Trade Finance Gap: Why Credit Risk Mitigants Are Not Applied

Abstract

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Banks play a vital role in global trade. However, an existing gap persists in fulfilling the demand for trade finance transactions, predominantly in developing countries with high credit and country risks. These risks can be hedged with credit risk mitigants (CRMs). This study aims to identify and analyse the barriers preventing banks from using CRMs. Employing a qualitative research approach, data were collected through semi-structured, in-depth interviews with trade finance bankers from various regions. Our study shows that, despite the availability, banks do not always use CRMs efficiently. The findings reveal a comprehensive set of factors influencing the decision to decline trade financing requests, categorised into three groups: regulatory, organisational and individual constraints. The implications of our research suggest that by managing CRMs more effectively, banks could approve more transactions, helping to close the trade finance gap. This study offers substantial contributions to the existing trade finance literature. It holds significant implications for financial institutions and a diverse spectrum of stakeholders, including exporters, importers, development banks, export credit agencies, insurance companies and policymakers. Additionally, it underscores the need for harmonised global policies to ensure consistent regulatory frameworks and facilitate smoother trade finance transactions worldwide.