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The volatility of the geopolitical and macroeconomic environment in recent years has caused some problems in the trade, treasury, and payments industries. 

However, industry actors have adapted and are working together to build resilience and make international trade even stronger.

To hear about developments in the factoring and supply chain finance world, Trade Finance Global (TFG) spoke with Çağatay Baydar, Chairman at FCI and Irina Tyan, Principal Banker, TFP at the European Bank for Reconstruction and Development (EBRD).

Challenges and growth in the factoring industry

The factoring industry has demonstrated impressive growth since the turn of the century despite facing significant challenges, particularly in emerging markets. 

Baydar said, “The growth rate in 2023 was 3.3% globally in the volume of the world factoring and in 2022 it was 18%. Over the last 20 years, the average growth rate has been 8% which shows that factoring is becoming a mainstream financial product globally, which is very good indeed.”

The sector, which revolves around the purchase of receivables from businesses to provide them with immediate liquidity, has become an essential component of global trade finance, but it also faces challenges. One of the primary challenges is the bureaucratic and infrastructural limitations inherent in the current system. 

Factoring, being an invoice-based product, requires a significant amount of paperwork and documentation, which can be cumbersome and traditionally relies on a paper-based system that only adds to the administrative burden for businesses.

In developed regions like Europe, factoring’s penetration rate – a measure of the amount of trade volume that uses factoring – is around 15%, reflecting a more mature understanding and use of this financial product. By contrast, in emerging markets, the penetration rate is significantly lower, with countries like Turkey and Georgia showing rates as low as 3%.

This discrepancy highlights the knowledge gap and infrastructural deficiencies in these regions. Businesses in these markets often lack the necessary awareness and understanding of factoring, which limits their ability to leverage this financial tool to its full potential.

However, factoring usage in some emerging markets is growing.

Tyan said, “We see the progress in the countries where we started five to seven years ago, like Georgia. We recently had a workshop in Jordan, where we also see a more adapted market, more ready to look into this type of product.”

Further collaboration and efforts to promote regulatory reforms and technological advancements may be what is needed to drive factoring growth in these underutilised regions.

Regulatory reforms and technological integration

Regulatory reforms are crucial for the sustained growth and development of the factoring industry, and legal clarity is particularly important in emerging markets, where the absence of a well-defined regulatory environment can pose significant barriers to factoring’s growth.

One of the key areas that require attention is the standardisation of data exchange formats. 

Creating common data standards for supply chain transactions can facilitate smoother integration between different platforms and financial institutions, improving efficiency, reducing administrative burdens, and enhancing the overall effectiveness of the factoring process. 

Another important aspect of regulatory reform is cybersecurity. 

Tyan said, “As this product heavily relies on platforms, clear regulation on data security and cybersecurity is crucial to build trust among the participants.”

Ensuring the integrity and security of transactions protects sensitive financial information from potential cyber threats and is vital for the long-term sustainability and credibility of the industry.

Digitalising to draw clients and talent to factor

The factoring industry has been significantly transformed by the integration of digital technologies that have made the process faster, more efficient, and more accessible, especially for small and medium-sized enterprises (SMEs). 

Traditionally, the paperwork involved in factoring, particularly for international transactions, slowed down the process and added to its complexity but digital platforms are allowing for quicker access to funds and improving the overall client experience.

Baydar said, “Today, with digitalisation and the platforms, we are making our business much faster, quicker, and more effective. This really helps SMEs to touch the money very soon, very quickly. This makes our clients happier than before because they can experience a very fast, very effective, seamless transaction.”

This shift not only speeds up transactions but also minimises the risk of errors and fraud associated with manual paperwork and can help attract more young professionals to the industry. 

Baydar said, “Young people prefer to work with new technology and high-level startup businesses rather than traditional models.”

The new generation of workers is drawn to innovation and technologically advanced sectors. By embracing digital advancements, the factoring industry can position itself as a forward-thinking and dynamic field, appealing to young talent looking for exciting career opportunities. This influx of new talent is essential for sustaining the industry’s growth and development in the long term.

Organisations that fail to embrace digitalisation risk being left behind in a rapidly evolving market, meaning that investing in digital solutions is not just an option but a necessity for the future of the factoring industry.

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Only 15% of exporting firms are led by women.

This finding, from the IFC’s whitepaper “Banking on Women Who Trade Across Borders”, speaks to the gender disparity that still exists in the international trade space, particularly in emerging markets.

To learn more about the challenges that women entrepreneurs face when trading across borders and some of the initiatives in place to offer support, Trade Finance Global (TFG) spoke with Makiko Toyoda, Global Head of the Global Trade Finance and Global Supply Chain Finance Programs at the International Finance Corporation (IFC), and Tacko Baro Fall, Waemu Head Financial Institutions And International Organizations at Ecobank.

The challenges facing women in trade are daunting

Women in trade face significant challenges that hinder their ability to participate fully and equally in the global market. 

Toyoda said, “In emerging markets, many women face difficult collateral requirements, they often don’t have a credit history, and there is a high cost of trade finance transactions”

These high costs associated with trade finance transactions can be disproportionately burdensome for women-led firms, which might already be operating with thinner margins compared to their male counterparts. 

Furthermore, the complexity of trade finance products themselves poses a substantial obstacle, particularly for those who are not well-versed in navigating the financial landscape, which disproportionately includes women due to historical and systemic educational and professional gaps in finance.

These challenges collectively contribute to a discouraging environment for women entrepreneurs in trade, limiting their growth opportunities and reducing their competitive edge in the global marketplace.

Recognising these challenges, organisations like the IFC and Ecobank are working to put initiatives and programmes in place to help change the status quo.

Baro Fall said, “It is imperative that we support women. We simply cannot ignore them as they constitute a significant number of our population and integral to the entrepreneurial landscape.”

Changing the status quo for gender equality in trade

Several initiatives and programs are actively addressing the challenges faced by women in trade, spearheaded by institutions like the IFC and Ecobank. 

The IFC has launched efforts through its Global Trade Finance Program (GTFP), which has been instrumental in supporting financial institutions in emerging markets to facilitate access to global markets. 

A notable part of this initiative is the collaboration with the Goldman Sachs Foundation to provide price discounts for women importers and exporters, aiming to increase the financial participation of women in trade.

Despite these efforts, however, the volume of transactions involving women remains disappointingly low.

Toyoda said, “Since 2019, we have only booked $260 million in transactions for women-led businesses. While that is not a small number, over the same period we booked a total of $40 billion in trade finance transactions, which means that only 0.65% of the total value went to women. This is not acceptable.”

To help overcome this disparity, the GTFP has been partnering with financial institutions to provide training programs on the importance of gender awareness with the ultimate aim of helping provide incentives for banks to book more women-related transactions. 

Some banks, like Ecobank, have embraced this mindset and launched programs to that end – a positive sign that change is coming.

For example, Ellevate, a gender financing program launched by Ecobank, is designed to provide both financial and non-financial support to female business owners, ensuring a holistic approach to supporting women entrepreneurs. 

Baro Fall said, “We recognise three basic needs: the access to credit, the access to markets, and the capabilities development.”

The programme leverages key partnerships with non-profit organisations, government agencies, and development institutions to enhance its offerings and reduce the need for traditional collateral requirements, making finance more accessible to women entrepreneurs.

Together, these initiatives represent a robust effort to integrate women more fully into the global trade environment by reducing financial barriers and increasing their business capacities through strategic support and training programs. 

With gaining momentum, it is time to begin putting together innovative solutions for the years ahead.

Levelling the gender playing field in the years to come

The future innovations in improving access to finance for women in trade involve a blend of digital solutions and strategic partnerships, one of which is the increased adoption of digital platforms and tools that enhance financial inclusion. 

Baro Fall said, “At Ecobank, we have launched a Trade Hub platform to help our women clients access markets in around 33 countries, where they will be able to sell and buy their goods and services.”

