The use of distributed ledger technology (DLT) like blockchain can help break financing barriers for small and medium-sized enterprises (SMEs) in emerging markets and result in increased efficiencies, according to new research jointly conducted by the World Economic Forum and Bain & Company. (See also, How Blockchain Can Protect the Global Economy.)
DLT Benefits Could Significantly Trim Global Trade Finance Gap
The report mentions figures provided by the Asian Development Bank (ADB), stating that the global trade finance gap was $1.5 trillion in 2017 and is projected to top $2.4 trillion by the year 2025. These estimates suggest that the use of new digital technologies, especially DLT, can be a game changer as they are expected to fill a large part of this void, resulting in an increase in new global trade volumes of around $1.1 trillion.
Titled “Trade Tech – A New Age for Trade and Supply Chain Finance,” the report cites an example of the bottlenecks and inefficient systems that mar present-day trade and supply chain processes. IBM and Maersk sent a test shipment of flowers from Kenya to the Rotterdam port in The Netherlands. The simple transportation exercise led to around 200 communications and trade documents being created, indicative of the cost, time and overhead involved in the supply chain. The processing and administration of trade documents are estimated to constitute up to 20 percent of the physical transportation costs. The report then goes on to explain the benefits of using blockchain and similar digitized technology that will not only curb such inefficiencies but will also cut down on practices such as smuggling and trafficking.
A big chunk of underserved SMEs continues to struggle with stacks of paper needed for communication among customs brokers, freight forwarders, transportation carriers, and numerous government authorities. All such entities will benefit big with the use of blockchain systems, owing to the efficient, secure and robust recordkeeping system it offers. The technology also finds use in another dimension. Amid growing concerns around provenance for products, use of DLT can help in ensuring fair-trade practices for the entire supply chain ensuring that it is socially and environmentally sustainable.
The report further focuses on the use of DLT in financing and the benefits that can be achieved. Financing institutes like banks have regularly attempted to decrease inefficiencies by transforming trade finance and supply chain finance. Trade finance consists of products, such as letters of credit, to reduce transaction risk and finance working capital requirements, while supply chain finance allows businesses to lengthen their payment terms to their suppliers over an extended term. Amid increasing global demand for both forms of finances that are integral to global trade, the heavy reliance on paper-based methods can be eliminated by replacement with DLT, as it will help mitigate credit risk, lower fees and remove barriers to trade.
With more than 75 percent of-of total documentary import and export trade transactions originating or arriving in Asia, countries such as China have already made strides to launch blockchain-based trade finance systems to allow SMEs easy access to financing and to prevent fraud, reports CoinDesk. (See also, HSBC Makes First Blockchain Trade Transaction.)