New supply chain finance, the new normal in Emerging Markets (TXF webinar)

In a discussion moderated by TXF, Finverity discusses new ways for companies to effectively use digitisation in emerging markets to propel access to financing for sustainable international trade through supply chain finance (SCF).

The panel was composed of:

Notable remarks

  • “The trade finance gap, as estimated by the ADB, has increased during Covid, although nobody yet has the data in the emerging markets to see by how much, and over 74% of the gap was already estimated to be concentrated within SMEs and mid-market companies, and over 60% of the gap was estimated to fall in emerging markets,” stated Viacheslav Oganezov, CEO of Finverity.
  • As 80% of global trade is dependent on some form of financing to keep the trade flowing, emerging markets need access to funds, and during Covid-19, demand for capital has been increasing in certain areas. On the flip side, we are seeing the supply of funding drying further as many banks have already been withdrawing from financing trade since the increase of capital requirements through Basel regulation.
  • “A lot of alternative financing providers are also coming into space as trade finance is a safe, uncorrelated asset class which performs well in environments of uncertainty,” says Oganezov.
  • “Finverity aims to bridge the gap and provide a platform that would firstly provide origination of good quality credit deals across emerging markets and secondly match them with the relevant funding while providing an automation engine to take care of back-office tasks and operations to run these types of facilities at scale.”
  • Alex Fenechiu Co-founder & COO at Finverity says, “We have found that one of the biggest hurdles to banks funding midmarket companies is that when you overlap banks’ capital requirements with operational costs and sometimes outdated legacy systems, it simply becomes economically unviable to service that segment without digitisation.” He adds that for alternative funds without those constraints, it paints a different picture. “We’re seeing a paradigm shift where banks and multinationals are going to form one side of the trade finance world and non-bank and alternative funders will form another with more midmarket companies.”
  • One of the reasons for the wide trade finance gap is that deals aren’t easily bankable. How do players determine how prepared they are both in terms of physical ability and what they know to be able to use the available technologies to fund cross border trade and how can those hurdles be overcome? It’s certainly not an easy task. “There are two sides of the readiness picture – one is the readiness of funders, whether they understand the market, have the feet on the ground to support rolling out programmes, the access to currency and resources and whether they can bring the right technology, etc,” says van der Hooft.
  • Transparency, more than insurance, is the key to unlock the whole of the trade finance process, as Fenechiu says, “Bad transparency has been underlying many of the high profile frauds in the recent past. If you can have a high level of transparency through the system and you can get data which is predictive, the risk equation changes dramatically.”
  • “Technology is good at automating things and increasing efficiency, but if you feed bad data into any system, the output is going to be bad. That’s why you have to do on the ground due diligence before you set up a facility,” adds Oganezov.

Closing note

Knowing what you are financing is vital. As van der Hooft points out one of the benefits of moving into SCF as opposed to the sorts of deals that provoked the GFC more than a decade ago, is that there remain tangible deals being financed. Going forward, proper engagement with the pre-shipment space for SCF will also be very important. Covid may have thrown a spanner in the works for those who use historical data as a predictor of the future, and it’s never been more important to do proper due diligence, but accessible technology, particularly for local players who have been ‘derisked’ by global banks should be a real enabler to help bridge the liquidity gap for mid-market while providing funders with a reliable, efficient and scalable way to participate in the asset class.