This platform is part of a broader movement towards digitalisation that was accelerated by the COVID-19 pandemic, leading to greater adoption of digital financial services. Such digital solutions are especially beneficial for women, who are more likely to engage in online transactions and can benefit from mobile money payment services that facilitate easier and more accessible trade transactions.

Another approach on the horizon is the use of blended finance, which combines concessional funds from donors or development finance institutions with commercial capital, aiming to motivate stakeholders to commit to gender-inclusive development goals. 

The idea is to use blended finance as a tool to encourage banks and other financial institutions to alter their traditional financing models, which often exclude women due to stringent collateral and credit history requirements.

Furthermore, there’s a push for multilateral development banks (MDBs) to play a more coordinated role in promoting access to trade finance for women. 

Toyoda said, “We don’t have a task force for gender trade, which is pretty embarrassing. In the future, this is something that we can propose to have under MDB’s working groups so that we can think about collective actions.”

Such a task force would potentially advocate for regulatory changes to support women-owned businesses, amplifying the impact of financial and developmental initiatives.

These future directions signify a holistic approach to addressing the systemic barriers that women face in trade, emphasising the role of technology, innovative financing structures, and collaborative efforts among global financial institutions and development agencies.

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It is easy to think that 2014 was a long time ago, and the world was very different. 

China has grown substantially during this period, with its GDP rising from $10.48 trillion in 2014 to $17.52 trillion in 2023, a 67% increase. In 2014, the United Kingdom was still two years away from voting to leave the EU, and TikTok was still just an idea, as it was not launched until 2016.

While there are differences economically and socially, in reality, historical events tend to repeat themselves. In 2014, Russia invaded and annexed Crimea, sparking deep international concern for the security of the entire country. A few months later, Israel and Palestine engaged in a seven-week-long conflict, as the United States and Egypt pushed for a ceasefire.

While the world looks very different today than it did ten years ago, it also very much looks the same. The same can be said about commodity finance. While some circumstances may have changed, many of the problems we face have similarities to those of 10 years ago.

To discuss the changes of the past decade, what might come in the next 10 years, and TXF’s Global Commodity Finance Conference in Amsterdam on 22-23 May 2024, Trade Finance Global’s (TFG) Deepesh Patel (DP) spoke with Jonathan Bell (JB), Editor-in-Chief and Director at TXF.

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DP: Let’s start by talking about how commodity trade financing has changed over the last ten years and how it may continue to change over the next decade. Many banks have exited the market in recent years. Likely due to frauds, a shift of strategic priority towards ESG and return on equity. What are the impacts of this retreat?

JB: There has been a massive change in the number of banks involved in commodity trade financing from 2014 to 2024. 

Through this period, many banks, particularly investment banks, have been opportunistic and jumped in and out of the sector when it suited them. Several other regular players jumped out of the soft commodity sector, largely due to the increased risk – accentuated by climate risk.

There has also been a realignment by banks regarding which commodities they want to finance, which led to many pulling out of financing soft commodities (agri-business) between 2011 and 2015.

However, the big changes have largely been caused by fraud and other such activities. This is not new – such cases go back many years – but between 2014 and more recently, certain banks and traders lost a lot of money in some high-profile cases. For example, the Qingdao and Penglai warehouse frauds of 2014 in China. There is also the notorious case of trader Hin Leong in Singapore in 2020.

A competitive world: Winners and losers across the industry

DP: Who are the winners and losers?

JB: The real big names that have exited the sector are ABN AMRO and BNP Paribas, albeit they still have some key clients who deal in commodities. Many other banks have retrenched to cherry-picking deals or the so-called misnomer ‘flight to quality’ syndrome!

With banks exiting or pulling back, the winners could well be the many more non-banks that are now involved, such as funds and capital management entities (e.g. Drumlin, Horizon, INOKS, Qbera, Tradeflow, etc.). There has also been the rise of smaller, specialist, localised/regional banks that have come in to fill the void left by mainstream banks.

Most mainstream banks that are still involved no longer support coal/coke financing, and many are trying to get out of being seen financing crude oil. Again, specialist traders have become big winners in coal and crude oil trading. Reputational risk is being pushed heavily by bank boards. However, with the requirement for oil and gas for decades to come a realistic approach is also being taken by most financiers. 

There is also now a much bigger push by banks to be seen as involved in sustainable financing – to be aware of environmental, social and governance (ESG) considerations and also mindful of the UN’s 17 Sustainable Development Goals (SDGs).

Overall, another winner is greater attention to sustainability and governance. It is changing financiers, as well as producers’ and traders’ attitudes, more quickly than others. So the sector is an overall winner here.

Law firms, of course, have been winners because they have picked up a lot of work in sorting out the mess of warehouse receipt frauds, of which some cases have been going on for years. But there are also many other commodity deal workouts or restructurings that keep legal teams in institutions busy, as well as many of the big law firms themselves.

It is also worth mentioning the change that has taken place with private insurers. Since the COVID-19 pandemic, several key insurers servicing the commodity sector have also pulled out of or pulled back from, the commodity market – citing increasing losses and not enough reward for the risks involved. This has led them to what may be considered safer territory, such as deals that may be backed by developmental finance institutions.

It should also be noted that because of the frauds that have taken place big commodity centres such as Singapore, for example, have introduced a centralised Trade Registry to try and eliminate potential frauds. So, another winner here could be the push for greater scrutiny of transactions and also the need for more electronic trade.

With the high-profile frauds, which hit the sector over the past ten years, the overall cost of finance went up for the smaller traders and producers, so they could well be considered a loser group in this case. Larger traders claim their cost of finance did not necessarily increase. 

DP: The underlying structures are changing too, right? Although unsecured finance represents nearly ¾ of CTF volumes, secured debt has seen an uptick in the past two years. What’s happening, and is this due to a ‘flight to quality’ for structured commodity finance? 

JB: Yes, indeed. When things have gone wrong in commodity finance, it has often been because deals and arrangements have become too loose. There has been a significant realignment to more structured transactions. Properly structured commodity finance transactions rarely encounter problems that cannot be dealt with sensibly and practically.

You are right, unsecured commodity trade finance still represents the largest segment of the sector – but an increasing number of deals will now have added structured elements. Additional security and more covenants are coming into many transactions that had previously been unsecured. At the same time, we are seeing more pure structured commodity finance – for example, pre-export finance, pre-finance, borrowing base, and reserve base lending.

In addition, other trends are happening on the lending scene – most of the big traders are still able to secure very sizeable standard revolving credit facilities (RCFs). Still, a much larger proportion of these are now tied to ESG criteria, meaning that the loan or parts of the loan cost less when it adheres to pre-determined environmental, social, or governance requirements. Last year, for example, we saw a high profile, very well-structured $785 million ESG-tied borrowing base transaction with metals trader IXM supported by some 14 international banks. 

It should also be mentioned that many big traders are also actively diversifying their sources of finance. As an example, Singapore-based trader Olam Agri in early April 2024, secured a Murabaha-financing (Shariah-compliant) amounting to $625 million from a group of diversified investors from the UAE, Malaysia, Singapore, and Hong Kong. 

And in June, Trafigura secured a Samurai loan equivalent to $821 million in March from some 28 institutions, including a number of new investors. The Samurai loan route was established a few years ago by Trafigura and others to diversify away from other more traditional loan routes out of Europe, the USA, and Singapore.

Pushing through a turbulent situation

DP: How is the fragmentation of the global political order influencing trade routes and commodity markets? Could you elaborate on the roles of countries like India, China, and Turkey in shaping the future distribution of Russian commodity exports, and the rising phenomenon of ghost traders?

JB: We are living in strange and often very difficult times, which in turn has led to this very strained fragmentation of the global political order. In particular, the two biggest economies – the USA and China – are competing for global supremacy, both economically and technologically, not to mention militarily. 

China, as the huge producer it is, has always been the giant sponge globally for raw materials (even though it is also a huge producer of many important commodities). However, China’s overall role is vital within commodity-based global trade. 

