G20 Foundation Publications China 2016 | Page 25

Trade is a key ally in the fight against poverty, especially if additional measures are taken to improve education levels, strengthen governance and deepen the financial sector. border trade transactions. The letter of credit is one of the oldest and most common trade finance instruments used by the banks to reduce payment risk. According to WTO (2015), nearly 80% of world trade relies on trade finance and credit insurance. Although there is no official data on the total size of global trade finance, existing studies estimate that some US$6.5–8 trillion of trade finance was provided in 2011. The Asia- Pacific region accounted for more than 50% of the total, while Europe accounted for nearly 25%. With the ongoing economic slowdown and increasing uncertainty at the global level, access to international trade finance has deteriorated considerably and financial institutions are finding it hard to meet existing demand. Small and medium-sized enterprises have become especially constrained. According to the recent WTO report, the estimated size of the trade finance gap ranges between US$ 110 and 120 billion in Africa and over US$ 1 trillion in Asia. By filling the trade finance gap, millions of people and thousands of businesses across the world could unleash their economic potential. Against this backdrop, it is incumbent upon the multilateral development banks (MDBs) to keep the supply chains financed. With increased pressure on the global financial markets, demand for MDB support is likely to increase further. This is why the MDBs need to look beyond their traditional methods of mobilizing resources, and explore alternative financing mechanisms such as Islamic finance in order to support trade and achieve higher economic growth results. Islamic Finance: High potential Considered as one of the fastest growing segments of the global financial industry, Islamic finance industry has recorded an impressive growth rate of around 15% during the past two decades. The current size of the Islamic finance market is estimated at $1.8 trillion, and expected to reach $3.4 trillion by the end of 2018. About 73% of the Islamic finance assets are held by Islamic banks. Most of the Islamic finance assets are located within the 57 member countries of the Islamic Development Bank (IsDB). Among them, Malaysia, Qatar, Saudi Arabia, Iran, Kuwait, Pakistan, UAE, Bahrain, Indonesia, and Jordan account for the major share of the Islamic finance market, but the industry’s geographical presence has now grown to include new players in Europe, Africa, East Asia and the Americas. With preferences among the Muslim populations shifting towards more Shariah-compliant banking, Islamic finance has grown and developed to include a number of new trade finance products, listed in Table 1. With a combined GDP of US$ 6.7 trillion and a population of 1.7 billion, the IsDB member countries have the potential to become an engine of global trade. Many of the 57 IsDB member countries are among the world’s largest exporters of strategic commodities, such as oil, natural 25