Businesses particularly the micro, small and medium-sized enterprises (MSMEs) continue to face challenges in accessing sufficient credit, resulting in a global trade finance gap of US$1.5 trillion in 2016. Even as technology is introducing new ways to assess and manage risk, the fundamental causes of unmet demand for trade finance have not been addressed.

While the trade finance gap has stabilized compared with the record high US$1.6 trillion in 2015, it still translated to missed growth opportunities and job creation, according to an Asian Development Bank (ADB) survey released on September 5.

Emerging economies continue to face the greatest shortfalls with developing Asia accounting for 40% of the global total in trade finance gap. The MSMEs have the biggest difficulties in accessing trade finance, representing 74% of the total rejections in 2016, compared with 57% in the previous year.

The fifth ADB annual study quantifies market gaps for trade finance and explores their impact on growth and jobs. It notes the high rejection rate means foregone trade, which is a drag on the overall economic growth. The ADB suggests that a 10% increase in trade finance globally could boost employment by 1%.

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 on financial support from smaller firms.

This comprised 29% of the rejected transactions – or those due to know-your-customer (KYC) concerns. The ADB study notes the reluctance of banks to undertake KYC for low-value transactions has been a persistent problem in the trade finance sector since the global financial crisis. It is a function of the expansion of regulations and capital requirements in the sector.

The cost of regulatory compliance can lead banks to exit client relationships as reflected by the 40% response in the 2016 survey and 45% in 2015, including the withdrawal of correspondent relationships.

The survey respondents believe that fintech and digitization have attracted a lot of attention as a potential solution to SME financing requirements for timely and affordable finance. However, data continue to show that few firms are familiar with fintech solutions to finance, and digitization of trade finance processes in banks are not reducing rejection rates for SMEs. The potential for both remains high, but the build phase continues.

“More than reducing cost, fintech needs to deliver an enhanced capability for financial institutions to conduct due diligence on MSMEs before it can play a role in reducing gaps,” says Steven Beck, head of trade finance at ADB.

Only around 20% of all reporting firms have used digital finance platforms, the survey shows. Among those firms, peer-to-peer (P2P) lending continues to be the type of fintech that was most used – which is in line with the global trends. An interesting feature of fintech, and in particular P2P, is that woman-led firms are more likely to use it than the general population.

On the supply side, among banks, digitization continues to make progress. This year, a greater proportion of banks report implementing digitization in banking operations, with the objective concentrated on cost reduction.