Russia is, of course, hugely influential as a critical producer of a vast range of commodities – from oil and gas to nickel, copper, gold, potash, diamonds, and fish – you name it! So, Russia’s invasion of Ukraine in February 2022 has been disastrous for Ukraine and Russia and overall global commodities supply – even though some nations don’t see it that way and are using the opportunity to bolster themselves in various ways. The negative impacts of this invasion by Putin and supported by his allies cannot be underestimated.

On the energy front, the disruption has been immense – particularly so for Europe as European countries had always been primary consumers of Russian gas and oil. Russian oil has consequently had to find new routes for export and new markets – even though some Russian oil still does end up in Europe through new routes. 

China certainly saw this as an excellent opportunity to secure vast quantities of oil and gas at considerably discounted prices. India, too has used this whole mess to push its weight on the global trade stage and act as a conduit for Russian oil, as well as bolster its overall trade relations with Russia. 

Turkey has also become a key route. Some established traders have taken advantage here. Beyond that, there is also a raft of so-called ‘ghost traders’ moving cargoes of oil even directly out of Russia shipped at heavily discounted prices on a range of tankers (‘ghost vessels) to destinations where that oil can then be trans-shipped to an end-user or refinery.

DP: With the increased sanctions regime and ongoing global conflicts, how are commodity trade and transportation being reshaped? What strategies should participants adopt to navigate this landscape and ensure deal security amidst these disruptions?

JB: The increased sanctions regime, ongoing global conflicts, and the overall fragmentation front have had and continue to have a significant impact on international commodity markets and transportation. We initially saw energy prices surge because of the Russian invasion of Ukraine. And, of course, Russia, along with Saudi Arabia, essentially control OPEC+ to ensure their cuts in production keep the oil price where they want it – Brent is currently at around $90/barrel. 

The energy problem has allowed the USA, in particular, to increase significantly its supply of gas (LNG) to European markets. Other countries with surplus supplies, such as Oman, have also gained ground.

On the soft commodity front, many countries had to pay a lot more for food staples such as wheat, barley, maize and vegetable oils due to the disruption to Ukrainian exports to key markets in the Middle East and Africa.

Russia now exports more of its own grain to these markets and also the grain it has stolen from Ukraine. At the same time, this has provided other big soft commodity producers – such as Argentina, Brazil, the USA, Canada, and Australia – with the opportunity to move into new markets or provide increased supplies to established markets. 

Globally, we have seen shortages of particular commodities lead certain governments to introduce export restrictions on their own produce to ensure security of supply to their own populations and industries.

Transportation was, of course, heavily disrupted during the pandemic – particularly for container goods, but this also includes commodities as many more commodities are now containerised rather than carried on bulk carriers – for instance, global sugar. 

However global conflicts are influencing disruption to transportation routes. Most noticeably, transport through the Suez Canal. Transport costs have skyrocketed as many vessels are taking the longer route around Africa to get to destinations. The Panama Canal has been badly impacted by drought, so passage has been limited and is much more expensive accordingly. 

Some big traders, in particular, have tried to limit the added costs by maintaining or expanding their own shipping fleets. This can have huge benefits as it also allows them to control where and when vessels are at any one time. On another aspect, some traders are helping in the decarbonisation of the shipping sector by converting to different and more environmentally friendly fuel sources.

It should also be mentioned, but almost probably goes without even saying, that on the sanctions front, lawyers have been big winners. There are many fraud cases taking place today in which law firms are engaged.

A vast industry requires a global effort

DP: With the global push for electrification escalating demand for key metals such as copper, nickel, lithium, zinc, and critical minerals like germanium and rare earths, how are commodity traders planning to address these changing market needs? Also, how are governments and agencies ensuring resource security, especially in light of their increasing reliance on ECAs for securing essential supplies?

JB: The energy transition and electrification drive have certainly driven the push to secure critical minerals and metals. However, this has not always been mirrored in the price of certain commodities over the past few years, and copper is a case in point. However, we are almost at $9,500 per tonne for copper, so things are picking up. 

And with low stocks globally, some predict copper will be at $10,000 by year-end. Most analysts agree that because of the requirements of the energy transition and electrification, there is likely to be a significant deficit of at least 4 million to 5 million tonnes emerging for copper by the end of the decade. And this has been exacerbated by the underinvestment in mining.

China, as it produces around 60% of global EVs, is key. Global electrification – with a requirement for much more cabling is also crucial. 

And, of course, traders are essential here, as they fully recognise the requirements of the market. Some traders are even increasing their investments in mining developments, for example, Trafigura in the Democratic Republic of Congo (DRC) with involvement from Burundi-headquartered Trade and Development Bank in a $600 million financing for the Mutoshi copper-cobalt deposits in November 2022. 

We are also seeing ECAs and other DFIs getting more involved in financing commodity and raw materials supply, and this has been led by national and regional interest and the need for the security of raw materials – predominantly metals and energy – for domestic industries. China Exim has been on this case for some time, with support for its strategic reserves. 

Still, Western agencies such as Japan’s JBIC, Korea’s KEXIM, Italy’s SACE, Canada’s EDC, Australia’s EFA, and Germany’s Euler Hermes, in particular, have become very active – and all working closely with global traders to secure energy or raw materials supplies. 

Euler Hermes came up with an $800 million financing for Trafigura to supply non-ferrous metals to the German industry in late 2022. The agency has also provided, in principle, some $600 million to the Arafura Nolans rare earths project in Australia. EKN and SEK of Sweden also came up with $208 million in ECA financing for the Kamoa-Kakula (Ivanhoe Mines) copper mine in the DRC in 2022.

DP: What does all of this mean for international commodity trading companies? What is their future role (big and small) in commodity trade finance? 

JB: Well-established international commodity trading companies already run the show in the supply of major commodities. Consequently, they are magnets for financiers and can control their access to affordable finance. 

This scenario will only get stronger as we move into a world where the security of supply is paramount. The strength of many trading companies also allows them to buy from producers at prices and volumes they command. In many cases, traders bring already well-structured deals to the bank/non-bank market for financing or better refinancing. 

It is no wonder they are crucial to global commodity trade and essential to global commodity activity. Vitol made profits of $13 billion last year (2023), and Trafigura, profits of $7.4 billion – for example. The ability of prominent traders to raise finance can be expected to increase. 

There are suggestions in the market that overall commodity finance levels are declining, but one must also consider that finance to big traders is increasing. In turn, while smaller traders will still struggle to raise finance, one has to realise that the big traders, when working hand-in-glove with some of the smaller traders on selective deals, will themselves be financing smaller traders. However, the cost of financing for smaller businesses has undoubtedly increased.

Digital adoption: Making real gains in the commodity world

DP: Digitalisation. A lot has happened, but what are your thoughts on the impact of MLETR adoption, the push towards 100% eBL usage and the acceptance of digital trade documents on commodity trade finance?

JB: Overall, in commodity trade finance, there has been a big wake-up call that better documentation is required, and that is aligned with a push to electronic documentation to move away from the vast paper trails where falsifying documents is much easier for fraudsters to orchestrate. Digitalisation in the commodities markets can potentially reduce fraud by making it easier to track transactions and scrutinise documents.

MLETR (the Model Law on Electronic Transferable Records) was introduced by UNICTRAL in 2017, and the UK played a big part in this as it was the leader of the G7 that year. Further adoption within G7 countries is at different stages, with the US being quite advanced, but it needs to be used more thoroughly. 

The same applies to Germany. France has produced a white paper to help implement it. Outside the G7, Singapore and UAE have adopted it. India and China both have a strong interest in the implementation, with China working with the ADB towards it.

Banks see MLETR as making trade and commodity finance more efficient, but it also helps with compliance and governance. Overall, MLETR represents a significant milestone for trade digitalisation.

The overall environment for accepting digital trade documents, including eBLs, improved considerably through the pandemic. However, the take-up across the sector still has a long way to go, and further impetus is needed. Big trading companies are leaders in helping this transition. 

