For years, the development debate in emerging economies has centred on access to capital. Governments want more investment, businesses want cheaper credit and smaller firms want a fairer chance to grow. Yet too often the discussion begins and ends with banks, external investors and public funding programmes.
That misses a more practical opportunity sitting in plain sight. Over the past decade, supply chain finance (SCF) has emerged as a valuable tool for emerging economies. The question now is how to maximise its effect.
Traditionally, finance and supply chains were approached separately. Finance from bankers and investors built up a business which then established supply chains with another set of companies. Though SMEs make up 90% of the global private sector, they often struggled to flourish within these separate systems, thanks to investor wariness about businesses with less proven performance and a higher perceived risk.
“SMEs make up 90% of the global private sector, they often struggled to flourish within these separate systems, thanks to investor wariness” Rupin Banker, Strategic Global Alliance
SCF instead uses the supply chain as a source of finance. A company’s position within that chain gives it access to other companies, and those companies can judge its performance and trustworthiness in real time based on their interactions.
Companies have a vested interest in the finance of reliable trade partners, as these partners help with their own growth. As part of SCF, firms provide each other with finance through mechanisms such as trade credit, optimising the efficiency of the system and improving liquidity for companies of all scales.
As well as improving financial liquidity, SCF increases an economy’s resilience. Companies that rely on banks can find themselves cut off from funds when the global economy is shaken, as international finance withdraws. This is particularly devastating for SMEs with limited resources to see them through. Finance integrated into the supply chain is safer from these shocks. As long as the businesses in the chain survive, they can keep supporting each other, and because they rely upon each other for business, they have far less incentive to withdraw support.
“As long as the businesses in the chain survive, they can keep supporting each other, and because they rely upon each other for business, they have far less incentive to withdraw support.” Rupin Banker
SCF is particularly valuable for developing nations, whose businesses have a harder time sourcing international investment. These nations can encourage growth by creating the conditions for SCF, conditions defined by three key factors: information, institutions, and interconnection.
Information
Companies are more willing to extend credit to partners they know perform well, so information is fundamental to SCF. The better the information, the more everyone can make informed decisions.
One strategy for improving finance is to improve the speed of transactions and transparency of information around them. There has to be a balance in this, to protect privileged data around business deals, but well-designed systems can ensure that balance.
The solution lies in digitisation. Electronic invoicing and payment systems let companies settle their debts faster, building up not only trust but also liquidity, as money flows to where it’s needed. At a glance, companies can see which of their partners are financially reliable and extend them credit in order to facilitate more business. Knowledge reduces risk.
Information from invoicing systems can be used to build up another valuable tool—credit scores. A digital system can create credit scores in real time, using data to show who pays up promptly and reliably. Businesses with access to these scores can increase their credit to lower risk partners, encouraging the flow of capital through the supply chain.
All of this is something that a government or trade association can support, whether by building its own systems or by investing in native fintech.
Institutions
The hand of the market has always been supported by governmental institutions. From local courts to global trade treaties, rules and the bodies enforcing them punish bad actors and protect those who act within the law, reducing the need to rely on personal relationships.
For a business to balance the risk of trading in a country, they need reliable institutions, so that they can assess the likely outcome of events. That knowledge is grounded in clarity and enforcement.
Clarity comes from regulations that are straightforward, consistent, and easy to understand. While laws can’t always be simplified, they can be made internally consistent and explained in accessible terms.
However it’s defined in theory, a law only exists as far as it’s enforced. It’s therefore also important to ensure that, whatever laws apply to businesses, they’re enforced promptly and consistently. Even if a set of regulations isn’t exactly the one that a company’s board would like, it’s easier to make plans if you know what the likely outcome of those regulations will be. This can be achieved by supporting professionalism and countering corruption across the board.
If regulations are both clear and fairly enforced, then companies are more likely to make deals that establish an effective finance network and grow an economy.
Interconnection
SCF is driven by the connections between individual businesses. If a developing nation wants to support this network of finance, it’s a good idea to encourage connections between those businesses, especially SMEs. Businesses that know and trust one another are more likely to offer favourable terms, letting the finance flow.
Some of this comes at the local level. By encouraging, supporting, and establishing business organisations, both local and national governments can get companies talking within the nation, finding ways to work together.
Cross-border work is also valuable. Modern trade is a vast global network, and connections with international partners can lead to more extensive supply chains. This means greater opportunities to increase efficiency, free up finance, and encourage growth. Support for cross-border conferences, organisations, and other meeting points will help establish those links.
Special economic and industrial zones can be leveraged to encourage interconnection. Businesses working within such a zone often benefit from working together, and physical proximity makes it easier for their leadership teams to connect. Governments can encourage businesses to see these zones not just as functional spaces but as communities in which to build up chains of finance and supply.
