Comprehending the instruments owing to which trade financing can be carried out and the efficiency with which it allows for exporters, importers, and companies alike to conduct business transactions has been examined below. Furthermore, this article seeks to shed light on its scope and future potential.
Definition: Trade Finance
Trade finance can be defined as an umbrella term that holds within it the financial implements, instruments, and products availed of by a broad diaspora of companies such that international trade and commerce can take place. By making use of trade finance, it is feasible for importers and exporters to conduct business transactions in an efficient manner. It is important to bear in mind that trade finance has within its operation a broad variety of financial products that companies and banks utilize in order to allow for their trade to take place.
Understanding the Trade Finance Market
Trade finance has a number of segments in place which have been broadly classified by the Global Opportunity Analysis and Industry Forecast for the period of 2021-2026 as follows.
- Based on Type of Service on Offer – Documentary Collection, Factoring, Guarantees, Letters of Credit, Supply Chain Finance, and Other.
- Based on Application – Finance, Energy, Metals and Non-Metallic Minerals, Power Generation, Renewables and Transport.
Allowing for trade transactions to take place at both, the domestic and international level, a third party facilitates transactions between the sellers and buyers of goods and services such that issues and risks associated with payment and supply are minimized.
Those who partake in trade finance include but aren’t limited to banks, companies that deal with financial products, export credit agencies, importers and exporters, insurers, and service providers.
Performance Thus Far
When looking at the performance of the global trade finance market, its valuation amounted to USD 8,942.27 billion as of 2019.
The Coronavirus pandemic, however, resulted in trade financing witnessing a brief dip resulting in the market falling to a value amounting to USD 7,616.52 billion as of 2020.
Close examination of world trade indicates that about 80 to 90 percent of it is conducted via trade financing which provides a number of services examined above.
Exporters and importers hailing from countries that aren’t as developed are often lumped with having to pay exorbitant fees which result in their exchange costs rising. Moreover, low-interest rates and fees provided by international banks more often than not, end up favoring traders belonging to developed countries.
Examining the Future of Trade Finance
The next few years i.e., the period between 2021 and 2026 are expected to result in the trade finance market ballooning to a valuation of USD 10,426.67 billion with a compounded annual growth rate of 5.37 percent during this period.
What is Driving this Growth?
The primary reason why trade finance is expected to grow majorly by 2026 is the increasing pace of global imports and exports.
What is Aiding this Growth?
A number of factors are responsible for trade financing growing at this anticipated rate. The more prominent of these factors have been examined below.
- Emerging technologies – Radio frequency identification (or RFID), optical character recognition (OCR), and quick response codes that help place and track orders have enhanced digitized mechanisms in place.
- Systematic development plans are anticipated to provide opportunities for growth.
- Employment of structured and price methods will also help aid growth opportunities.
- Banks that provide financial services help reduce the risks that arise between buyers and sellers of products and offer to buy trade credit insurance which will help enhance the market growth. Moreover, these banks are in the process of shifting their paper-based operations into digitized systems that allow for greater efficiency and transparency. This move alone will greatly help with trade financing operations.
The market for trade financing is vast and is only set to grow further in the coming years owing to the demand for global imports and exports. Factors that have helped drive this growth include but aren’t limited to –
- The rate of increase with which open accounts are traded within the factoring. Market
- The rate of increase with which blockchain usage within finance markets including trade finance and credit insurance has increased.
- The general global rate with which the market for trade credit insurance has expanded.