DP: Before we wrap up, I wanted to mention that TFG is delighted to be a media partner of TXF’s Global Commodity Finance Conference in Amsterdam on 22-23 May 2024. Why are we celebrating the number 10, and what can we expect?!

JB: Well, last year was the 10th year since the start-up of TXF, so we are now into our 11th year – but crucially on the commodities front, our Global Commodity Finance Conference in Amsterdam on 22-23 May 2024 is the 10th one we have done in the city. So it will be a celebration! 

Along with that, we will have an anniversary black-tie dinner on the evening of 21 May – and this will also incorporate the TXF Commodity Deals of the Year for 2023, along with industry awards and some other special recognitions. Over the next three days, we anticipate that over 400 people will come to the event, including high-profile people from producers, traders, bankers, financiers, law firms, insurers, advisers, and various logistics companies involved in commodity trade and finance. 

We will have great presentations and discussions and plenty of networking, relationship-building, and deal-making time. 

It’s going to be fun, and I, for one, am really looking forward to it!

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The global trade finance gap expanded to $2.5 trillion in 2022, and it looks like that number is only going to get bigger in the years to come. 

To inject more liquidity into the trade finance space and make it easier for businesses to get the funding they need to grow internationally, many financiers are looking towards the emerging concept of trade finance as an asset class.

Do trade finance assets really have a place in investment portfolios? What role do regulations and rating agencies play in helping to safeguard and standardise this emerging area? 

To understand more about how trade finance assets can fit into a broader investment strategy and learn more about future trends that could shape this investment class, Deepesh Patel spoke with Bertrand de Comminges, Managing Director and Global Head of Trade Finance Investments at Santander Alternative Investments at the Trade and Investment Forum is organised by BCR in partnership with ITFA.

Increasing attractiveness of trade finance as an asset class

Trade finance as an asset class is gaining traction among diversified investment portfolios for several compelling reasons. 

Primarily, it represents a direct link to the real economy, providing a tangible connection to everyday goods and services, and enhancing understanding and comfort among investors. 

Moreover, recent regulatory changes have prompted a shift from a predominantly bank-driven market to one that is more inclusive of private and institutional investors. This transformation –  driven by the need for capital efficiency among banks – opens the door for alternative investors and makes trade finance assets an appealing option for those seeking reliable investment alternatives. 

De Comminges said, “Trade finance is enormously more stable than many other asset classes. The performance is phenomenal and it’s been phenomenal for many decades. The banks know this and that’s why they’ve kept this market private between themselves and their clients.”

However, interest is now increasing among institutional and retail investors for trade finance assets, influenced by a growing educational push that helps these investors understand and become comfortable with the asset class. 

This makes enhanced transparency and data sharing even more vital to meet the requirements of diverse investors, such as pension funds, life insurance companies, and private debt funds.

De Comminges said, “It is important to understand that the requirements from the different institutional investors are not all the same. They are subject to different regulations in their industries and the country they operate from. That’s where the trade finance industry needs to come together to raise transparency on data sharing.”

Trade finance is becoming increasingly attractive as an asset class due to its inherent stability, linkage to the real economy, regulatory evolution, and significant educational efforts aimed at broadening investor participation. 

And yet, the trade finance gap continues to grow.

The $2.5 trillion dollar trade finance gap

Despite significant progress in the field, the trade finance gap remains a substantial challenge, particularly impacting micro, small, and medium enterprises (MSMEs). 

De Comminges said, “At the end of the day, it’s a question of trust.” 

In transactions where counterparties do not or cannot trust one another, they often demand upfront payments or secure payments through mechanisms such as cash, credit cards, or more complex instruments like letters of credit or guarantees. 

These more complex instruments require bank involvement on both the buyer’s and seller’s sides, adding layers of complexity and cost.

The complexity is further compounded by regulatory requirements, which vary widely across different jurisdictions, making standardisation difficult and often leading to increased transaction costs and reduced accessibility for MSMEs. 

De Comminges said, “You need to accommodate the trade finance solution to each one of the jurisdictions. Trade happens, and trade happens everywhere in the world, every single minute of the day. That’s where the gap grows.”

The ongoing need for customised solutions to meet diverse regulatory standards and the high costs associated with financial services for MSMEs continue to prevent the closure of this significant gap in the global trade finance market.

The need for transparency

Accompanying the shift from private to public markets is a need for greater transparency across the trade finance space, which will facilitate the access and understanding crucial for developing trade finance into a viable asset class.

Transparency builds trust among participants and is the linchpin that will enable trade finance to mature from a niche market dominated by a few key players into a globally recognised and accessible asset class. This shift is crucial for the future expansion and health of the trade finance industry, providing a structured and secure investment alternative that attracts a diverse pool of investors.

Currently, trade finance is marked by its operations within the confines of private market relationships dominated by big banks that hold large volumes of trade finance assets on their balance sheets, typically shielded from broader public scrutiny.

However, the movement towards a public market structure demands full disclosure and transparency to fulfil regulatory requirements and enable rating agencies to appropriately assess and rate these assets. 

De Comminges said, “As with any market, if you want me to invest in this asset then I need to have data so I can understand the asset. In the context of trade finance, you’re moving from a private relationship into a public market, which is not that easy to do.”

Accurate and standardised ratings will be critical as they help investors gauge the risk and potential returns on investments in trade finance assets, comparing them favourably against other asset classes in money market funds (MMFs).

Looking forward, the push for transparency is likely to continue shaping the trade finance industry by fostering growth and acceptance of trade finance as an asset class. 

As more data becomes available and educational efforts increase, a broader spectrum of investors will likely feel more comfortable engaging with trade finance. 

This trend will help close the current trade finance gap and ensure the sustained growth of trade finance markets. Maybe one day it will even lead to a trade finance ticker on platforms like the Bloomberg terminal. 

That would signal mainstream acceptance.

De Comminges added, “I can only see growth. If you work with the right counterparties, trade finance as an asset class will always keep growing.”

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Trade finance is the lifeblood of global commerce, enabling companies around the world to expand their operations across borders. 

However, the sector faces pressing challenges that can restrict access and impede efficiency. 

To uncover more about how digital innovation is poised to revolutionise this vital field and enhance transparency, security, and inclusivity in global trade, Trade Finance Global (TFG) spoke with Steven Beck, Head of the Trade Finance Private Sector Operations Department at the Asian Development Bank (ADB) and Neil Shonhard, CEO of MonetaGo.

Trade finance challenges and the promise of digitalisation

Two of the most significant challenges facing the trade finance sector today are a lack of financial inclusion and the substantial trade finance gap, which, according to the Asian Development Bank, reached a staggering $2.5 trillion in 2022. 

This gap highlights a significant barrier to access to financial services and particularly affects small and medium-sized enterprises (SMEs) and women-owned businesses, hindering many from accessing necessary financing to engage in international trade.

The status quo has failed to address these challenges. Beck said, “The current system is an antiquated, outdated architecture for trade that we need to tackle.”

While these challenges may seem daunting, advancing digital technologies may hold a solution. 

The drive towards digitalisation promises to streamline processes and aims to make trade finance more inclusive and accessible. It can lower barriers to entry for smaller companies and enhance the transparency needed to tackle issues like trade-based money laundering and other related crimes.

Beck said, “We believe that if we can digitalise trade, it would truly be transformative on a number of different levels.”

This feeling is echoed by many actors in the industry. In the Asian Development Bank’s “2023 Trade Finance Gaps, Growth, and Jobs Survey”, 73% of firms believe that digitalisation will increase their efficiency and access to international trade, and 70% of banks plan to leverage new technologies to increase support for SMEs.

However, adopting new technologies on an industry-wide level can be challenging, particularly given the multi-jurisdictional and heavily paper-based nature of international trade.

Shonhard added, “Trade finance is reliant on data. High-quality and verifiable data. Due to the nature of trade, it’s about enabling the transference of this data across the ecosystem, across jurisdictions, through businesses, banks, financiers, fintech, and many more.”

