Ngozi Okonjo-IwealaandMakhtar Diop

Opinion | For fairer trade, expand supply-chain finance in emerging markets

Multilateral lenders must coordinate with governments and local financial institutions to include the world’s most underserved regions

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Employees work at a garment export factory in Hung Yen province, Vietnam, in December 2020. For many smaller firms, securing supply-chain finance from local banks is a significant challenge. Photo: Reuters

Ngozi Okonjo-IwealaandMakhtar Diop

Published: 2:28pm, 24 Oct 2024Updated: 3:44pm, 24 Oct 2024

Supply chains form the backbone of international commerce, representing over half the value of global merchandise trade. They also create large numbers of jobs and lower the bar for countries and companies to participate in the world economy. But the finance underpinning supply chains is inadequate, leaving too many small businesses in emerging and developing economies cut off from the benefits of global trade.

Supply-chain networks bring together raw materials, parts, services and other inputs from multiple countries, with goods often crossing borders several times for processing before they are finished, distributed and marketed.

The firms within these networks depend on short-term supply-chain finance to avoid being squeezed between upfront payments to their suppliers and late payments by their buyers. Such financing enables a large share of global trade, and for small firms in developing countries, it is essential.

Supply-chain finance was a lifeline for many during the Covid-19 pandemic, which disrupted trade and markets globally. As consumers worldwide shifted spending from entertainment and travel to goods, businesses in industries vital for developing countries faced cash-flow constraints, owing to the surge in demand and production.

Garment producers, for example, needed financing to increase their purchases of inputs, even though payments from buyers would come only later. Supply-chain finance offered access to immediate funds, helping them manage working capital, stabilise operations and contribute to easing the world’s supply bottlenecks.

At the global level, supply-chain finance is one of the fastest growing segments of trade finance, with BCR’s latest World Supply Chain Finance Report estimating its value at around US$2.3 trillion. But only some are benefiting from this expansion.