Exploring Alternate Solutions for Closing the Trade Finance Gap

The prominence of trade finance has been steadily increasing as more countries engage in international trading. At its simplest, stages of the process can include allowing a seller to gain financing for the purchase of goods in order to sell them to make a profit, providing buyers with the funds to purchase goods from the seller with which to resell or manufacture them, and guaranteeing the buyer and seller that payment will only be made after a successful transaction. Ignoring the means of attaining credit, the major commercial banks in this domain are based in nations which possess a current or former global reserve currency. This is because these countries usually experience an increase in imports and exports during their industrialisation period. Moreover, due to this reserve currency being widely used in international commerce, these commercial banks gain profits from enabling cross-border trade and supplying access to the reserve currency. As I read news on trade finance and looked back through info-graphics from the past, this (paraphrased) thought popped into my head. I understand that trade financing is classified as unsecured debt, because it largely hinges on the credit status of either the buyer or seller. The increased risk leads to a higher interest rate, which in turn necessitates that commercial banking institutions reserve more capital for protection. In this closed loop system, commercial banks are the primary source of costly credit, as they are commercial entities. To insert other means of credit necessitates looking beyond banking. For asset management, the typical process of obtaining credit/capital is to issue debt, with the promise of future interest payments and eventual repayment. If loans for trade finance can be tokenized and incorporated into the financial system, they could work as a financial asset. This asset would be associated to economic activities within the real economy. The difficulty is that due to the turnover of trade finance loans, the amount of asset servicing needed will be higher. It appears likely that both developing and developed economies' SMEs would be the most likely recipients of trade finance loans. If there was a greater focus on doing 'good' instead of solely on profit, then a fund of credit could be put aside in order to facilitate such loans. The issue is how to determine the trustworthiness of the SMEs. The default rate for the loan system could start off relatively high, but would likely improve with further data collection. A unique notion might be to have the income from this fund be taxed in a preferential way, or any potential losses could be used to offset other tax liabilities. These are nothing more than fanciful concepts. Take them with a grain of salt.

Source: https://medium.com/@notherArmchairEconomist/alternative-credit-to-bridge-the-trade-finance-gap-f72a27fb4654?source=rss------fintech-5