Given this vast array of stakeholders, successfully digitising the industry will require a degree of alignment to create a standardised ecosystem conducive to digital growth and regulatory acceptance.

DSI and the strategic push for standardised digitalisation

Digitalisation in trade finance is a transformative force capable of reshaping the landscape of global trade, with potential benefits including increased global GDP, enhanced productivity, and lower barriers to entry for smaller companies. 

These advancements are crucial for enabling broader access to the international trading system and fostering greater economic inclusivity, but industry efforts need to be focused to be effective.

This is where initiatives such as the Digital Standards Initiative (DSI) come into play. 

This DSI aims to push trade finance into a new era by standardising around 30 paper-based documents prevalent in trade today, allowing them to be used and legally recognised in electronic formats. 

This initiative by the ICC DSI, called “Key Trade Documents and Data Elements (KTDDE)”, is an important step in creating an industry wide standard for the most commonly used trade documents. By collating agreed upon definitions and best practices, it provides a starting point to move forward to a standardised industry.

But this is just a first step. The DSI is a collaborative effort, which needs actors from across the industry to come together to ensure progress moves forward at a faster pace.

Beck said, “We’re also bringing multilateral development banks together to complement and to boost the work of the DSI, the Digital Standards Initiative, to try to move the needle more quickly to get this done.”

The potential impact of the DSI on global trade is profound. By digitalising trade documentation and gaining legal acceptance for electronic records, the initiative promises to enhance transparency across the trade finance sector. 

This transparency will help address challenges such as trade-based money laundering and other forms of financial crime currently prevalent in the sector. 

Furthermore, many experts expect the shift to digital documentation to reduce processing times, decrease costs associated with trade transactions, and mitigate the risks of document fraud, thereby making trade more secure and reliable.

But simply standardising key trade terms and documents is a moot point without proper legal recognition. According to Beck, an equally important step in this process is working with governments, policymakers and legal experts to ensure there is codified recognition of these documents.

Public-private partnerships for trade finance innovation

Collaboration between the public and private sectors is a critical driver for innovation and security. This partnership is pivotal in leveraging technological advancements and establishing a regulatory and operational framework that supports secure, efficient, and inclusive trade financing practices.

Shonhard said, “It’s important to recognise how public and private are different. The private sector is great at innovating and using technology to solve problems. The public sector is there to ensure that necessary foundations are in place – be it roads and bridges, or regulations and laws – to safeguard a market.”

There are several examples where such collaborations have significantly impacted the trade finance ecosystem. 

In India, for example, MonetaGo’s technology is being used to shut out fraudulent activities from the trade finance market, showcasing a substantial annual growth in secure, fraud-free transactions. 

This use case highlights the efficacy of technological solutions in enhancing security and the essential role of public-private partnerships in facilitating the adoption and implementation of these technologies across different markets.

But India is just one example, in one region. In the last fiscal year, MonetaGo has seen that between 17-37% of lenders suffer duplicate finance fraud in developed markets, and the same fraud is seen as high as 85% in emerging markets.

In addition to private sector innovation, multilateral development banks, like the ADB, play a key role in advocating for and helping governments implement enabling legislation, such as those based on the Model Law on Electronic Transferable Records (MLETR). 

According to the ICC DSI’s MLETR Tracker, There are currently 8 countries, including Bahrain, France, Germany, the United States, and the United Kingdom, where MLETR laws have entered into force. Singapore and the Abu Dhabi Global Market have also adopted MLETR equivalent laws. 

Shonhard said, “Where multilateral development banks are important – if not inspirational – is how they can often bridge the gap between public and private, creating inclusive markets, ecosystems, and economies.”

These laws are crucial for the broader acceptance of digital solutions in trade finance, ensuring that the legal frameworks keep pace with technological advancements and empowering the private sector to continue to create innovative solutions, without fearing that they won’t be legally viable.

Beck said, “If we can accomplish the digitalisation of trade through the standardisation of these documents and through legal systems that recognise those documents, I think then the decision for companies becomes a lot easier.”

Integrating public policy frameworks with private sector innovation through collaborative efforts is indispensable for advancing security and efficiency in trade finance. 

These partnerships foster technological adoption and ensure that innovations are effectively integrated into the global trade system, enhancing regional and global economic stability and growth.

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Mexico’s $1.4 trillion economy makes it the second largest market in Latin America, and its geographical location provides it with a prime position for supply chain and trade advantages. 

In 2022, international trade represented 88% of the Mexican GDP, but the world of international trade is changing. 

Geopolitical and macroeconomic instability have forced many countries to rethink their trading strategy and countries are increasingly looking to shift to a nearshoring and de-risking trade strategy, and Mexico might stand to benefit from these developments.

Though the potential is there, it will still take a collaborative effort from all actors involved to take advantage of the unique position that Mexico finds itself in.

To learn more about Mexico’s potentially prosperous position in international trade, Trade Finance Global (TFG) spoke with Gerardo Gutierrez-Olvera Cabrales, Chairman of the Banking Commission at ICC Mexico and Executive Director, Head of Trade Finance and International Business at Banorte.

Mexico’s rising global trade profile

Mexico’s rise to become the leading exporter to the United States, surpassing China, marks a significant milestone in its economic narrative. 

The country’s geographical proximity to the United States has always been a strategic advantage, facilitating more accessible and cost-effective logistics for cross-border trade. This advantage is amplified by the longstanding trade relationships and agreements that have laid a solid foundation for Mexico’s trade infrastructure and policies for over three decades.

The legacy of the North American Free Trade Agreement (NAFTA), now succeeded by the United States-Mexico-Canada Agreement (USMCA), has been instrumental in integrating Mexico’s economy with its North American counterparts. 

Gutiérrez-Olvera said, “If you put together the US and Canada, they represent 85% of all Mexican exports and more than half of our imports. We are very much an integrated region – the three countries that are part of USMCA – and that is only strengthening and consolidating.”

Over the decades, these agreements have eliminated significant trade barriers and encouraged the development of robust manufacturing and export sectors within Mexico. 

Manufacturing has come to represent a very substantial portion of Mexico’s exports, reflecting the country’s capability to competitively produce a wide range of goods – including automotive, electronics, medical supplies, and, increasingly, aerospace equipment. 

Over the past few years, geopolitical and macroeconomic uncertainties have prompted many countries, particularly the United States, to reconsider their supply chain strategies, which have significantly benefited Mexico. 

 Gutierrez-Olvera said, “In Mexico, we are certainly feeling the sunny side of this major global trade reconfiguration. We see it in different stages, and the first stage of investment and preparation for nearshoring is already happening. Mexico made a record of foreign direct investment last year, much of it coming from the US, much of it destined for sectors and industries that are already fully integrated in the North American region.”

The country’s strategic location, favourable demographics and established trade agreements make it an attractive destination for companies looking to mitigate risks associated with longer supply chains and reliance on distant markets like China.

The influx of foreign capital supports the expansion and modernisation of Mexico’s industrial base and contributes to the development of its infrastructure, including logistics and transportation, which are critical for sustaining growth in exports.

Navigating the changing landscape of trade finance

Mexico’s financial landscape is also undergoing a significant transformation in response to global trade and economic policy shifts. 

The country’s financial sector is navigating a complex environment marked by the end of an era of cheap money, as global and local rising interest rates and persistent inflation challenge traditional financing models.

Gutiérrez-Olvera said, “Many financial partners are beginning to look at the supply chain in a different way. There has been a movement away from the strict just-in-time delivery methodology, which was the flavour of the last two decades, to a just-in-case approach where the importance of not disrupting global supply chains is weighed more heavily than it used to.”

This shift emphasises the need for robustness and flexibility in the face of supply chain disruptions.

To aid in this, Mexico’s banks and financial institutions are also embracing digitalisation and the innovation of electronic trade documents as critical opportunities for streamlining operational processes and enhancing efficiency that facilitates financial inclusion

The adoption of electronic trade documents, in particular, could represent a significant advancement, offering the promise of more secure and faster transactions that can keep pace with the demands of modern global trade. 

