Financial Inclusion in the CAREC Region: Promoting Fintech to Meet Underserved Needs in Trade Finance

Abstract

Trade financing inadvertently falls short to the needs of even the viable transactions from smaller firms, unmet demand expected to reach around $2.4 trillion by 2025 if effective solutions are not in place. In 2018, 57 percent of trade finance applications from firms in Central Asia Regional Economic Cooperation (CAREC)—mostly from the Kyrgyz Republic and Pakistan—were rejected, almost half of which no longer seek alternative finance, altogether withdrawing from a potentially viable trade activity. Applying the Heckman two-step correction to analyze a cross-section of firms in various waves of the ADB’s Trade Finance Gaps, Growth, and Jobs Survey, the paper validates that smaller firms experience higher incidence of trade finance rejections relative to larger firms, owing largely to their weak company financial health and history. Interestingly, results suggest potential of fintech in reducing the incidence of trade finance rejections disproportionately experienced by smaller firms, thus advancing financial inclusion. The paper maps the financial ecosystem in CAREC member countries and explores the potential opportunities and limitations of fintech adoption and entry points for intraregional cooperation. Policy proposals put strong emphasis on efficient financial structures, effective regulatory frameworks, and the needed capabilities to advance inclusive trade and finance.