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Ripe for industrialisation in the trade sector, technology advancements could bridge the current $1.5tn trade finance gap, with potential to inject a much-needed growth in business, according to a new report.
The research highlights the emerging impact of digital transformation for importers and exporters, and the world’s top 10 commodity trading hubs, along with the ongoing shifts in global economic power.
The ‘Future of Trade’ report from DMCC, the UAE’s international commodities hub for trade, states that 50 per cent of small and medium enterprises (SME) funding applications are rejected by banks and that alternative trade finance, powered by FinTech and Blockchain, is on the rise.
For example, the alternative finance market in the APAC (Asia Pacific) region more than doubled between 2015 and 2016 to the total value of $245.2 billion. The report also noted that blockchain is likely to redefine the trade sector over the next decade, providing faster, more secure and effective ways to handle workflows and move goods across borders, but that large scale progress is still to be made.
Estimates indicate that blockchain could increase global GDP by nearly five per cent and trade volumes by 15 per cent. Ahmed bin Sulayem, executive chairman, DMCC, said: “Trade and trade finance will be revolutionised by blockchain and other emerging technologies.”
With a 10-year outlook, the report states that the world’s economic centre of gravity is shifting to Asia and that China’s Belt and Road initiative is gathering momentum. “Global trade and trade finance are at the cusp of a digital revolution,” added Gautam Sashittal, DMCC’s CEO. “Just as the shipping container revolutionised trade in the 1950s, sweeping advance in tech will reshape trade and how we move goods across borders. Our research helps us all understand how global trade will evolve, and how we can prepare, over the next decade.”
Businesses of all sizes continue to struggle to access sufficient credit, resulting in the global trade finance gap, according to Asian Development Bank (ADB). “A sizeable trade finance gap is a drag on trade, growth and job creation,” said Steven Beck, head of trade finance at ADB, who hoped the private and public sectors would be encouraged to ramp up collaborative efforts to improve businesses’ access to trade finance.
SMEs are critical for the economic and social development of emerging markets. These businesses generate income and create the majority of jobs - between 70 and 95 per cent of new employment opportunities - in emerging economies. SMEs are more likely to generate jobs, and at a faster pace, when they have access to finance.
Findings suggest that one of the biggest reasons financial institutions are reluctant to provide trade finance to small businesses is rooted in the cost and complexity of anti-financial crimes due diligence and the perception of low returns.
Many believe that FinTech can be a solution, although awareness and usage of this technology has to be improved.
A blockchain is a distributed database, where transactions are organised in blocks. Each block has a timestamp and an association to a previous block, forming the so-called ‘blockchain’. Using a distributed ledger and cryptology, the technology ensures that everyone’s copy of the ledger is kept synchronised and unique. While information can be added, it can’t be deleted.
The main idea behind the technology is the security and independence of data. But this isn’t the only advantage. A transaction based on blockchain can take place at the speed of light, connecting places distanced by a thousand miles in only a fraction of a second.
While blockchain started as the underlying technology for cryptocurrencies, the use of distributed ledgers is forecasted to grow exponentially in the coming years.
While the process of implementing blockchain might be time-consuming, the gains would certainly prove themselves irreplaceable, some analysts suggest.
Blockchain could change the way of trading commodities simply because transactions would be much quicker, if not safer.
Yet, a few challenges still need to be addressed before the technology can establish itself as the new standard, as not everyone is convinced or as bullish. Despite the zeal for digitisation, just 20 per cent of firms reporting to the ADB have used digital finance platforms. And, as time is money, others warn that blockchain might still fail to establish itself as the game changer of the industry so many predict.