This digital shift, coupled with the strategic realignment of global supply chain finance, reflects a broader trend towards more agile, customer-centric, technology-driven solutions that can support international trade. 

Through these efforts, Mexico is addressing the immediate challenges posed by the current economic environment and laying the groundwork for a more flexible, resilient, and efficient trade finance ecosystem.

Building a resilient trade ecosystem in Mexico

To bolster Mexico’s position as a leading force in global trade, the country must focus on improving logistics and expanding trade corridors, which are crucial for streamlining Mexico’s import and export processes. 

Given the country’s significant reliance on land transportation, particularly for trade with the United States, enhancing road and rail infrastructure is pivotal but not the only area that would be beneficial. 

Gutierrez-Olvera said, “60% of Mexican exports to the US go to three states: Texas, California and Michigan, which is related to the automotive industry. If we were able to develop logistics and seaports infrastructure on the Gulf of Mexico and South Mexico, we would be able to reach the east coast of the United States, where we currently do not sell a large amount of products. That wouldn’t be a game-changer for Mexico.”

Developing port infrastructure would help in diversifying Mexico’s export destinations and reducing logistical bottlenecks and is an area where public-private partnerships may be instrumental. 

Collaborative efforts between the government, financial institutions, and the private sector are necessary to mobilise the resources and expertise required to upgrade infrastructure, comply with international trade agreements, and transition to greener energy sources. 

Such partnerships can facilitate sharing risks and rewards, ensuring that projects are viable and aligned with national priorities.

As Mexico navigates the complexities of modern trade, its focus on comprehensive infrastructure development and digital advancements signals a proactive approach to securing its position as a key player on the world stage.

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Digitalising trade has been a prominent feature of industry conversations for several years. With the passage of the Electronic Trade Documents Act (ETDA) in the UK, as well as the progression of similar bills in countries including the US, Germany, France, and Bahrain.

Conversations have progressed from simple questions of “how to digitalise trade”, to focusing on what the concrete next steps should be.

These next steps in the digitalisation journey are critical, with no room for complacency, as stakeholders need to make laws work and ensure the construction of a better, more resilient industry.

One of the key next steps is understanding how to actually utilise the data and how deeper information can be built off the back of the digitalised format.

To unpack these issues, TFG’s Brian Canup was joined by Patrik Zekkar, CEO of Enigio, to break down the complex next steps of digitalising trade.

Enigio: Going beyond the surface level of digital trade documents 

Enigio is a Swedish-based tech company focussing on formulating digital original documents suitable for trade transactions. Enigio’s trace:original technology provides all the qualities of paper in a digital, end-to-end, form. 

Key questions regarding this process concern how the data is gathered from digital trade documents and the next steps after obtaining the data, as ease of data collection is essential to efficient digitalisation processes. 

Here, it is useful to understand the process behind the data gathering. 

The first phase is the application or request to start the process. Secondly, there is a processing or operational step, third is the execution of a transaction. Enigio’s trace:original “docks in” to the execution phase, maintaining the core process whilst changing the outcome, i.e., moving from paper to digital. 

Enigio is able to do this using a range of simple APIs, or customers can continue to use PDFs and upload them onto the trace:original platform. There is also the opportunity to provide manual entries to the trace:original standalone module. 

Zekkar said, “We have provided all optionalities from manual to fully integrated. Another part is also how you either go from structured data to a document, or from a document to structured data. Both ways work.” 

Security and privacy of digitalised documentation

However, understanding the process of digitalising trade documents is only one part of the story. Concerns regarding security are common, as this is still a relatively new process.

Enigio takes several steps to ensure the gathered data is secure and prevents any privacy concerns for clients. Zekkar said, “That is a fundamental part of how we have set up trace:original and where we differ from other providers in the market. For us, it is key that all data stays in the documents – we are a document-centric solution.”

To ensure there is maximum security, Enigio only stores the data in the actual document. There is no need to upload data to the platforms.

Zekkar said, “Enigio neither holds nor has access to any data. Only the person in possession of the document controls the data and the data sharing through the document. If you think about it, it is just like paper.” 

It is important for the industry to be educated in this regard, with sharing data online still being a new reality for many stakeholders. These security elements are critical to communicate in this context in order to better utilise digital processes. 

Applications to ESG metrics

The data gathered through Enigio’s portal can also be used to provide ESG metrics more efficiently. In trade transactions, there are more data receivers than data providers. 

Zekkar said, “In a trade chain, you have a couple of parties which actually provide the trade data, but you have a lot of parties that need to consume that data, and they do it for various purposes.” 

One example of this is ESG. Here, trace:original allows the merging of the digital and sustainable agendas into a unified goal. This is because the data in a trade document is comprehensive, with a lot of detail required in the set of trade documents. 

Zekkar said, “The challenge is to consume that data and extract the part which is relevant for each part easily. That is what trace:original makes possible with the structured data part on the back of the document. For example, take ESG scoring: if you have a set of trade documents such as the bill of lading without the attached documents (packaging list, invoices, certificates etc.), and you are able to capture these data points from the document, that enables you to do all types of [ESG] scoring.” 

These include carbon emissions calculations which can be done independently on single transactions. Moreover, digitalising the e-bill of lading and other trade documents instantly provides the opportunity for businesses to score single trade transactions, giving every party in the chain the possibility to see what type of transaction is being dealt with. 

Digitalising trade not only increases efficiency but there are clear environmental benefits as well.

The most prominent statistic emerging from the signing of the ETDA is that nearly 3 million trees are used every year when it comes to creating paper documents for trade. However, there is an additional layer adding to the benefits of digitalising trade related to the scoring metrics using data. 

Prospects for efficiency, collaboration, and outlook for the sector

Additionally, digitalisation adds significant value through tracking how goods are transported. Digitalisation enables analysis of processes that allow the identification of improved transport methods and techniques. 

There are also indirect efficiency gains, including the possibility to use data for singular ESG scoring with the help of electronic trade documents feeding an AI engine scoring model and how these elements interact with the actual supply chain. 

This can also involve port and customs authorities, and customs duties. Here, clearance time, security and risk based assessments in customs controls using AI technology, as well as accessing the structured data that is pulled from the trade document itself by trace:original, present huge possibilities for reduction in delays of customs clearance.

Tackling efficiency problems in international trade will take an industry-wide effort. Zekkar said, “We know trade is a multiparty, international, and fragmented industry.” 

These include trade associations and governmental bodies, who are particularly useful in terms of raising awareness and driving regulatory changes. 

Though there have been positive developments in this area, further collaboration is needed, according to Zekkar, in order to remove the ”daily roadblocks” to trade activity, particularly focussed on port and customs authorities’ processes and procedures. 

Zekkar said, “The exciting and very encouraging development is how we mature and develop in using the data downstream – the data which is now possible to get in a usable, flexible, and controllable form.” 

Releasing this “goldmine” of data for downstream applications – from AI to hardware – presents significant potential benefits for both the public and private sectors in terms of accessing data in a controllable, usable, and flexible form. 

Zekkar said, “I think it is really what is going to make the industry take a huge step forward.”

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In April 2021, the world of football was rocked by the announcement of the European Super League (ESL), a proposed elite competition that sought to permanently place Europe’s top football clubs in a closed league. 

The plan – met with widespread criticism – was seen as a move that prioritised financial gain over sporting merit, threatening the inclusive nature of the sport by potentially leaving smaller clubs and their fans behind. 

This incident serves as a parallel in the world of finance, particularly within the factoring industry, raising pertinent questions about ensuring growth, resilience, and inclusivity. As the factoring sector continues to expand, significantly impacting global trade and economic development, it faces the challenge of evolving without creating disparities reminiscent of the ESL debacle. 

To better understand the principles of financial inclusion, equitable regulation, and sustainable growth in the factoring industry, Trade Finance Global’s (TFG) Deepesh Patel spoke with new FCI Secretary General, Neal Harm. 

