Rising interest rates around the world have pushed the value of the U.S. dollar up 14% in 2022, according to the September Global Investment Report from Morgan Stanley. The U.S. dollar is the most widely used currency for international trade.
For micro, small and medium enterprises (MSMEs) around the world, the dollar’s strength creates economic headwinds as it makes dollar-based purchases and debt more expensive, which can widen trade deficits. MSMEs represent about 90% of businesses and are important contributors to job creation and global economic development. In emerging economies, formal SMEs contribute up to 40% of GDP. These numbers are significantly higher when informal SMEs are included, according to the World Bank.
SMEs are less likely to be able to obtain bank loans than large firms. The International Finance Corporation estimates that 65 million firms, or 40% of formal MSMEs in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending. The financing gap is even larger when micro and informal enterprises are taken into account.
East Asia and Pacific account for the largest share (46%) of the total global finance gap and is followed by Latin America and the Caribbean (23%) and Europe and Central Asia (15%). The rejection rate for requests of trade finance in Africa exceeds 50%, according to the African Development Bank Group trade finance study.
Shortages of trade finance pose a direct threat to seven of the United Nations’ 17 Sustainable Development Goals (SDGs), particularly those related to poverty reduction, economic growth and gender equality. The UN General Assembly has been working hard to raise awareness of this and in formal recognition states: “As the backbone of societies everywhere [MSMEs] contribute to local and national economies and to sustaining livelihoods, especially among the working poor, women, youth, and groups in vulnerable situations.”
Institutional and individual investors may consider turning to trade finance lending as part of their overall Environmental, Social and Governance (ESG) plan. The introduction of ESG investment metrics as a global movement signals a renewed value on ethics, sustainability and broader long-term value indicators. Significant social pressure is reflected in the marketplace demand for investment vehicles that support human well-being and ‘world positive’ investing.
For investors looking for impact, trade financing gives MSMEs access to critical working capital to sustain their operations through global supply chain disruptions and economic challenges. And this financing type offers investors extremely attractive risk-adjusted, stable returns and protects lenders against long-range interest rate volatility.
Triterras believes that helping MSMEs gain access to critical-need financing is an ESG priority. Our Kratos platform opens trade finance investments to a wider pool of capital and facilitates flows of capital into emerging markets where it is much needed to close the trade finance gap.
With all these financial benefits, trade finance lending is a sound investing strategy and a globally minded gesture of “doing well by doing good.”
