Leveraging Supply Chain Finance for Development
Trade financing, an esoteric and poorly understood branch of finance, is demonstrably critical to the pursuit and conduct of international trade, by companies of all sizes, and by small and medium-sized enterprises (SMEs) in particular. Those based in developing and emerging markets are in even more urgent need of the liquidity and risk mitigation solutions available through trade financing.
The global financial crisis has demonstrated beyond debate that there is an important role for public sector and international institution actors in assuring the availability of adequate levels of affordably priced trade finance, particularly (but not exclusively) in times of crisis.
It is worth noting explicitly that the discussion which follows necessarily refers to various instruments and structures of trade and supply chain finance for the sake of clarity and to provide concrete examples; that said, reference to trade finance and supply chain finance should be understood in the widest possible sense, encompassing any financing and related activity in risk mitigation, that aims to support the conduct of cross-border trade. The focus ought to be on a holistic understanding of this domain, its linkage to the conduct of trade and its clear potential to contribute to international development and poverty reduction.
Interestingly, some of the techniques evolving with the aim of supporting international supply chains can (and do) apply very well in the context of domestic, supply chain-centered activity.
A core question to consider is whether, independently of instruments and transactional technicalities, there is sufficient capacity in the global system to finance trade, and thereby to create economic value, and contribute to development and poverty reduction.
Even as the research, analysis, deliberations and dialogue around trade financing evolve, there is an opportunity for differentiated contribution to these efforts. Illustrative recommendations include:
1. Advocate for and facilitate a global coordination of efforts, knowledge management and policy recommendations around trade and supply chain finance,
2. Engage with the International Chamber of Commerce (ICC), the World Trade Organization (WTO), the multilateral development banks and others, to add further to the deliberations around appropriate but non-stifling regulation of bank intermediated trade financing in particular, including capital adequacy, compliance, due diligence and related areas. Advocate in support of appropriate treatment of on and off-balance trade financing as well as emerging propositions in supply chain finance. Support the adoption of a global solution to due diligence and “Know your Customer” requirements, such as the SWIFT KYC Registry.
3. Undertake specific analysis on the potential for supply chain finance and emerging solutions like the bank payment obligation, to address the needs of SMEs in developing and emerging markets, and to assist those markets in better linking to global supply chains and value chains.
4. Conceive, design and engage in an exploratory dialogue with industry experts and policymakers around innovations in trade financing to address specific, strategically important categories of trade activity, such as high-value services sector trade flows, commodity flows and others deemed important to international development.
5. Conceive and lead analysis aimed at identifying innovative ways to address the global gap in trade financing, including through a variety of non-traditional sources and providers, and with consideration of developments in mobile finance, microfinance and similar areas relevant to SMEs and developing economies.