How smart contracts via blockchain technology could close the $2 billion global trade finance gap – Businessamlive

By Olivia Nnorom

According to the World Trade Organization, 80 to 90 percent of international trade depends on trade finance, which includes trade credit, cash advances, insurance, export financing and other short-term financing. For a long time, trade finance has facilitated growth and progress in global trade.

However, it is almost impossible to ignore the obvious trade gap arising from the technical limitations and especially the supply of trade finance, which can form the basis of 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 trade finance demand through rejected applications followed an increasing trend from $1.7 trillion to $2 trillion, as a result of an increasing hawkish attitude towards risk and inflation eat into the lending limits.

The report noted that SMEs, which are key drivers of an economy, were the most credit-constrained, estimating that half of SME trade finance requests are rejected.

On the back of digital technology to avert the looming economic crises that may erupt from this credit starvation, innovations such as DMCC Tradeflow were introduced. The dmcc platform helped register the ownership of goods stored in UAE facilities, which was launched to address the critical gap in the regional trade finance market.

Despite the significant level of growth of the platform, reports show that there is still an urgent need for a more advanced technology that can support a comprehensive regulation and address the root causes of the challenges faced in trade finance.

In the area of ​​trade, the report pointed out that blockchain makes goods traceable in real time, increases trust by guaranteeing the security of payments and financing, facilitates the verification of digital quality and origin certifications, enables the immediate sharing of information at various stages of trade, and helps to improve how related public and private services work.

It further stated that blockchain networks eliminate a number of inefficiencies that can result from physical paperwork between the importer and exporter, their respective banks, shipping companies, receiving companies, local shippers, insurance companies and a variety of other 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 adoption of blockchain networks has improved the trade finance supply chain through reduced costs, error-free documentation and much faster transfer of documents between parties, and has essentially streamlined the onboarding process for SMEs.

“Often digital money is the first thing that comes to mind when blockchain is mentioned, it is interesting to know that there are unusual parts of this technology that are solutions to real challenges,” the report said.

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

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

“Because the actions are automated based on predefined terms and conditions, this enables the parties to cooperate, either much more efficiently through an intermediary such as a bank or without a hero, increasing trust and transparency in trade,” it added.

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

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

“If the cost scalability barrier is overcome, and the smart contract penetration stage in commerce is achieved, the benefits of operational simplification, reduced risk, automated compliance and faster settlement should be obvious to all,” the report said.