Finance that powers supply chains is essential, yet many small businesses in emerging and developing economies lack access to it, preventing them from taking advantage of global trade.
GENEVA/WASHINGTON, D.C. Supply chains are the backbone of international trade, accounting for more than half the value of global trade in goods. These chains not only create many jobs, but also facilitate the integration of countries and companies into the global economy. However, the lack of financing that underpins them leaves many small businesses in emerging and developing economies out of the benefits of global trade.
Supply chain networks integrate raw materials, components, services and other resources from multiple nations; products often cross borders multiple times during their production, distribution and sales stages. To avoid imbalances between advance payments to suppliers and late collections from customers, companies involved in these networks require short-term financing. This financial support is essential for international trade and even more crucial for small businesses in developing countries.
Supply chain finance proved crucial for many businesses during the Covid-19 pandemic, which brought disruption to global trade and markets. As consumption shifted from entertainment and travel to tangible goods, increased demand and production created cash flow pressures in key industries in developing economies. For example, clothing manufacturers required immediate financing to purchase more inputs, even if their customers’ payments were delayed. Supply chain finance mechanisms allowed them to obtain liquidity immediately, facilitating working capital management, operational stability and the resolution of bottlenecks in global supply.
Globally, supply chain finance is one of the fastest-growing sectors of trade credit; BCR’s Global Supply Chain Finance Report 2024 estimates its value at approximately US$2.3 trillion. However, this expansion is not yet reaching everyone. Large corporations and advanced economies have integrated this modality into their supply networks, while companies in developing countries largely remain on the sidelines.
For many of these companies, especially micro, small and medium-sized enterprises (MSMEs), it is extremely difficult to obtain financing for their supply chains through local banks. Obstacles include inadequate regulatory frameworks, limited technological infrastructure and high transaction costs, which prevent them from growing and developing, depriving their countries of the full benefits of global trade.
Joint surveys by the International Finance Corporation and the World Trade Organization reveal the scale of this problem. Even in countries such as Vietnam and Cambodia, where many small businesses have successfully integrated themselves into supply chains in sectors such as textiles and consumer electronics, the lack of adequate financing represents a significant economic drag, as these companies are often dependent on cash flow.
Although 50% of trade in these nations is linked to supply chains, when considering only those sectors that are supported by local financial institutions, this percentage drops to 0.5%. This situation means that local companies face not only continued financial pressure and higher attrition rates, but are also unable to generate the resources necessary to invest and move up the value chain.
Increasing supply chain financing in developing countries can bring significant benefits. According to a WTO study, a 10% increase in the use of international factoring, which is the main form of financing for these chains and which SMEs use to obtain immediate liquidity in exchange for outstanding invoices, could result in a 1% improvement in the trade figures of these nations.
Improved access to supply chain finance tools can significantly increase participation in international trade, especially among MSMEs in developing countries. This, in turn, will contribute to increasing incomes, reducing poverty, and promoting greater financial inclusion.
Multilateral development banks also have an important role to play as catalysts for supply chain finance in these nations. We propose that these lenders commit to coordinating their efforts with governments, industry associations, and local and international financial institutions. This collaboration can facilitate multiple objectives, such as strengthening legal frameworks for supply chain finance where they are insufficient or absent, and increasing the capacity of regulatory and policy-making authorities.
Second, international bodies can facilitate the creation of standards for credit data reporting, creditworthiness norms, and oversight mechanisms by offering training to market participants and regulators on global best practices. Third, they can foster digitalization by collaborating in the development of the necessary technological infrastructure. Fourth, they can provide financing and technical assistance to banks and other supply chain finance providers in emerging markets to increase the availability of these products.
Through a joint effort, multilateral agencies, governments and financial institutions can unlock the potential of supply chain finance, thereby promoting international trade and financial inclusion in the most underserved regions. To boost development, increasing supply chain finance represents an accessible opportunity that can contribute to a wide range of global development goals, thanks to its significant potential to generate improvements in employment, international trade and economic growth.
