How smart contracts via blockchain technology can close the $2trn global trade finance gap

By Olivia Nnorom

According to the World Trade Organisation, 80 per cent  to 90 per cent of international trade relies on trade finance, comprising trade credit, cash advance, insurance, export finance and some other short-term financing. In a long while, trade finance has facilitated growth and advancement in global trade.

However, it is almost impossible to ignore the obvious trading gap emanating from the technical limitations and most especially, the supply of trade finance, which can form a basis for a potential damage to a real economy.

Trade Finance Global (TFG), a leading B2B fintech in trade finance reported that between 2020 and 2023, unmet demand for trade finance through rejected applications followed an increasing trend from $1.7 trillion to $2 trillion, as a result of a rising hawkish stance on risk and inflation eating into lending limits.

The report noted that SMEs, which are important driving factors in an economy, were the most credit-constrained, and estimates project that half of SME trade finance requests are rejected.

Riding on the back of digital technology to avert the looming economic crises that can erupt from this credit starvation, Innovations such as the DMCC Tradeflow were introduced. The Dmcc platform helped to  register the ownership of commodities stored in UAE facilities, which was launched to address the crucial gap in the regional trade finance market.

Despite the substantial growth level with the platform, reports show that there is yet an urgent need for a more advanced technology that can support an all-round regulation and address the root-causes of the challenges encountered in trade finance.

In the area of trade, the report pointed out that blockchain makes goods traceable in real-time, enhances trust by guaranteeing the security of payments and financing, facilitates the verification of digital quality and origin certifications, enables instantaneous sharing of information at different stages of trade, and helps improve how related public and private services operate.

It further stated that blockchain networks eliminates an array of inefficiencies that can result from physical paperwork between the importer and exporter, their respective banks, shipping companies, receiving companies, local shippers, insurers, and a range of additional parties, by serving as a shared ledger that all parties can access at any time to receive the information they need to keep the trade finance process flowing seamlessly.

According to the TFG report, the superficial application of blockchain network has improved the supply chain in trade finance through reduced costs, error-free documentation, and much faster transfer of documents between parties, and has essentially streamlined the onboarding process for SMEs.

“Oftentimes, digital money is the first thing that comes to mind when blockchain is mentioned, it is interesting to know that there are uncommonly tapped sections of this technology that are solutions to real-life challenges,” the report stated.

To ensure a stronger performance in the sector, the report recommended a widespread application of the blockchain network in the form of smart contracts within trade.

TFG explained that smart contracts are simply programmes stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss.

“Because the actions are automated based on pre-defined terms and conditions, this enables parties to collaborate, either much more efficiently through an intermediary like a bank or without one entirely, increasing trust and transparency in trading,” it added.

The report also showed that the cost-saving effect of the smart contract process would have an immeasurable impact on many underserved businesses impacted by the $2 trillion trade finance gap by creating new, less constrained sources of liquidity that are still underpinned by trust and transparency.

With the utilisation of this automated mechanism, the report noted that the import and export banks would be able to review documents swiftly  without the need for physical paperwork.

“If the cost-scalability barrier is overcomed, and the penetration stage of smart contract into trade is achieved, the benefits of operational simplification, reduced risk, automated compliance, and faster settlement should be obvious to all,” the report stated.