Supply Chain Finance Is the Future for Asia - An Opportunity Not to Be Missed

An increasingly interconnected global economy will no doubt create prosperity for Asia. China and India are poised to become the new economic powerhouses of the 21st century. Meanwhile, the region’s emerging economies are projected to expand by 5.3% this year.

Even amid a slowing economy, Asia is fast becoming the hub of global commercial activity, innovation, and manufacturing-and is driving the rise of emerging market influence on the world. International trade and interconnected supply chains have contributed to these impressive developments.

However, with the advantages of global connectedness also comes risk. We learned during COVID-19 that the shutdown of trade, and trade finance, crucially hurt the global population’s access to jobs, goods and capital. Related disruptions and social unrest only exacerbated the hazards that non-diversified supply chains have on economies when major challenges occur.

The trade finance system requires deep change to create jobs and reduce poverty where it is needed the most. This task isn’t just a simple upgrade to fix a few problems. It represents an opportunity to shine a light on the global trading system for innovative solutions that will maximize gains in Asia.

MSMEs Need More Access to Capital

The Asian Development Bank (ADB) estimates micro, small, and medium-sized enterprises (MSMEs) make up 97% of all regional enterprises, employ 69% of the labor force and contribute significantly to the GDP. Still, most MSMEs do not have access to sufficient credit and liquidity required for their daily working capital needs. Over 60% of these private enterprises cannot get loans when they need them; operators and their employees are forced to live cash-in-hand.

Supporting supply chain financing for MSMEs will boost the entire developing world. Facilitating MSME access to different receivables finance techniques is crucial for many economies in Asia, particularly ASEAN, to stay competitive in local and regional markets.

Closing the Trade Finance Gap

Supply chain finance is one of the fastest-growing parts of the financial world-with volume leaping from $330 billion in 2015 to $1.8 trillion in 2021.The strongest SCF growth is reported in Asia (43%) according to BCR’s latest World Supply Chain Finance Report. However, the amount of money available versus the optimal amount needed by businesses is growing. The trade finance gap according to ADB was $1.5 trillion in 2018 and had risen to $1.7 trillion by 2020. It is now estimated to have topped $2 trillion due to rising risk aversion and inflation eating into lending limits.

Not surprisingly, MSMEs that don’t have the financial footing to qualify for commercial loans are disproportionately hurt by this gap. With only a few banks ready to serve MSME clients, there’s a large market opportunity. Non-bank financial institutions (NFBIs) are starting to fill in on important funding, especially for sub-investment grade corporates, where lending has moved from banks to the private debt markets. Fintech platforms are capitalizing on pre-existing middle market financing gaps left by the banking sector and are finding great benefit from the rapidly growing e-commerce sector in Asia Pacific.

More Liquidity, More Momentum

Global issues such as the negative implications of inflation on food security means that the entire finance industry should be working together to ensure those needing trade finance receive it and increase credit limits to companies to compensate for changing macroeconomic conditions.

Recent trends such as nearshoring and localization bring additional investment requirements and can affect balance sheet structure. Simply put, many companies are working to secure lines for capital expenditure financing. SCF can play a role in helping to alleviate financial concerns.

Companies are also experiencing longer payment and working capital cycles. Buyers are requesting longer payment terms, so there’s greater appetite for early payment solutions to help suppliers receive payment sooner, rather than waiting for cash that is tied up. Sellers are also increasingly turning to deferred payment solutions that can help their customers by enabling them to pay later.

An uptake of SCF is also coming from suppliers that are more actively drawing on alternative sources of funding. The value of SCF loans are not tied to fluctuations in traditional markets, which protects against the erratics of the stock market and naturally hedges FX exposures. Increasingly, companies that are switching to new suppliers may not be comfortable trading on open account terms, meaning there is a greater need for instruments such as letters of credit or guarantees.

“Supply chain finance has outpaced the traditional trade finance market and will continue to do so as platforms digitize and the demand for working capital grows.”

Bold Moves for Banks and Non-banks

Supply chain finance has outpaced the traditional trade finance market and will continue to do so as platforms digitize and the demand for working capital grows. At a time of traditional bank revenue stagnation, both banks and non-banks are considering what it would take to carry out a cost-efficient infrastructure for SCF at scale.

Many emerging market economies have extended tightening trends that began in mid-2021. And while the fintech investment market is correcting globally, many regions in Asia are holding their position well. As an increasingly trusted hub for high growth markets, the diligence in developing an open, cross-border ecosystem in Asia is paying dividends.

We’ve reached a defining moment in the history of trade and supply chains, one that requires a bold move into the future. Working with both regional and global partners, the business world’s shared objective should be to make global trade more accessible, especially to MSMEs. This will open up tremendous opportunities for supply chain finance and unlock the potential for Asia.