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MSMEs make up around 90% of businesses globally, but accounted for just 23% of applications for trade finance in 2020. Despite their low representation, these smaller firms made up 40% of rejected trade finance applications. This mismatch between demand for and supply of trade financing known as the trade finance gap, is growing rapidly - from an estimated $1.5 trillion in 2018 to $2 trillion in 2022, and shows no signs of slowing.

Trade finance offers a differentiated combination of credit and duration risks, liquidity profile that can complement other portfolio allocations in fixed income and increase diversification. Discussions in the broader ecosystem of trade finance have consistently pointed towards a greater role for institutional investors to provide trade credit through specialized funds, which is expected to expand greatly in the coming years.

In CNBC-TV18's interview with Steven Beck, Head of Trade Finance at Asian Development Bank (ADB), a primary reason for the trade financing gap getting larger is inflation. The global economy is expected to grow at less than 3% and international trade volumes are also expected to fall to less than 1% after a decent growth last year.

Increased regulation and growth in world trade is sparking a need for trade financing, and there is growing interest in transferring risk from banks to non-traditional sources of capital, such as investment funds with substantial capital and liquidity.

Private capital within trade finance activity comes from a diverse range of participants. Given the widening global trade finance gap, trade finance has increasingly been attracting private capital across the credit spectrum and a range of participation formats. However, there are several factors which have hampered its development as a mainstream subset of private credit.

Global Trade Finance gap, the difference between requests and approvals for financing to support imports and exports, grew to a record $2.5 trillion in 2022 from $1.7 trillion two years earlier, as rising interest rates, flagging economic prospects, inflation, and geopolitical volatility reduced the capacity of banks to deliver trade financing, according to the 2023 Trade Finance Gaps, Growth and Jobs Survey released today by the Asian Development Bank (ADB).

Measured at $1.7 trillion in 2020 and surpassing $2 trillion today, the trade finance gap hinders SMEs who tend to be the most credit-constrained, with half their trade finance requests as compared with only 7% for MNCs. 68% of SME companies surveyed did not seek alternatives after being rejected.

Trade finance assets have traditionally been ignored by investors because they perceive them as a complicated and unstructured asset class with multiple variations dependent on geographies, commodities or goods, and counterparty. But in recent years, this lesser-known asset class has drawn increasing interest as an uncorrelated investment with low risk and the possibility of high returns.