The Asian Development Bank (ADB) reported that the trade finance gap expanded to $2.5 trillion in 2023, up from $1.7 trillion in 2022. 

Despite efforts to mitigate this growth, the gap continues to widen, posing challenges for global trade, particularly in emerging economies.

Businesses are navigating an increasingly volatile environment, with significant geopolitical and geo-economic shifts.

Over 40% of the global population will participate in elections in 2024, likely resulting in further political unrest and policy uncertainty. 

Since 2005, the frequency and duration of conflicts have doubled, further complicating the trade landscape.

The prioritisation of globalisation and business-friendly policies is waning, giving way to regionalisation and protectionism.

Climate events exacerbate food insecurity and water scarcity, prompting more governments to adopt protectionist measures. Concurrently, record inflation and persistently high interest rates are making borrowing and trade finance more costly.

To discuss how multilateral development banks can help and the role that credit insurers play, Trade Finance Global (TFG) spoke with Azzizza Larsen, Senior Vice President, Lenders Solutions Group Leader and Credit Specialties Growth Leader for North America, and Stephen Kay, Managing Director, Structured Credit and Political Risk at Marsh, at the International Finance Corporation’s (IFC) Global Trade Partners Meeting, held in Barcelona, 7-9 May 2024.

Multilateral support for trade and supply chain finance

Multilateral development banks (MDBs) are crucial in supporting trade and supply chain finance programs, especially during such turbulent times. 

Larsen said, “We see many lenders, regardless of how much they want to support the real economy, turning to traditional risk assessment methods – like collateral and balance sheets – instead of other performance measures. This limits how much financing many businesses can receive and disproportionately impacts micro, small, and medium enterprises (MSMEs).”

Larsen highlighted the importance of facilitating access to financing as emerging markets seek to bolster resilience against climate change and promote economic development for women, low-income households, and MSMEs. 

These sectors are often the hardest hit by economic volatility and require targeted support to thrive.

Role of private credit insurers

Private credit insurers play a pivotal role in mobilising finance to support trade banks, particularly in emerging markets. 

Kay explained that the private credit insurance industry often partners with MDBs to venture into high-risk markets. 

He said, “The credit insurance market follows multilateral development banks into developing markets, leveraging the preferred creditor status that these institutions can offer. This arrangement benefits insurers through the multilateral’s diligence and scrutiny, which is more comprehensive than what private banks or clients can undertake.”

This collaboration allows entities like the International Finance Corporation (IFC) to mobilise commercial insurers’ risk-taking capacity. 

He said, “This is reflected in IFC’s great track record of negligible losses unblemished over 20+ years of supporting trade, including the last 15 years with risk sharing from private market credit insurance.”

By doing so, they support trade in high-demand, challenging markets, maintain trade flows, and keep emerging economies connected. 

Kay noted that this involvement is crucial for maintaining access to critical imports such as food and medicines.

Managing limit pressures and resource allocation

MDBs often face limit pressures due to their extensive engagements with emerging market banks, which can include guarantees for trade finance, equity holdings, and medium- to long-term credit. 

Sharing these risks with private credit insurers allows MDBs to expand their support without overextending their resources. 

“Private credit insurers typically do their own credit review of emerging market issuing banks when approving support for IFC,” Kay said, “but they also rely on IFC’s extensive review and screening of these names.”

The limits provided by private insurer partners are additive to IFC’s own credit limits, enhancing IFC’s capacity to support trade for specific banks. 

Local banks in difficult jurisdictions benefit from this cover, which might otherwise be unavailable.

Independent support from private credit insurers

Private market credit insurers have a long history of mobilising trade capital in emerging markets by insuring risks for commercial banks. 

This support has evolved from short-term trade finance instruments like cross-border letters of credit (LCs) and trade advances to a variety of trade finance structures. 

Banks can optimise capital and expand lending limits in various jurisdictions by partnering with credit insurers and brokers.

This partnership has allowed credit insurers to develop deep expertise in underwriting emerging market risks and establish a strong track record of paying claims. 

Kay said, “Banks have been able to not only free up lending limits but also optimize capital in many jurisdictions enabling them to lend more or take additional risk. As a result, credit insurers have developed deep pools of expertise in underwriting emerging market risks and a proven track record of paying claims, but their appetite varies depending on the country of risk and creditworthiness of the counterparty, amongst other factors.”

However, their appetite for risk varies depending on the country and the counterparty’s creditworthiness. In volatile or economically challenged countries, multilateral support remains crucial.

Bridging the gender gap in trade finance

According to the IFC’s report “Banking on Women Who Trade Across Borders,” women-led firms account for only 15% of exporting businesses globally. 

Credit insurance can help bridge this gap by improving access to trade finance and facilitating better financing terms for women-led firms. 

Larsen said, “Credit insurance can help women-led businesses feel more confident in exporting, knowing they can mitigate non-payment risk.”

Credit insurance can help women-led businesses make more informed decisions by providing access to valuable market intelligence, such as buyer payment terms and country risk analysis. 

This information empowers women entrepreneurs to expand their export activities and play a more significant role in the global economy. 

However, while credit insurance can be part of the solution, it is not a panacea. The current focus in underwriting has predominantly been on the environmental aspect of ESG, with less emphasis on social factors. 

The industry should consider using the criteria developed for environmental risks as a blueprint to support social factors, such as women-led businesses. 

Shifting the narrative to include more social considerations in underwriting can help better support these businesses and the risks they undertake.

By partnering with MDBs and supporting businesses, particularly MSMEs and women-led firms, the industry can mobilise the necessary resources to foster global trade growth. 

This collaborative approach ensures that trade flows continue, even in the most challenging environments, ultimately supporting economic development and resilience in emerging economies.