Agustín Fregossi
Rebeca Vidal
Production chains are long-term linkages established between business units for the purpose of obtaining shared benefits. They include various actors associated along the value chain of a product, so that each one makes contributions and interacts with each other to obtain joint benefits and increase their levels of competitiveness.
These linkages face significant challenges that limit economic growth and the integration of small and medium-sized enterprises (SMEs) into global markets. One of the main challenges is related to the trade finance gap, which is estimated at US$2.5 trillion, according to the Asian Development Bank. This gap disproportionately affects SMEs in emerging markets, which often do not have access to international financing, and whose local financial systems have difficulty assuming their risk profiles. Approximately 95% of companies in Latin America and the Caribbean are SMEs, and they account for around 60% of employment.
The Trade and Supply Chain Finance Gap Summit organized by the International Trade and Forfaiting Association (ITFA) and the International Finance Corporation (IFC) in October 2024 in Washington, DC, addressed these challenges in a comprehensive manner. The event brought together more than 80 participants from across the global trade finance ecosystem, including development finance institutions, commercial banks, insurers, fintechs and investment funds. The main objective was to exchange experiences and identify practical solutions that adapt to the challenges and realities of each region.
Of the various collaborative solutions analyzed to overcome the trade finance gap, the need for better coordination between the public sector and development finance institutions, as well as the clear definition of roles and responsibilities, stood out. Among the conclusions, it was mentioned that the role of development finance institutions is fundamental, given their greater propensity to risk and their political capital, while the private sector is called upon to provide liquidity, technology and expertise to achieve effective financial solutions. Therefore, there is unanimous support for finding solutions to improve trade between countries, based on initiatives that prioritize the integration of SMEs into value chains through financing instruments.
The Washington Declaration, presented at this summit, is a call for urgent action to address the trade finance gap. The declaration urges the United Nations (UN) to formally recognize this gap as a critical barrier to achieving the Sustainable Development Goals (SDGs). It proposes that the UN adopt a bold goal of halving the global trade finance gap by 2030 and eliminating it entirely by 2040.
Bringing together the most influential institutions in the trade finance ecosystem, the event reviewed cases that offer innovative and collaborative solutions with real impact on the ground. The experiences shared by entities such as the European Bank for Reconstruction and Development through its trade facilitation program; Swiss Re with its Trade Finance & Working Capital Solutions initiative; Africa Global Trade Finance; Samawati Capital Partners; Rawbank and Fidelity Bank, highlighted some of the keys to the design and implementation of financing programs with a value chain approach:
- The understanding and participation of actors from the institutional ecosystems of each country is essential to coordinate efforts that guarantee the appropriate and agile use of resources and improve the probabilities of achieving a sustainable impact over time.
- The value chain vision implies simultaneously meeting corporate demands, as well as those of SMEs linked to the large companies to which they offer their products and services.
- Giving the lead role to the traction company in facilitating access to financing for its affiliated SMEs has yielded excellent results.
- It is necessary to design complementary offers of products and solutions, for example, integrating credits with guarantee programs tailored to each linkage, as well as promoting the use of insurance.
- In the case of international financial institutions, the generation of alliances with local financial institutions is critical.
- The incorporation of technology-based financial solutions allows for greater reach, impact and efficiency.
- It is necessary to accumulate more market information, the analysis of which allows for a more agile alignment of the needs of SMEs with the available financing instruments.
- The countries' regulations need to be updated to favor trade and financing for SMEs.
For the strategy of CAF - Development Bank of Latin America and the Caribbean, in its role as an ally of the private sector, these lessons are of great relevance. The alignment of public and private sector efforts, as well as the complementarity of financial and non-financial services that CAF can articulate, represent a great advantage to play an essential role in strengthening value chains in the economies of the region.
From a broad perspective, the trade financing gap limits international trade and economic growth, undermining employment opportunities, income and sustainable development. The importance of this event lies in its focus on resolving one of the major obstacles to economic growth and sustainable development in emerging markets. By addressing this gap, CAF, as part of the ecosystem, can contribute to the economic development of the region and strengthen its position in the global economy.
In summary, meetings such as the Trade and Supply Chain Finance Gap Summit and its Washington Declaration add value to the search for and implementation of solutions to the challenges of productive integration and trade finance, through the promotion of innovative and collaborative solutions. For CAF's strategy, these scenarios and their mandates are essential to support the private sector and the sustainable and inclusive development of the region.
