PODCAST | Bridging the commodity trade finance gap with transparency and innovation

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The global commodity trade finance gap remains at $2.5 trillion, leaving small and medium-sized traders struggling with access to the credit they need.
Regulatory changes, such as Basel III and IV, have made banks more risk-averse, creating an opportunity for alternative investors to fill the gap, though they require greater transparency to feel confident.
Digital assets, like stablecoins and tokenised assets, could revolutionise cross-border payments, though regulatory clarity and adoption are still key challenges for their widespread use.

The global trade finance gap persists at around $2.5 trillion, leaving businesses – especially small-and-medium commodity traders – struggling to pay suppliers, ship goods, and keep cash flowing while they wait for buyers to pay invoices.

This gap refers to the disparity between the financing companies’ need to move goods across borders and the credit they are actually able to secure. Commodity trade finance (CTF) is at the heart of the problem.

From coffee and cocoa to oil and metals, commodities are the raw materials that drive global trade. Yet, banks retreat from financing, citing regulatory burdens and risk concerns, and many traders find themselves locked out of the system.

Charles Osborne, Director at Trade Finance Global (TFG) sat down with David Wigger, CEO & Co-founder of Liquide Finance, to discuss how to attract new liquidity into CTF, why transparency and education are key to institutional investment, and how digital innovation can help close the gap.

Banks and regulations

Global banks were once the backbone of CTF, but regulations have reshaped the industry, pushing many to retreat from lending in this space. “I would say that Basel III and Basel IV have been a huge trigger for this gap,” said Wigger.

Basel III – a regulatory framework developed as a response to the 2008 financial crisis — required banks to hold more and better-quality capital, as well as extra buffers that limit lending in credit booms. It introduced a minimum leverage ratio and new liquidity rules, forcing banks to hold enough cash for both short-term stress and long-term funding needs.

Basel IV, also known as Basel III endgame, built on this by tightening how banks measure risk, so they can’t underestimate exposures.

Following this, the Bankers Association for Finance and Trade (BAFT) warned that Basel IV could have unintended consequences, making banks more risk-averse and less willing to extend credit to small and medium-sized enterprises (SMEs).

For commodity traders, the effect has been hard-hitting. High-value but low-margin transactions have become less attractive for banks, leaving many SMEs in oil, metals, and agriculture struggling to secure the financing they once relied on.

Institutional investors and transparency

As banks step back, the financing gap in commodity trade is increasingly expected to be filled by alternative investors. However, they, too, remain hesitant.

“If we put ourselves in their shoes, they’re trying as much as possible to avoid risks,” Wigger explained. “The problem of this industry is a lack of transparency, problems related to jurisdictional enforcement, operational complexity, and even credit risks,” he said.

In reality, trade finance has historically low default rates. The International Chamber of Commerce (ICC) Trade Register 2024 confirms this, noting that data confirms the longstanding understanding that trade finance is a low-risk asset class.

However, as Osborne noted, “these are investors that are often investing into vastly different asset classes. The CTF market definitely needs to educate some of this demographic in more detail.”

“I believe that people feel more comfortable investing with you if they know that you are willing to share your information and explain what your process is,” said Wigger, emphasising the importance of transparency. “The key metric is to have clear processes in place, where it shows that you are capable of managing whenever there are issues.”

Put simply, investors don’t expect perfection — they need to see robust systems in place for when there are risks.

Margin expectations and market misalignment

Even with greater transparency, there still is a mismatch between investor expectations and market realities. Many institutional investors enter the space with high return expectations, while commodity traders are accustomed to the lower-cost financing they historically accessed from banks.

This gap creates tension, which Wigger argued can be bridged by education and data. Investors need clearer information about how CTF works, while borrowers must understand that funds and banks are not directly comparable.

Banks typically offer revolving credit lines, whereas CTF funds provide transaction-based investments that carry different risks and cost structures. Wigger also noted that CTF managers bring distinct advantages: they are closer to the ground, quicker to deploy, and often more specialised in particular commodities.

This expertise helps bridge the gap by delivering efficiency and transparency — even if it comes at a higher margin than traditional bank loans.

For smaller commodity traders, especially SMEs, the key is to show they are reliable partners. Transparency around data, strong internal governance, and a history of well-managed deals all help build trust — making them more attractive to investors.

As Osborne added, tools like insurance, inspections, and collateral management agreements can further strengthen confidence, providing financiers with more reassurance.

Digital assets and stablecoins

Innovation in digital assets can also help narrow the commodity trade finance gap. Stablecoins and tokenised assets are among the most-discussed tools, with the potential to make cross-border payments faster and cheaper.

“If it’s done correctly, it could be very promising,” Wigger said. “Stablecoins are obviously speeding up all settlement and cross-border payments. Now, the question is adoption and also what is related to regulatory clarity and risk control. If you don’t have those two metrics, it’s going to be complicated.”

So far, adoption has been limited, but pilot projects reflect potential. For instance, Singapore’s Project Guardian — a regulatory-led initiative exploring tokenised bonds and trade finance — has highlighted the efficiency gains digital assets could bring.

The greatest impact of such tools may be seen in regions with weaker banking infrastructure, where they could help ease cross-border liquidity constraints. However, rather than replacing traditional structures, they are expected to complement them.

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The future of CTF depends on whether trade finance can build the trust and standardisation that institutional investors require.

While technological innovation can support building reliability and efficiency, Wigger stressed that institutionalisation — clear policies, robust processes, and transparent data — will be critical. If achieved, the sector could unlock significant new capital.

Finally, as Osborne pointed out, there is a particular urgency here. CTF goes beyond finance. It is central to the energy transition, from metals for renewables to fuels for shifting energy systems. Without greater investment, meeting climate targets becomes harder.

“Think about it,” summarised Wigger. “Tomorrow, you cut all the financing of the commodity, it’s over. Everything is over. At the end of the day, it’s essential for it to happen and needs to happen.”