An Evaluation of Alternative Sources of Trade Finance For SMEs in Emerging Markets
Abstract
This study evaluated the efficacy of alternative sources of trade finance in enhancing the export performance of Small and Medium-sized Enterprises (SMEs) in Nigeria. The research examined which financial instruments and macroeconomic variables significantly influenced SME exports using time-series data from the Central Bank of Nigeria (1981–2023). A Generalized Linear Model (GLM) with a Gamma family and inverse link function was employed to account for the non-negative nature of the dependent variable. Two models were estimated: a baseline model (2000–2017) and an augmented model (2007–2017) that incorporated trade credit and overall trade performance. The findings revealed that Deposit Money Banks’ (DMBs) lending to SMEs showed a weak and inconsistent relationship with export performance—positive but insignificant in the baseline model and significantly negative in the augmented model. This suggests that general bank lending may not effectively support SME exports, particularly during periods of economic volatility. Conversely, Letters of Credit and the exchange rate were consistently positive and highly significant (p < 0.01), confirming their vital roles in mitigating payment risks and enhancing price competitiveness. Broader credit measures, such as total private-sector credit and direct export loans, were statistically insignificant, underscoring that financial depth alone does not address SMEs’ export constraints. The study concludes that specialized trade finance facilities, combined with stable and competitive exchange rate management, are essential for boosting SME participation in international trade, fostering inclusive growth, and promoting Nigeria’s economic diversification.
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