Understanding factoring: A catalyst for global trade

Factoring is a financial service that profoundly impacts global trade and economic development. 

This service involves financing receivables, where a business sells its invoices to a third party at a discount in exchange for immediate cash, allowing the business to improve its cash flow and access working capital without needing to wait months for its invoices to be paid according to their credit terms. 

Factoring is a big business, and getting bigger.

Harm said, “It’s estimated that volumes of global factoring are over $3.6 trillion per year, growing consistently.”

This growth embodies the multiple ways that this financial mechanism serves as a catalyst for global trade growth. 

Firstly, it addresses a critical pain point for businesses, especially small and medium-sized enterprises (SMEs), which often struggle with cash flow due to delayed customer payments. By providing immediate liquidity, factoring enables these businesses to continue their operations, invest in growth, and take on new opportunities without being constrained by cash flow issues. 

Secondly, factoring is particularly beneficial in financing open account trade receivables, a common practice in international trade where goods are shipped and delivered before payment is due. 

This aligns with global trade needs, where extended payment terms are standard and can pose significant risks and liquidity challenges for exporters.

The factoring industry can tap these benefits for global markets by increasing awareness and understanding of factoring and by fostering partnerships with financial institutions and regulators. 

Harm said, “What’s interesting – and it’s history repeating itself – is how we’re entering those emerging markets today. It’s no different than 56 years ago. It’s learning about the market, advocating for the product, and educating the members on what this product is and what it isn’t. Then it’s watching it grow.”

By following this proven approach, the industry can open up new markets and support trade finance in regions where access to traditional banking and financial services is limited, helping to lift nations out of poverty and facilitating their integration into the global economy.

Expanding horizons: Factoring’s growth in emerging markets

Factoring has significant growth and potential in emerging markets, underlining its vital role in enhancing economic development and facilitating trade. 

Harm said, “If you think about the African region or the Southern Asian region, particularly India, there’s a huge opportunity for growth as they mature with open account finance.”

This opportunity lends itself to the evolving understanding and adoption of factoring as a crucial financial service that supports businesses in managing cash flow and accessing working capital efficiently.

A key aspect is the exponential growth potential of factoring in these markets, propelled by increasing trade volumes and the need for alternative financing solutions that complement traditional banking services. 

The growth of factoring in developing regions is not just a function of the expanding global trade but also a result of deliberate efforts towards education, advocacy, and the establishment of supportive regulatory frameworks that recognise invoices as investable assets. 

Harm said, “It’s complex and it requires coordination between banks, financial institutions, and regulatory agencies. With all of those groups working together, we can figure out the best way to make an invoice into an investable asset –  the regulations we need to put around it, how we secure it, and how we bring liquidity into the market to support it.”

Moreover, the strategic partnerships between global institutions like FCI and other local stakeholders can help to foster a deeper understanding of factoring and are crucial in creating an ecosystem where it can thrive by aligning businesses, financiers, and policymakers.

Vision and challenges ahead: Insight from FCI’s new secretary general

The FCI’s mission is to ensure the resilient, sustainable, and inclusive growth of factoring on a global scale. Central to this objective is the recognition of factoring as a financial tool and a vital component of the global trade ecosystem that can drive economic development and alleviate poverty. 

Harm said, “It comes down to awareness, advocacy, and education. That’s what FCI is there for. For us to be aware of what’s going on in the market, advocating as we see something happening, and then educating as fast as we can, to bring people up to speed.”

Recognising the challenges and opportunities of regulatory changes and economic trends, FCI positions itself as a voice for the factoring, open account and trade finance industries, engaging with policymakers and stakeholders to advocate for regulations and policies that support the growth of these markets. 

Through these efforts, the organisation aims to address potential challenges head-on, such as those arising from European late payment regulations, by promoting awareness and education, which can lead to more informed and constructive policy-making.

At the heart of FCI’s vision is the desire to see factoring and open account receivables recognised as a critical element of the global trade finance landscape, capable of driving significant economic benefits. 

Harm said, “I want FCI to be three letters that come immediately top of mind when someone is thinking about open account. If we’re talking about a receivable, the transaction, the financing, whether you’re a bank, whether you’re a regulator, we’re part of that conversation.”

This vision is not only about fostering growth in the volume of factored receivables but also about ensuring that the benefits of factoring are widely and equitably distributed, supporting businesses in developed and emerging markets alike.

Just as the football world united against the exclusivity of the ESL, the factoring industry must embrace inclusivity, ensuring no small player is left behind in the pursuit of global economic progress.

Putting the idea into practice, FCI is hosting their 56th Annual Meeting in Seoul, South Korea from 9-13 June, bringing together all global professionals to further the discussion into factoring and receivables finance.

For Harm, this event offers the opportunity to grow the industry. He said, “A big part of the event of awareness, advocacy, and education… It’s to have time with each other, learn how to do business and how to make money together. And again, to take that friction out of the transaction as it goes cross-border.”

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Trade Finance Global’s (TFG) annual Women in Trade, Treasury, and Payments campaign in 2024 focused on Inspiring Inclusion around the globe. Different regions face different challenges when it comes to gender inclusion, and it is vital to understand perspectives from across the globe.

To learn more about the challenges that women face in the trade, treasury, and payments space across the African continent, and some of the programmes in place to help balance the scales, TFG spoke with Gwen Mwaba, Director and Global Head of Trade Finance at Afreximbank.

Afreximbank’s role in addressing gender equality

Women in Africa aiming to accelerate their careers in trade, treasury, and payments face several significant challenges, including societal pressures, which sometimes dictate women’s roles and affect their career opportunities. 

Additionally, women can encounter obstacles in career advancement due to periods of maternity leave, which can put them behind their male counterparts. Many women also lack sufficient role models in leadership positions within their fields.

Mwaba said, “The reality is that trade is not gender balanced, particularly across developing and emerging markets.”

This is something that Afreximbank focusses on addressing in order to support, include, and empower women across the continent. 

The bank has implemented various initiatives to provide mentorship and training programmes to upskill female employees and attract more women into the industry. These efforts are part of a broader strategy to build capacity and offer support systems that enable women to navigate their careers more effectively, including overcoming organisational challenges. 

Beyond internal initiatives, Afreximbank extends its support to African female entrepreneurs, offering targeted programmes to facilitate their involvement in trade and access to essential information and financial resources. 

Through these comprehensive measures, the bank is making significant strides in empowering women in Africa, helping to overcome the generations of embedded challenges.

Impact of Afreximbank’s work

Afreximbank’s Trade Information Portal is one initiative that has helped to democratise access to trade information and is helping to level the playing field for women in trade. 

The Trade Information portal, which is available under the Afreximbank’s digital ecosystem the Africa Trade Gateway (ATG), offers a subscription-based service where entrepreneurs, at no initial cost for the free limited access version, can access information about market needs and opportunities in neighbouring countries. This information is crucial for women looking to export goods and services, empowering them to make informed decisions and identify viable markets for their products.

The bank’s role in promoting successful female-led enterprises further highlights its impact. 

Mwaba said, “We have a very successful client in the cocoa industry in Ghana. She started as a cocoa bean trader, but we encouraged her to set up a manufacturing plant, which Afreximbank financed. Now, the company is semi-processing cocoa beans into cocoa cake, cocoa liquor, and cocoa butter for export to manufacturers of finished products outside of Africa. 

“What is exciting about this business is that it is owned by a woman who is also the CEO, her CFO is a woman, her entire senior management team are women, and the people on the shop floor are women. 

“That’s just one example of Afreximbank’s initiatives to support women entrepreneurs.” 

However, supporting entrepreneurs in today’s technology-driven economy also requires a dedicated digital approach.

How can digital education help women?

Afreximbank is strategically positioned to enhance and promote digital education among African female entrepreneurs, enabling them to participate more fully in digital trade. 

The bank’s approach to digital education – which is no longer just an advantage but a necessity for staying competitive in the global market – involves providing digital solutions and training to ensure users can fully leverage these technologies.

