The writer is the International Finance Corporation’s global vice president for industries.

For developing countries, trade and global value chains offer a proven pathway to drive productivity, support growth, reduce poverty and encourage investment. Over the past four decades, as developing countries’ share of global trade more than doubled, poverty across the world has declined from around 40% to single digits.

One tool that plays a critical role in this process is trade and supply chain finance. This bridges the time delay between a supplier shipping products and the buyer settling the invoice. It provides funding and liquidity, and mitigates risk for businesses to enable them to sustain and expand their operations.

Yet for most businesses in developing countries, trade and supply chain finance is neither easily accessible nor affordable. More must be done to roll out this funding to help jump-start economic development across these markets. 

This funding is particularly important in low-income and fragile countries, where World Bank and International Labour Organization data shows that agriculture and services account for as much as 60% of output and 75% of employment. These sectors tend to be dominated by micro, small and medium-sized enterprises (MSMEs) which rely on trade and supply chain finance as the primary — often only — source of funding. It is crucial to help them buy equipment and intermediate goods, which enable MSMEs to participate in local and global value chains.

Affordable access to trade and supply chain finance is critical for other building blocks of economic development in these countries, too. It helps develop local financial markets, and import staple foods and pharmaceuticals needed to ensure health and food security. 

A $2.5tn gap 

Despite its importance, there is a large and persistent global trade finance gap. The difference between requests and approvals for financing to support imports and exports worldwide has been above $1tn for the past 10 years and jumped to $2.5tn in 2022 amid the fallout from the pandemic, according to the Asian Development Bank.

In low-income countries, and especially among their MSMEs, this gap is particularly noticeable. Recent joint IFC and World Trade Organisation (WTO) studies show that the share of trade covered by trade finance across several countries in West Africa and south-east Asia is below 40%. That compares with between 60% and 80% for developed countries. Costs are also high in less advanced regions: in West Africa, IFC-WTO studies found that the cost of trade financing can be up to twice the average cost for developing countries and eight times that of developed countries.

Trade and supply chain finance shortages can worsen during economic downturns, with flows to developing countries drying up precisely when they are needed most. Conversely, IFC-WTO studies show that when the availability of this finance increases, trade can flourish, particularly south-south flows. An IFC-WTO study of Côte d’Ivoire, Ghana, Nigeria and Senegal showed that increasing trade finance coverage and lowering its costs could raise their total trade by around 8% and amplify trade between them by up to 42%.

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Knowledge transfer 

The $2.5tn funding gap highlights the need for greater intervention by multilateral development banks and development finance institutions to improve access to funding, especially in higher-risk countries underserved by commercial finance providers.

There is also a need to further build the capacity of banks in developing economies. This will not only help strengthen financial markets, but also bring about much-needed innovation and a broader offering of trade and supply chain finance.  

IFC is working on both these fronts. Its trade finance programme channels close to 80% of its total investment into lower-income countries and is focused on promoting south-south trade. It also works with the WTO to train local banks on trade and supply chain finance products and extend best practices in anti-money laundering and combating the financing of terrorism. Together, we’ve trained more than 1200 bankers across 40 developing countries in the past three years. 

But more must be done. Co-ordinated action by all stakeholders will be necessary to ensure this funding reaches the countries and companies where the gap is most acute, and help improve the skills and capabilities of lenders and regulators in developing countries. Failure to act now could have long-lasting consequences for trade and economic development in the countries needing it most.    

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