25 January 2022

Why trade finance matters to unlock LDCs' trade potential

by Natasha Smith / in Op-ed

A training course for trade officials in LDCs increased their understanding of trade finance, giving them the tools to increase access to this financial mechanism for businesses in their countries.  

Trade finance is vital to facilitate trade. The WTO estimates that between 80 and 90 percent of world trade relies on trade finance in the form of trade credit or insurance. A better access to trade finance in least developed countries (LDCs) could allow businesses to have the financial tools to participate in national, regional or global trade. Trade finance not only reduces the risks associated with trade for companies but also improve their cash flow, allowing them to access new markets. According to research by the World Economic Forum (WEF), lack of access to trade finance was found to be one of the top domestic barriers to a country's trading capacity, alongside transportation and logistics. Without trade finance, many small businesses cannot trade and compete.

Even prior to the pandemic, there was a significant gap between the demand for and the supply of trade finance mechanisms globally, especially in the LDCs. As a result of the COVID-19 crisis, the global trade finance gap has grown to an estimated USD 1.7 trillion in 2021, up from USD 1.5 trillion in 2018, according to recent research from the Asian Development Bank. This increase in trade finance gap has disproportionately affected the world's poorest countries, and small businesses have been particularly hard hit by the limited access to trade finance. To improve LDC access to trade finance and foster a sustainable recovery from the pandemic, investment in knowledge-building on the topic is vital for policymakers and government officials.

In 2020, the Enhanced Integrated Framework (EIF) partnered with the Islamic Trade Finance Corporation (ITFC) and the International Chamber of Commerce Academy (ICCA) and launched a training course on trade finance for government officials in LDCs. The initiative built the trade finance knowledge and networks of 10 participants from 8 LDCs through a structured course. Over 12 months, the participants developed skills to deliver and process trade finance solutions, while deepening their knowledge of supply chain finance, risk distribution and cross-border trade.

Three participants share why growing their understanding of trade finance matters for them and how they will put their new skills into action.

Building export capacity for small businesses in Ethiopia

In recent decades, Ethiopia has experienced rapid economic growth and considerable expansion of its trade flows. An important component of this growth is the promotion of export development, and the need to increase the access of Ethiopian businesses to the international trading system. This economic expansion has been accompanied by a strong demand from businesses for trade finance, with only limited capacity to respond to such demand.

Mr. Endris Negus is a Monitoring and Evaluation expert at the Ministry of Trade and Industry in Ethiopia. Before embarking on the course, Negus recognized that the lack of trade finance in Ethiopia remains a key challenge for both new start-ups and existing businesses looking to expand.

Negus says that until now, the Ministry of Trade and Industry has only focused on developing a limited set of traditional finance products. The training course has exposed him to a multitude of alternative financing mechanisms that could be useful to support the growth of Ethiopian businesses. The modules on supply chain finance and Islamic banking have been particularly valuable elements of the course which have direct relevance on his role. Upon completing the course, Negus identified scope for incorporating trade finance elements into future trade capacity-building projects in Ethiopia.

Increasing public-private cooperation on trade finance in Rwanda

The role of the public sector is critical to close trade finance market gaps. In Rwanda, the support it provides to businesses is relatively small compared to the size of the market. The private sector plays a pivotal role in developing trade finance mechanisms, but the public sector needs to shoulder some of the risks involved.

Mr. Frank Abaho Gakwaya works as a Strategy and Resource Mobilization Manager at the Rwanda Development Bank. With his new expertise gained from the course, Gakwaya is developing a trade finance strategy for the bank. He has already engaged like-minded partners from the public and private sector in Rwanda to support the Bank in developing trade finance products.

Cross-sectoral collaboration and public-private partnerships, such as co-financing, is an important part of increasing public sector involvement in trade finance. Part of the public sector’s role in developing trade finance could be generating data, including default and loss statistics by country, which would help the private sector to develop a clearer understanding of the risks involved, and identify where greater opportunities lie for trade finance.

Making banks more accessible in Zambia

In Zambia, micro-, small- and medium-sized enterprises (MSMEs) are an important contributor to the country's economic growth. However, many of these MSMEs need access to banking services and financing to tap into new markets and grow their businesses. Accessing these financial services is a key challenge facing Zambian business.

In her role as a Monitoring and Evaluation Officer at the Ministry of Commerce, Trade and Industry in Zambia, Mrs. Kasonde Sampa has recognized an opportunity to increase access to finance and exports for traders in her country.   

Sampa will conduct a survey across commercial banks in Zambia to scope what options are available to traders, and how they can access their services. She has already identified 5 of the 18 banks in the country that have an international presence and can facilitate cross-border trade. Beyond the survey, Sampa will work to foster closer engagement on trade finance issues between the Department of Foreign Trade and the Department of Domestic Trade. The two bodies already work closely on trade facilitation and border management issues, and Sampa has identified opportunities to build on this cooperation to promote access to trade finance in Zambia.

Increasing the knowledge of government officials in LDCs on ways to facilitate trade – such as through trade finance – is an important part of contributing to increase LDC access to global markets. More readily available trade finance mechanisms will not only help individual exporters and small businesses, but will also help raise the global share of LDC trade and improve livelihoods.

To learn more about the Trade Finance Initiative, listen to the ICC Academy's recent episode of its Trade Insider podcast, featuring insights from EIF's Deputy Executive Director, Annette Ssemuwemba and participant, Endris Negus. 

Any views and opinions expressed on Trade for Development News are those of the author(s), and do not necessarily reflect those of EIF.