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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.”