Supply chain financing: an effective way to finance developing markets

Supply chain finance is emerging as an effective instrument to reduce financing gaps in developing markets.

Offering low risk and good returns, the outlook for supply chain finance (SCF) is positive, buoyed by scope to expand in developing economies, channel capital where it is needed most and support more sustainable trade.

SCF is not a new form of financing and has been used for a long time by banks focused on investment-grade companies with the aim to providing financial access and stability into their supply chain. While recently SCF has seen emergence of non-banking providers, banks continue to have a key role to play in the financing of SCF, particularly in emerging markets and for small and medium-sized companies, where there is significant potential to expand and develop the market. Banks bring governance, transparency, expertise, and networks as well as access to fintechs and a wider pool of investors, especially the banks who have adapted well to the emerging trends, in addition to the years of trade finance expertise they already have.

Properly financed and robust SCF is not just a critical cog in the wheel of global trade, it can also help kickstart growth in developing countries − giving assurance to enterprises and business owners who might otherwise struggle and helping to encourage and create more sustainable supply chains.

Growth is also being spurred1 by an ongoing investor hunt for yield and rising demand from corporates seeking to maximise the impact of their working capital as they recover from the pandemic.

“The optimism is clear: supply chain finance is a very attractive asset class, and it’s a crucial part of the ecosystem,” says Nicolas Langlois, Global Head of Trade Distribution at Standard Chartered. “New players are bringing different approaches, new technologies and new ways to finance. Given its unique structure, SCF can incentivize the participation of financiers who may otherwise be unable to support developing markets, so there are exciting times ahead.”

Developments in emerging markets

SCF as an asset class is emerging strongly in developing countries, where there’s a need to free up finance and a current lack of products to mitigate risk.

The World Trade Organization and the World Bank have stressed the vital role that trade plays2 in integrating developing countries into the global economy. As per the Asian Development Bank, the role is even more crucial since it says shortages of trade finance3 put at risk seven of the United Nations’ 17 Sustainable Development Goals.

SCF products could “improve the prospects for millions of entrepreneurs4 who are held back by a lack of fixed collateral and limited offerings of appropriate credit products by financial institutions,” according to the World Bank, which also sees scope for financial institutions in many emerging economies to offer a broader range of these products.

But while there is much optimism about the opportunities and the scope to channel capital to developing countries, the collapse of UK- and Australia-based financial services company Greensill Capital5 shone a spotlight on some deficiencies and threatened the reputation of the industry.

Shoring up credibility

Despite Greensill, SCF as an asset class remains a positive option for investors and offers much potential for expansion. The Greensill story also paved the way for an improved understanding of the area, better investor education, while also underscoring the need for robust practices, improved infrastructure and better credit assessments.

Banks like Standard Chartered will play a leading role in helping shore up credibility of these processes. Not only do they bring transparency, expertise, and well-developed networks, they also offer access to technology developed by their fintech partners and a wider pool of investors.

Looking ahead, blockchain technology and asset tokenization6 can also help to create more resilient digital supply chains by providing delivery assurance to all parties. This will reduce pain points including document delays and fraud, by increasing transparency and visibility all along the supply chain, according to a paper from Cognizant.

Collaboration between technology solutions companies – including AI and blockchain applications – and banks, the traditional providers of liquidity to SCF, can also help. The banks bring confidence, finance, infrastructure and credibility, while the tech companies bring greater access to data and better transparency, that could help attract a wider pool of investors.

Standard Chartered is helping lead the way with these tech developments, backing the Asian Development Bank’s first credit guarantee using distributed ledger technology7, with the first cross-bank Letter of Credit transaction between Vietnam and Thailand.

Sustainable solutions

The sense of optimism is evident from the growing number of corporates willing to consider entering the market. Additionally, lenders are increasingly guiding their borrowers towards improving their environmental, social and governance (ESG) credentials and that will strengthen the market.

Standard Chartered employs sustainable trade finance solutions across Asia, Africa and the Middle East, Europe and the Americas, encouraging clients to improve their disclosure, reporting and definition of use, while meeting their ESG goals. SCF is a key area of focus for this work.

Recent turbulence in the SCF market has opened opportunities and underscored that there is no substitute for good and effective credit underwriting. Robust operational processes and strong underlying infrastructure are critical to monitoring deals throughout their life cycles.

Standard Chartered is optimistic about the outlook. As the global economy recovers, the risks in emerging economies will come down, and more institutional capital will flow to these areas. The right banks will be at the centre of this expansion, along with the key ecosystem partners.

Even so, this will require better regulation and education on the investor side to broaden not just the range of providers, but also institutional investors and alternative sources of capital. A better understanding of the origination process and how credit underwriting works are key areas to work on.

“There is a flight to quality in supply chain finance underway and that’s led to a lot more awareness among investors and investor education,” says Mr. Langlois. “The outlook for this asset class is positive: there is more blue sky than there are clouds.”

This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.

1 https://www.hedgeweek.com/2021/03/31/298048/rise-supply-chain-finance-and-lessons-greensill

2 https://www.wto.org/english/news_e/news20_e/rese_30jul20_e.htm

3 https://finverity.com/insights/supply-chain-finance-in-emerging-markets-as-an-ethical-alternative-investment/

4 https://blogs.worldbank.org/psd/supply-chain-financing-effective-way-development-banks-support-small-entrepreneurs

5 https://www.ft.com/content/8ca7b05d-f1a8-4ddd-8fda-3383f11e5143

6 https://www.cognizant.com/whitepapers/blockchain-for-trade-finance-trade-asset-tokenization-part-3-codex3337.pdf

7 https://www.adb.org/news/adb-conducts-its-first-credit-guarantee-using-distributed-ledger-technology-trade-finance

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