org/publications/view/739.
Trade finance will be a topic at the second annual Milken Institute Asia Summit, to be held Sept. 17-18 in Singapore. The Summit will bring together 400 CEOs, major investors, heads of sovereign wealth funds, philanthropists and other leaders. Like the Institute’s annual Global Conference — but on a much more intimate scale — the Summit provides an opportunity for these leaders to focus on some of the world’s most pressing challenges with a highlight on Asia. Panel topics include hyper-aging, financial technology, Indian Prime Minister Narendra Modi’s second year in office, Japan’s resurgence in the Asia-Pacific region, the AIIB and the evolving multilateral lending landscape, and China’s growing movie industry.
Complete information about the Milken Institute Asia Summit, including a full program and list of speakers, is available at http://www.milkeninstitute.org/events/conferences/summit/asia-summit-2015/