The World Trade Organization (WTO) estimates that up to 80% of global trade uses trade finance. According to a WTO study on Trade finance and SMEs, Up to 80 percent of trade is financed by credit or credit insurance, but coverage is not uniform. A lack of trade finance is a significant non-tariff barrier to trade, particularly (but not exclusively) in developing countries.

 • Small and medium-sized enterprises (SMEs) face the greatest hurdles in accessing affordable trade financing. In some large, developed countries, up to a third of SMEs face such challenges. SMEs account for 20 percent of US exports and 40 per cent of EU exports.

• Globally, over half of trade finance requests by SMEs are rejected, against just 7 per cent for multinational companies. Global liquidity tends to be concentrated within the biggest institutions and their clients. 

Access to finance is a significant challenge for SMEs around the world. Many SMEs have difficulty obtaining financing from traditional banks and financial institutions, which often have strict lending criteria and require collateral or a solid credit history. FCI statistics show that more and more sellers are looking for guaranteed receivables. Looking at the product distribution of FCI members, we see that non-recourse factoring has been the most applied product for years. But how much of SMEs benefit from it?

Every year, thousands of SMEs are integrated into the global production chain. Even though the increasing supplier financing solutions provide alternative financing resources to SMEs, these enterprises, usually weak in information and technology, cannot benefit from the systems. Onboarding SMEs into the system is the most fragile point of these financial solutions.

A WTO-OECD survey found that the lack of integration of low-income countries into global value chains is a major obstacle to development. In such countries, the local financial sector’s ability to provide supply chain finance arrangements is limited. Local access to factoring is almost less than %5 of the lending portfolio, and SMEs stay out of the supply chain financing systems.

The EBRD has been involved in the promotion of factoring through the activities of the Trade Facilitation Program (TFP) and the Financial Institutions (FI) team's investments since 2012 by working on improving the legal environment for factoring in the EBRD region. Under the program, the EBRD offers technical assistance in creating a facilitative legislative environment and an appropriately designed regulatory regime and seeking to support the development of local and regional reverse factoring programs.

We are working within this program with the EBRD TFP team in developing countries. We are sharing our experience here more broadly within all CEE and Middle East on a country and institutional level.

Now, associations, especially global associations like ours, are essential in supporting developing countries. SME financing is more than just a problem for a single institution; it depends on establishing an infrastructure that the whole financial ecosystem solves by working together. FCI contributes to countries' open account financing infrastructure .by partnering with development banks.  

Factoring law studies in different countries of the region, Jordan, Palestine, Uzbekistan, and Ukraine, are in rapid development with the contributions of their central banks, ministry of finance, and investment banks, and with the support of the EBRD legal transition team. By the end of 2023, we will see that the factoring law in at least a few of these countries will be approved by parliaments.  

These developments will solve the increasing demand for open-account trade financing needs in the medium term, especially in Middle East countries.

There are also significant developments in the legal infrastructure of government-supported digital solutions. Efforts are being made to increase the number of successful invoice registration centers, like the successful example of Turkey, especially in CIS countries. Government-supported digital solutions are vital for developing the receivable finance sector and financing SMEs.

The Association of Financial Institutions of Turkey's receivable recording system prevents double assignment and financing with an encrypted and stored data system.

It Works Online & Integrated with the System of Revenue Administration and Verifies that the e-invoices arise from a real trade transaction and are valid. It also Verifies the ID and VAT numbers of Sellers & Buyers and Collects the payment information of the factored receivables. It Provides reporting for all receivables data to the sector and Regulatory Bodies. The increase in such state-sponsored financial solutions is indispensable for sound financial infrastructures.

This article was written by Ms Betül Kurtulus, FCI Regional Director CEE, SEE and the Middle East, for the May 2023 edition of the FCI In-Sight Newsletter.

Discover more

• This article was recently published in the FCI In-Sight Newsletter, May 2023 Edition. To read more, click here.
• Join us at the 55th Annual Meeting, taking place in Marrakech from 17-21 September 2023, as we dive into Supply Chain Finance, Receivables Finance, Factoring, and so much more. Register today by clicking here.