Finding solutions

Financial inclusion is key to participation in international trade

International trade is crucial for economic growth. On one hand, it provides markets for the sale of their exportable surplus and on the other it helps them import goods that they do not manufacture or for which imports are the cheaper alternative. While the import of luxury items is discouraged generally, that of essential items, capital goods and raw materials is extremely important to meet the urgent needs of the people and keep the wheels of the industry running.

Growth of international trade is hindered in some countries on account of their high production cost, tariff and non-tariff barriers imposed by other states, poor quality of the products they make and a general trust deficit. Apart from these, the availability of international trade finance has a significant role in making companies venture into international trade. The conditions are different for different countries and companies and finance is not easily available to all.

Studies show that countries like Pakistan and Kyrgyzstan have some of the highest numbers of rejected applications for international trade finance. Data shared by the Central Asia Regional Economic Cooperation (CAREC) Institute research conference in March 2021, which aimed to catalyse research on acute topics and produce relevant analytics that could aid CAREC members - Afghanistan, Azerbaijan, China, Georgia, Kazakhstan, Kyrgyzstan, Mongolia, Pakistan, Tajikistan, Turkmenistan and Uzbekistan – stay in the forefront of sustainable development in the wake of Covid-19 pandemic.

Research on financial inclusion and fin-tech technologies, by Dr Minsoo Lee of the Asian Development Bank (ADB) and Dr Ghulam Samad of the CAREC Institute, highlights the problems and suggests solutions these countries can look out for with regard to trade finance.

According to a World Trade Organisation (WTO) estimate, trade finance facilitates 80-90 percent of international trade today. Worldwide, the unmet demand for trade finance amounted to $1.5 trillion in 2017. It is expected to rise to more than $2.4 trillion by 2025. In 2018, 57 per cent of the trade finance applications from firms in the CAREC region - mainly from Kyrgyzstan and Pakistan - were rejected. Almost half of the applicant are no longer seeking alternative finance and have altogether withdrawn from a potentially viable trade activity.

Dr Lee and Dr Samad analysed financial inclusion in the CAREC. They point out that trade finance requests from smaller firms are often rejected due to i) high perceived costs and risks associated with their insufficient collateral or guarantees, ii) lack of a relationship with financial institutions and iii) insufficient credit or performance history. For lenders, they say, smaller transactions involve high transaction and information costs of having to stringently comply with international regulations and standards, such as anti-money laundering and know your client (KYC) rules. Country-specific factors such as the lack of correspondent banking relations, exacerbated by large global bank withdrawal from emerging countries due to the perceived risk of doing business, also influence the success of trade finance applications.

Dr Lee and Dr Samad discuss potential solutions to the trade finance gap through the use of financial technologies (fin-tech). In simple words, fin-tech refers to the integration of technology into offerings by financial service companies to improve their use and delivery to consumers. Block chain technology is an example of enhancing the flow of information and overcoming compliance challenges. Then there are mobile banking, mobile payments and crypto-currency etc.

The authors also recommend CAREC member countries focus on building their fin-tech foundations, bolstering the ICT and digital infrastructures, ensuring regulatory quality (e.g., cyber-security and addressing technical vulnerabilities, data governance, and privacy protection), and enhancing capabilities to advance inclusive trade and finance.

The authors argue that digital technologies in financial services make risk management more effective, facilitate transactions across larger distances and faster speed, allow transactions without having to rely on personal relations, and increase transparency. In short, these digital technologies reduce human interaction and dependence on cumbersome procedures to verify the antecedents and credibility of trade finance aspirants. “Using distributed ledger technology, supply chains can be more cost-effective and efficient by replacing complex paper-based procedures,” the CAREC Institute research says.

The authors also recommend CAREC member countries focus on building their fin-tech foundations, bolstering the ICT and digital infrastructures, ensuring regulatory quality (e.g., cyber-security and other technical vulnerabilities, data governance and privacy protection), and enhancing capabilities to advance inclusive trade and finance. They recommend that CAREC members benefit from the ADB-supported guarantees and loans through its Trade and Supply Chain Finance Programme to support international trade.

The case of Pakistan needs a special mention here. The financial market efficiency in Pakistan was hit hard after the Pakistan Stock Market (KSE-100) benchmark index plunged by more than half (57 per cent) on December 30, 2008. However, according to the study, Pakistan has made consistent gains over time in terms of improving credit availability to the private sector as well as ensuring the efficiency of its financial institutions. But this does not mean that Pakistan is well off, and that there is no need for digital and financial technologies. There is a long way to go.

Khalid Umar, chief of Strategic Planning Division of the CAREC Institute, points out in his paper, Financial Inclusion and Fintech in CAREC: Constraints and Prospects, that globally, 1.7 billion adults lack access to banking services. Recent trends point towards a rising number of adults opening bank accounts. He says that due to the advent of ICT and the rapid rise of global smartphone ownership, individuals increasingly have access to non-traditional financial services, for example, mobile money providers. At the same time, there are substantial financial inclusion disparities between countries, regions and economic blocs.

The CAREC Institute study says that CAREC members are at different stages of development and calls for improvement in financial inclusion figures. These countries, the authors say, widely vary in population, from Pakistan with over 200 million people to Mongolia with just over three 3 million people. The study comes up with some interesting CAREC figures that follow. Mongolia takes the lead as its share of the population with a bank account stands at 93 per cent, almost double the rest of the countries. It is followed by Georgia and Kazakhstan, with 61 per cent and 59 per cent share of the population having a bank account, respectively. However, in some countries, the growth in account ownership remains low. Afghanistan (15 per cent), followed by Pakistan (21 per cent) and Azerbaijan (29 per cent), represent the lowest share of bank account holders in the region.

Achieving better financial inclusion and deployment of fin-tech and addressing the barriers listed above can reduce the trade finance gap, which hinders trade and access to markets and impedes investment flows that could affect future economic growth and development. Finding solutions to bridge the gap would foster business dynamism, enabling even smaller firms to benefit from the reallocation of production and investment within the global supply chains.


The author is a staffer and can be reached at [email protected]

Finding solutions