One digital initiative which can also be accessed on ATG is the Mansa Digital Platform, a KYC repository that simplifies the verification process for corporates and banks. This platform is instrumental in helping entrepreneurs gain quicker access to financial services by streamlining the due diligence process for potential lenders.

Mwaba said, “Once you are Mansa verified, it’s easy for banks to provide you with solutions. Within that ecosystem (ATG), we have also developed a digital solution called the Africa Trade Exchange (ATEX), which is a digital exchange for buying and selling all manner of commodities.”

To further support ATEX, Afreximbank is the payment bank and will link ATEX to the payment platform, the Pan African Payment and Settlement System (PAPSS) which facilitates transactions in local currencies. 

For example, PAPSS would allow a seller in Kenya to receive Kenyan shillings for goods that they sell to a buyer in Rwanda, who pays in Rwandan Francs. This system significantly reduces the reliance on foreign currencies, making trade more accessible and cost-effective for African entrepreneurs.

For Afreximbank, however, the digital journey is about more than just providing access to these technology platforms. It is also about training and education. 

The bank ensures that users of its digital solutions receive comprehensive training, empowering them with the skills needed to navigate and maximise the benefits the digital solutions provide. 

Mwaba said, “Through our HR department we offer Afreximbank academy AFRACAD, which has a number of digital and non-digital courses accessible to people who want to upskill themselves in anything to do with banking and trade.”

This effort enables women to trade more effectively in the digital realm and contributes to fostering inclusivity and empowerment in the African trade sector. Afreximbank plans to continue this momentum by rolling out new initiatives in the years to come.

Looking to an inclusive future

One of the initiatives the bank is driving is the establishment of Export Trading Companies (ETCs), which seek to overcome one of the significant challenges female entrepreneurs face: the inability to export due to the small size of their operations. 

Mwaba said, “This model entails aggregating goods from different markets to create scale. For example, you have many sesame seed producers who, on their own, are too small to be able to export. 

“This ETC initiative would aggregate sesame seeds into one location with the highest comparative advantage, package and brand them under one label and, using that volume, export them outside Africa.” 

Additionally, Afreximbank is spearheading the development of industrial parks focused on light manufacturing across Africa. These industrial parks would provide a conducive environment for entrepreneurs who engage in light manufacturing, such as producing small electrical components or garments, and are well suited to women due to their scalability and potential for job creation.

Through these and other programmes, the bank continues to pave the way for a more equitable and prosperous future for women in trade across the continent. A future that will inspire inclusion for all.Mwaba said, “To me, Inspire Inclusion means you can’t be all things to all people. Just be the best version of yourself can be.”

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The $2.5 trillion trade finance gap is the elephant in the room for the trade finance industry.

Trade Finance Global (TFG) surveyed 20 trade finance experts to start the year, and every single one predicted that the trade finance gap would grow in 2024.

Part of their reasoning is that general economic conditions would lead to a decline in liquidity and economic growth, decreasing access to capital. But, other factors include the implementation of new capital constraints such as Basel 3.1.

As the world of international trade finance adapts to the changing macroeconomic environment and the ever-increasing trade finance gap, there has been a clear shift to the originate-to-distribute model.

To help break down this fresh approach, TFG’s Brian Canup spoke with Oladapo Adeigbe, Head of Financial Institutions Trade Sales – (Africa) at Absa and Boitumelo Thoka, Head of Pan Africa Trade Working Capital Distribution, Syndication and Insurance Product at Absa.

Origins of the originate-to-distribute model

The shift towards an originate-to-distribute model in the banking sector reflects a strategic evolution in how banks approach trade finance. 

Initially, banks prioritised originating loans and retaining them on their balance sheets, aiming for balance sheet growth and market share expansion. This approach was attractive because trade finance, as a low-default asset class, bolstered the banks’ financial profiles.

However, several factors have contributed to the shift towards distribution. 

The globalisation of markets expanded opportunities for banks but also introduced new challenges, such as the need for optimal capital utilisation and higher return on equity. Banks now tend to focus more on originating deals while limiting their capital commitment, mitigating risk and improving capital efficiency. 

This shift was facilitated by the increased interest from various new investors, including non-bank financial institutions, insurers, export credit agencies, and fintech companies. These entities, attracted by the diversified portfolio opportunities presented by trade finance, have become critical players in the distribution model.

Advancements in data transparency have also made risk mitigation more effective, particularly in managing trade finance risks like commercial contracts, currency, and country risks. 

Ageigbe said, “The clarity this has brought has introduced more investors to trade as an asset class and to distribution as an option.”

For Absa, this shift has had significant strategic impacts. 

Thoka added, “It has allowed us to be bold and flexible in how we service our clients, and it helps alleviate both internal and external constraints imposed by factors such as a tightening regulatory framework, unknown markets, scarcity in foreign currency liquidity, and risk appetite.”

Distribution has facilitated better management of returns, exploration of new markets, efficient recycling of liquidity, and judicious use of limited capital, ultimately enabling more dynamic client service, improved risk and liquidity management, and strategic capital utilisation.

Challenge begets collaboration 

The current macroeconomic landscape – characterised by rising interest rates, global supply chain disruptions, and political instability – has significantly impacted the trade distribution sector. 

These factors have increased commodity and energy prices, fueling inflation and prompting central banks worldwide to raise interest rates, which has resulted in higher borrowing costs. As a result, trade finance is becoming more expensive, decreasing capital supply, especially for corporates and SMEs involved in cross-border trade. 

The heightened political risks, particularly prevalent in Africa, and concerns over sovereigns’ ability to repay in foreign currencies have further exacerbated the challenges, reducing trade volumes and heightened default risks.

According to Afreximbank’s 2022 Africa Trade Report, about 40% of African SMEs struggled to secure funding in 2022, primarily due to the lack of bank-acceptable collateral. 

This gap creates an opportunity for non-bank liquidity providers and private credit entities to step in. These entities can distribute trade finance risks more broadly, relieving pressure on banks’ balance sheets and increasing their capacity to service SME clients. 

The role of non-bank liquidity providers in the originate-to-distribute space is increasingly important. These providers, including development financial institutions (DFIs), insurers, and other financial institutions, can offer alternative financing solutions that banks may be unable to provide. 

By partnering with banks, these non-bank entities can help bridge the SME funding gap, leveraging their different risk profiles and capital sources.

Adeigbe said, “This would bring inclusivity and reduce the financing gap and will create much more room for collaboration among willing investors in the distribution space.”

Distribution in trade finance needs to be more inclusive, focusing on direct corporate risk alongside the traditional focus on financial institution risk. 

Technological advancements may be able to help.

Technology addressing challenges

To tackle the challenges that exist in facilitating an originate-to-distribute approach, Absa is exploring various technology-oriented solutions. 

One significant stride has been in automating manual processes, creating efficiencies in internal operations, and streamlining previously cumbersome and time-consuming processes. By reducing the time and effort required for these processes, the bank can focus more on strategic aspects of trade finance distribution, such as expanding its reach and improving service delivery.

Thoka said, “For where we are right now as a business and our level of maturity where distribution is concerned, we are progressing well and have managed to leverage the various options in the market quite adequately.”

But it’s not just internally that the bank is leveraging technology; Absa is also exploring marketplace opportunities through networked platforms to offer new ways to connect with partners, clients, and investors. 

Absa hopes to broaden its distribution network by engaging more actively on these platforms, enhancing its ability to reach different markets and client segments.

The substantial $2.5 trillion trade finance gap might not be going away soon, but the industry is set in motion to try and do something about it with a strategic shift towards an originate-to-distribute model. 

This evolution, shown by insights from Absa and other trade finance experts, reflects a response to global economic changes and the need for efficient capital utilisation. 

Embracing technological innovations and engaging non-bank liquidity providers, the industry is actively working to bridge this gap. These efforts aim to streamline trade finance, particularly for SMEs, indicating a proactive stride towards a more inclusive and dynamic trade finance landscape.