Trade finance provides ‘systemic liquidity’ to emerging-market businesses in COVID crisis

Impact Alpha article by Yasemin Saltuk Lamy & Diana Kolar

In a world where innovation is revered, it can be easy to forget the value of tried and tested tools. When Covid-19 revealed itself as a global pandemic, CDC turned to one of the oldest forms of international finance to support financial stability with systemic liquidity: Trade Finance. This age-old instrument has not attracted many modern impact investors, yet trade finance, and other forms of invoice or inventory-backed working capital financing, is exactly the type of support businesses need to maintain operations and jobs without jeopardizing financial health by taking on leverage or diluting ownership during a crisis.

Development Finance Institutions have announced more than $12 billion in trade-related COVID-response initiatives as of early July. For impact investors in need of lower risk opportunities that can absorb larger capital allocations, this is just the ticket. But we have yet to see impact investors active in this market. It could be that the multi-layered approach of partnership through banks that on-lend feels too removed from the impact for end beneficiaries. Or is the administrative burden too high for the thinner margin of these short-term transactions? 

Historically low default rates of ~0.08% should be compelling for lenders, and this has proven to be one our quickest, most scalable and most prudent tools for supporting systemic liquidity early in the crisis. Investors open to old-fashioned tools could have significant impact – reaching small business at scale – with low risk. Too good to be true? Or just tried and tested?

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