After the pandemic, Small and Medium-Sized Enterprises (SME) might be the biggest beneficiaries because organizations and governments are turning to them. Different panels have been set up to research financial inclusion tools that will be effective and efficient to service them.
SMEs and Global Trade Finance
We take a snapshot of the current state and the fortune of SMEs by drawing from a publication by the World Trade Organization (WTO) on “Trade Finance and SMEs: Bridging the Gaps in Provision” in 2016. The publication revealed some facts:
“Small and medium-sized enterprises (SMEs) face the greatest hurdles in accessing affordable trade financing. In some large developed countries, up to a third of SMEs face such challenges. SMEs account for 20 per cent of US exports, and 40 per cent of EU exports.”
It was reported that over 80% of trades are financed by credit and credit insurance (majorly banks). More than half of trade finance requests are rejected and businesses from developing countries suffer the rejection most.
More often than not, international trade financing presents a huge risk to financiers. According to WTO, these risks are characterized by transaction default rate, implied maturity, recovery rate, specific transaction level loss rate, and defaulted transaction loss rate. The defaulted transaction loss rate is 57%. These risks make up the major reasons why SMEs are excluded. Other p2p trade financing platforms present financiers with other risks such as fake invoice or documents for financing, supplier and buyer conniving to defraud the financier, etc.
Tradefinex from Xinfin Hybrid Blockchain
From a recent webcast by World of Open Account (WOA) learning lab, Atul Khekade, co-founder of Xinfin and Tradefinex, began exploring how blockchain technology can effectively put an end to barriers preventing SMEs from accessing liquidity in their businesses. He stated that Tradefinex is connecting trade finance to a new breed of Alternate asset investors- the non-bank financiers e.g traditional market investors. Built on the XDC01 protocol, Tradefinex can be used to transparently connect financiers, buyers, and suppliers in a fully compliant manner to execute cross-border trade finance without hassle. It is a framework itself so it can be incorporated as a middleware to work with an organizational structure. The digitization and tokenization of trade instruments and origination tools such as Invoice, Letter of Credit, Bills of Laden, etc. via smart contract has opened a lot of ways to effectively deal with fallouts in trade financing. The advantage is that a hybrid Blockchain like Xinfin makes transactions transparent, immutable, and secure while keeping private data private. Not just this, the platform has KYC and AML measures in place to actively curb frauds of all kinds.
Mitigating Trade Finance Risks for Financiers
Soon, trade financing platforms built with the Tradefinex framework provided will be able to actively mitigate risks for financiers through different tools the platform has provided.
KYC and AML measures
These will make sure that all parties to be involved are verified and comply with all governing laws. This is such that no one can make away with funds or default. The confirmation of identities and verification of business can cement trust in the mind of liquidity providers or financiers.
The potential Smart contracts in trade finance are limitless. Apart from the fact that it can be used to tokenize assets, it is useful in locking balances. For example: After a seller, A signs and sends an invoice to a buyer B. B confirms it, signs, uploads it (with all relevant information) to the platform for tokenization, and digitally signs it with his private key. To become accredited or confirmed, A has to also sign it digitally with his own private key. After the confirmation, it is vetted by the platform (in case of conflict resolution). Before it is acceptable, B has to lock a percentage of the fund needed (say 40% for new participants who do not have a credit score) as collateral. The financier C reviews the information and sees if the interest rate and the payment times are acceptable. He signs the contract with his private key, thus settling the trade.
At the time when the repayment is to be done, the smart contract initiates again to see if it has been repaid with interest. If this has been done, the financier uses his private key to assign a trust score to both A and B, thus completed. In the case of non-repayment, the locked balance, AML, KYC, and the platform will be instrumental in the resolution of conflict.
Blockchain-Based Credit or Trust Score
As explained above, a trust score can be assigned to parties via smart contracts. These are transparent and immutable thus permanent and updatable (since new scores will contribute and complement the old ones). They are just like normal transactions in a Distributed Ledger.
Xinfin Blockchain is the first of its kind to focus especially on Trade Finance. It is unique and has really been successful in doing what it does best.
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