By: Duarte Pedreira, Global Head of Trade & Working Capital Finance, Crown Agents Bank and Chair, Trade Finance Conference of Parties

The global trade finance gap remains a persistent obstacle to shared prosperity in emerging markets. First quantified by the Asian Development Bank in 2013 at $1.9 trillion per year, the shortfall has grown to $2.5 trillion despite advances in technology, regulation, and financial sophistication.

Small and medium-sized enterprises (SMEs) are central to this issue. According to the World Bank, they represent around 90 per cent of all businesses and more than half of global employment. In developing economies, SMEs drive diversification and value creation. Yet they face systematic exclusion from trade and working capital finance. When viable SMEs are unable to fund imports, exports, or participation in regional supply chains, growth stalls, inequality deepens, and economic development is impaired.

The persistence of a $2.5 trillion gap reveals an uncomfortable reality: the binding constraint is not a lack of capital, but ineffective risk transfer. Even commercially sound, well-structured, and fully compliant transactions still fail to attract funding because jurisdictional, regulatory, or balance-sheet considerations deter international lenders. Risk aversion, rather than bankability, has become the dominant obstacle.

The FX gap’s silent impact

Overcoming this risk aversion has been the focus of the work being undertaken to tackle the gap. But there is a hidden element that thus far has received little attention, and which requires resolution as a condition precedent to any attempt to solve the primary issue…

In emerging markets, the vast majority of SME financing is conducted in local currency. SMEs generate revenues, incur costs, and employ labour domestically, making local-currency funding essential to match cash flows and avoid destabilising foreign-exchange exposure. Hard-currency lending (typically USD or EUR) is confined to a relatively small subset of larger, export-oriented firms with natural FX hedges. This creates a fundamental mismatch where SME demand for financing is predominantly local-currency based, while international capital (including that provided by development finance institutions and global banks) remains overwhelmingly denominated in hard currency. The result isn’t a lack of capital in aggregate, but a structural inability to channel that capital into the form SMEs actually require, at scale and sustainably.

Eliminating the SME financing gap, therefore, requires addressing access to local-currency FX hedging solutions for international lenders. Without the mobilisation of international capital pools into emerging markets and the creation of mechanisms allowing international lenders to participate in local-currency SME financing structures without assuming unhedged FX risk, the gap cannot be solved at source, regardless of how much credit enhancement, first-loss protection, or other risk-mitigation features are layered into those structures.

Today, FX derivatives markets for emerging-market currencies are either fragmented and prohibitively expensive or non-existent. Existing solutions address spot liquidity (the ability to enter or exit a currency today) but do not provide the forward certainty required by international lenders to surmount the FX risk barrier.

For a functional derivatives market to emerge, someone must be willing to take the other side of the trade, effectively guaranteeing future access to hard currency when local-currency exposures are unwound. In markets where hard currency is structurally scarce, private actors alone are neither incentivised nor able to provide this guarantee at scale. As with borrower and country risk, overcoming this constraint requires intervention by politically mandated public-sector institutions (the likes of development banks, central banks, and similar entities) acting in pursuit of the greater economic good.

TF COP’s role to play

Trade finance fundamentally enables livelihoods, employment, and economic resilience through the cross-border movement of goods and services. When trade flows function efficiently, they support entrepreneurship, job creation, and income generation. When they don’t, prosperity in emerging markets is constrained at its source.

This challenge sits at the heart of the Trade Finance Conference of Parties (TF COP), created in 2024 as a global public-private initiative designed to move beyond diagnosis into delivery. TF COP has convened one of the broadest coalitions ever assembled in trade finance, bringing together development banks, export credit agencies, trade bodies, and private-sector participants with a shared objective of closing the trade finance gap to unlock prosperity in emerging markets.

The TF COP Task Force, created in July 2025, serves as its executive engine with two complementary pillars. First is a think-tank tasked with identifying structural constraints that prevent capital from reaching SMEs, and second is an incubator where practical solutions can be designed, tested, and scaled in a sandbox environment.

Against this backdrop, creating a dedicated FX Working Group becomes essential to remove this hidden obstacle fuelling the trade finance gap.

This FX Working Group under the TF COP Task Force is mandated to generate ideas and engagement from public and private stakeholders, focusing on creating an FX derivatives market for emerging market currencies. With participation from institutions such as Crown Agents Bank, alongside multilaterals, development banks, and other private sector entities, the Working Group can provide a forum to frame the problem and design viable solutions. The objective is to progressively move from structured analysis within the think-tank to practical experimentation through sandboxes within the TF COP incubator.

This is ultimately an attempt to tackle two deeply interconnected constraints at once. First being the trade finance gap, and second being the FX gap. It is precisely the kind of challenge that a coalition such as TF COP is positioned to address.