The missing rails behind the $2.5 trillion trade finance gap
By: Scott Sanchon
Over the past several years, there has been considerable change and pressure in the trade finance and cross-border payments spaces. Yet, as the Asian Development Bank has reported, the trade finance gap, one of the most consequential challenges in the industry today, now sits at $2.5 trillion.
Despite significant efforts to bridge this gap, the shortage of financial access has not only endured but grown from $1.5 trillion a decade ago to its current level.
Trade Treasury Payments’ Deputy Editor Carter Hoffman spoke with Ayo Ojerinola, Founder and CEO of NOBO Finance, to explore the underlying problems of the trade finance gap, the promise of UK-Africa trade, and why interoperability is the key to unlocking an inclusive global trading economy.
The SME problem is not just about risk
The $2.5 trillion trade finance gap has demonstrated why the industry’s underlying structural challenges are no longer easy to overlook. The concentration of trade finance accessibility among larger firms and the risk associated with this financial practice has been the default explanation for why SMEs struggle to access capital. But risk, Ojerinola argues, is only part of the story, and perhaps not even the most important part.
“The problem is when you have a larger deal with a multinational and when you have a smaller deal with an SME, the cost of compliance and due diligence stays the same, the overhead cost,” Ojerinola said.
“So if you’ve got a twenty million dollar ticket deal for a larger business, and the cost of compliance is fifteen thousand dollars, no one bats an eyelid. But as soon as you have a five hundred K, one hundred K SME deal, and the cost of compliance is still fifteen thousand to fifty thousand dollars, that becomes an economic problem. And
that deal is no longer economically viable.”
Because of these costs, even the most creditworthy SME transactions can fail to access financial support. This is despite the fact that SMEs are an important part of any economy. Export SMEs, for example, help export domestic goods and are vital in driving global trade.
The opportunity cost that emerging markets are paying
Accessing financial capital not only enhances resilience but also enables businesses to operate and scale – without it, they will miss opportunities.
For businesses in emerging markets, the challenge is a deep and perhaps structural problem. Fragmented data and interoperability problems are other issues that pull back smaller businesses in emerging economies from accessing financing. Because financiers assume higher risk and unverifiable credit history, these factors create more challenges for them in accessing financial support.
“You know, the financiers need to deploy into deals that are within their risk threshold. They need to be deployed to deals that they feel they can trust. So from a trusted source, a trusted supplier, a trusted supply chain,” Ojerinola said. “So the money is there, but the right conditions need to be there to deploy.”
Furthermore, misalignment between regulatory frameworks and assessment metrics is another critical factor limiting emerging economies’ access to trade finance. In the space, the criteria used to evaluate compliance were largely built around the infrastructure of developed markets. Applying those same metrics to SMEs in developing markets is using the wrong tool for the right job.
The missing rails
And of course, there are the challenges of interoperability and scalability.
In trade finance today, many participants are working in silos. Platforms that work well within a closed network of partners but cannot communicate with anyone outside are not scalable. Especially in the trade finance industry, where shipment or business activities span across jurisdictions, they will encounter different regulations and processes applicable in that area.
“You can’t truly have global scalability without having interoperability, especially in
trade finance where you have multiple parties trying to trade,” Ojerinola said.
In the early days, companies built their systems on one cloud provider. Microsoft Azure is a great example of a digital tool that found itself locked in. Moving to Google Cloud or Amazon Web Services meant starting over. The industry eventually solved this by building inclusive architecture that could run on any platform, anywhere, without being tied to a single provider.
“Building your architecture in a way to ensure that you’re offering true digitalisation at scale,” Ojerinola said. “I think that’s where things will start to move in the right direction. Everyone starts to build with that in mind, and everyone follows the standards so their systems can play together. And yeah, we can solve these challenges in that way.”
For Ojerinola, interoperability and scalability remain the two most consequential unsolved problems in trade finance today. And the capital gap in emerging markets is also something that the industry often overlooks.
Intra-African trade currently stands at just 14 per cent, compared to 64 per cent for intra-European trade. It is a sign of limited infrastructure that was never designed for African markets. Nigeria, for example, is the second-largest adopter of stablecoins and Bitcoin globally. Whether the infrastructure is ready, the interoperability and regulatory gap across jurisdictions is another aspect that the public does not pay attention to. These are the missing rails that the industry must build, not just for Africa, but for every emerging market where the opportunity exists but the infrastructure does not match it.
