Trade finance for small firms fails where trust is low

The World Bank studied how businesses use a common trade finance tool called letters of credit. It turns out that younger, smaller, and foreign-owned companies use them less often. This is especially true in countries where it is hard to get reliable information or enforce contracts.

This paper challenges the idea that trade finance tools work the same for all businesses. It shows that the very firms that need help with trust and risk in difficult markets, like younger and smaller companies, are the ones least likely to use these tools. This means current efforts to boost trade in developing economies might be missing their target.