The Trade-Finance Paradox
The subject of this series is the relationship between firms that buy and sell across borders and the banks that help them manage the risks of doing so. Its first question is simple but easily overlooked: why can the firms that most need a bank’s protection be the least able to obtain or use it? Understanding that question requires more than learning what a letter of credit is. It requires separating a firm’s need for risk sharing from its application, approval, price, and eventual payment choice.
That distinction matters because trade is often financed before it produces cash. An importer may need credit to pay a supplier; an exporter may need confidence that goods will be paid for after shipment. If financing is unavailable, a commercially viable order can fail before any goods move. The consequence is not confined to a bank’s balance sheet. Firms lose access to suppliers and customers, supply chains become harder to reorganize, and economies miss opportunities to diversify trade.
A financing gap is a trade constraint
The Asian Development Bank defines the global trade-finance gap as unmet demand from companies for financial institutions to provide loans and risk mitigation for importing and exporting goods and services. The definition is broader than letters of credit. It includes the financial support that allows a transaction to proceed when the two parties cannot safely rely on trust, cash, or an established relationship alone.
ADB’s 2025 Global Trade Finance Gap Survey places that gap at $2.5 trillion, unchanged from the estimate in its 2023 edition. At first glance, an unchanged number might suggest stagnation. But the denominator matters. Merchandise trade grew, so the gap represented about 10% of merchandise trade in the newer comparison, down from about 10.6% previously. Relative to the volume of goods traded, that is some improvement. In absolute terms, however, the unmet demand remains large enough to constrain businesses and development.
The estimate is a benchmark, not a complete count of every firm that wanted finance. It draws on data for 2023 and 2024 and on views collected from more than 110 trade-finance providers during the first half of 2025. ADB says those respondents may represent up to one-third of the global trade-finance market, while also acknowledging that the total market size is unknown. The figure is therefore useful for establishing scale and persistence, not for answering whether a particular small importer was rejected, discouraged from applying, or able to find another source of funding.
The timing makes the benchmark especially important. Banks surveyed by ADB expect trade-finance demand to rise as companies diversify suppliers and markets, deepen intra-regional trade, and reorganize supply chains. A new trading corridor creates a need for working capital and risk mitigation before the parties have accumulated the information that makes ordinary trade credit comfortable. If supply-chain relationships are being redrawn while finance remains selective, the cost of reorganization will be borne unevenly.
What a bank changes—and why that change is selective
A letter of credit is one of the clearest examples of this tension. Cross-border trade contains a two-sided promise problem. If an exporter ships first and waits for payment, the exporter risks receiving nothing. If an importer pays first, the importer risks non-delivery, delay, or goods that do not meet the agreement. A bank-intermediated instrument can reduce both risks by requiring the importer to commit to the bank and by releasing payment when the exporter presents the agreed evidence of shipment or delivery.
That protection has a price. The bank must review documents, monitor conditions, assess the parties and the corridor, and accept some residual exposure. The importer may need collateral, a cash deposit, a banking relationship, or the organizational capacity to complete the process. Fees and administrative effort can make the instrument uneconomic for a small transaction. A bank may also decide that the country, counterparty, or application is too costly or risky to serve.
This is the paradox in its most compact form: the weaker the private information about a counterparty, the more valuable bank intermediation may become; yet weak information also makes the bank’s verification task harder. A firm with little history, modest scale, or limited collateral can face the greatest commercial risk without being the easiest customer to underwrite. The product that substitutes for trust may therefore be rationed precisely where trust is scarce.
The paradox should not be turned into a claim that every firm that does not use a letter of credit is excluded. Some firms use open-account trade because a relationship has become reliable. Some pay in advance because the exporter will not accept another term. Some use a different financing product, or decide not to trade. Others may need finance but never apply because they expect rejection, cannot understand the process, or cannot meet the documentation and collateral requirements. These outcomes look similar in an aggregate “use” statistic while representing different economic experiences.
The firms behind the headline number
The global estimate becomes more meaningful when the unit of analysis shifts from the market to the firm. A bank does not finance “global trade” in the abstract. It decides whether a particular importer or exporter, dealing with a particular counterparty in a particular corridor, can be served at a price that makes the transaction viable.
That decision is shaped by more than the legal form of the product. A young firm may have a good order but little record of performance. A small domestic importer may understand its market but lack the collateral or banking relationships that make that knowledge legible to a lender. A first-time trader may face unfamiliar customs, documentation, and foreign-exchange requirements. A foreign-owned firm may have access to information and finance through an international network, even if its observed use of a letter of credit is lower because it can rely on intra-group relationships or better screening.
The early evidence points in two directions at once. The detailed study of Vietnamese firms finds that letter-of-credit users are, on average, older, larger, more productive, and more experienced than other traders. That pattern could be read as evidence that stronger firms use more bank finance. But it could also mean that stronger firms can obtain a letter of credit more cheaply, while firms that lack the required capabilities are missing from the pool of successful users. A profile of existing users is not a profile of all firms that need access.
The same caution applies to the ADB’s SME figures. In the 2025 survey, the reported rejection rate for small and medium-sized enterprises was 41%, close to the 40% rate for large and mid-cap corporates. ADB treats that convergence cautiously. It may reflect better SME support, but it may also reflect changes in bank screening, nonbank finance, or discouraged firms choosing not to apply. In evidence summarized from regional work, some SMEs reported a genuine need but did not submit an application because of collateral requirements, fear of rejection, or unfamiliarity with the process.
These distinctions are not semantic. Suppose two small firms are absent from the same data. One has found a dependable supplier willing to sell on open account. The other abandoned an export order because no bank would provide the required guarantee. Their non-use of a letter of credit has opposite meanings. The first may be well served by private trust; the second may be part of the unmet demand represented by the global gap. A serious account of access has to keep both possibilities open until the evidence separates them.
A question of access, not simply volume
The persistence of the gap also changes how progress should be judged. Expanding the supply of finance is valuable, but not every additional dollar reaches the same kind of firm or solves the same constraint. A guarantee can help a bank absorb counterparty risk, yet leave a small supplier unable to prepare the documents. Digital documents can reduce manual processing, yet create new requirements for firms without reliable records or connectivity. A local-currency facility can protect a borrower whose revenue is in local currency, yet not solve a lack of information about the foreign buyer.
The practical question is therefore not only, “How much trade finance is available?” It is also, “Which firms, in which corridors, can access which form of protection at what total cost?” Answering it requires keeping five relationships in view: the firm’s own ability to screen and execute a transaction; the counterparty’s willingness to pay or deliver; the bank’s cost of verifying the promises; the partner country’s information and enforcement environment; and, in some cases, a stronger buyer or public institution that can share the risk.
This framing gives the global figure its proper force. The $2.5 trillion estimate shows that the problem is not a collection of isolated mistakes. The firm-level evidence suggests that the allocation of finance is not explained by country or product characteristics alone. And the survey evidence on demand, rejection, and self-rationing warns that the visible market may understate the firms that are most constrained.
The next step is to examine the instrument itself in closer detail. Once we see exactly how a letter of credit reallocates the risks of payment and delivery—and what the bank must be paid to do—we can understand why protection becomes an access filter, and why the answer cannot be simply to ask every firm to use the same product.