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- Trade finance holds significant potential as an asset class.
- This is being recognised by private credit providers, who are now seeking to finance SME working capital.
The use of private credit in trade finance is growing in popularity, particularly as traditional banks face increasing regulatory constraints, such as those introduced by Basel IV. Institutional investors, such as pension funds and insurance companies, are beginning to recognise the untapped potential of trade finance as an asset class.
These private credit providers can help to diversify the sources of funding available to businesses, which, in turn, reduces the reliance on traditional banks that may have limited appetite or capacity to finance smaller businesses.
One participant said, “The moment that the institutional investor—who has the real money—finds a way to finance the real economy, the banks will not be needed to assess the risk but only to become the pipes.”
This could lead to a reconfiguration of the trade finance landscape, where private credit providers assume a more prominent role in financing the real economy, allowing banks to act as conduits rather than risk assessors.
Another participant added, “Banks play a significant role as lenders, whereas institutional investors can help to provide funding and liquidity, but there is a need for banks to change and also the industry to come forward in supporting the wider ecosystem on SME financing.”
To encourage the incorporation of other capital sources in trade finance, ITFA’s Trade Finance Investment Ecosystem (ITFIE) have recently launched three working papers. They include a discussion of routes to non-banking capital sources and the role the asset management industry can play; an explanatory overview of trade finance jargon for non-bank investors; and a guiding document to simplify the Securitisation Risk Distribution market, to improve accessibility.
Addressing the trade finance gap through portfolio-based solutions
For private credit to fully address the trade finance gap, more effort is needed to develop structured financing solutions that appeal to a broad range of investors.
Private credit deals must be structured to distribute risk efficiently across a portfolio of smaller transactions rather than concentrating on a few large-scale deals.
This portfolio-based approach allows for a more balanced and scalable risk management framework, providing greater liquidity to SMEs without exposing individual investors to excessive risk.
One participant in the roundtable said, “There is a massive appetite to finance companies’ working capital. Trade finance is at the heart of what big investors want to do.” This presents an opportunity for collaboration between varied parties.
Scaling up private credit through collaboration
While institutional investors have shown growing interest in the sector, the ability to scale up these investments will depend on the creation of more standardised and transparent structures that appeal to a wide range of investors.
For private credit to become a sustainable and significant contributor to closing the trade finance gap, the industry must continue to innovate in structuring deals that balance risk and return.
This requires insurers and banks to play a more active role in mitigating risks through mechanisms that can spread risk across a diverse pool of investors, enabling private credit providers to support a greater volume of SME transactions.
Private credit providers clearly want to finance SME working capital. Now, the question is whether banks and credit insurers will step up and make the necessary adjustments to welcome them to the table.
