World Bank Calls for Firm-Focused Approach to Closing Trade Finance Gaps

A World Bank and Federal Reserve Board study using Vietnam trade data finds that firm characteristics such as size, age, productivity, ownership, and trading experience explain far more of the variation in letter-of-credit use than country or product factors. The findings suggest that governments, development partners, and banks should target younger, smaller, and less experienced firms with tailored trade finance and advisory support to boost participation in global trade.

A new study by the World Bank Group and the Federal Reserve Board is challenging conventional thinking about trade finance. Using detailed data from Vietnam between 2016 and 2022, researchers found that differences between firms matter far more than country risk or product characteristics in determining whether businesses use letters of credit (LCs), one of the most important tools for reducing risks in international trade.

The findings come at a time when developing economies face a trade finance gap worth trillions of dollars and when improving access to finance could increase trade volumes by an estimated 5 to 16 percent in many regions.

Why Letters of Credit Matter

International trade involves significant risks. Exporters worry about not getting paid after shipping goods, while importers fear paying for products that may never arrive. Letters of credit solve this problem by using banks as intermediaries that guarantee payment once agreed-upon conditions are met.

Globally, letters of credit support more than 10 percent of world trade, but their importance is even greater in developing countries where information gaps and weak contract enforcement increase business risks. In Vietnam, around 24 percent of imports and 9 percent of exports were financed through letters of credit, making the country an ideal case for studying trade finance behavior.

Firm Characteristics Explain Most of the Difference

The study analyzed more than 36,000 exporters, over 100,000 importers, and trade relationships with 241 partner economies. One of its strongest findings is that firm-level characteristics explain much more variation in LC use than country or product factors.

For imports, firm-level factors explained over 38 percent of the variation in letter-of-credit use, compared with only 5.6 percent explained by country-product factors. For exports, firm characteristics explained 25 percent of the variation, more than double the contribution of country-product characteristics.

The profile of LC users is clear. Firms using letters of credit tend to be older, larger, and more productive. Importers using LCs employed an average of 132 workers compared with 97 workers for the average importer, while LC-exporting firms employed 216 workers compared with 178 workers for other exporters.

Who Uses Letters of Credit and Who Does Not?

The research found major differences based on ownership and experience.

Foreign-owned firms were significantly less likely to use letters of credit. Among importers, foreign ownership reduced the likelihood of LC use by 7 to 13 percentage points. Researchers suggest that multinational companies often rely on internal networks, trusted suppliers, and established business relationships, thereby reducing the need for bank guarantees.

State-owned enterprises showed the opposite trend. They were 6 to 7 percentage points more likely to use letters of credit than private firms, possibly reflecting stronger ties with domestic banking institutions.

Trade experience also mattered. Firms with longer importing histories and more diversified supplier networks were less dependent on letters of credit because they had learned how to manage risks and identify reliable trading partners over time.

What This Means for Governments and Development Partners

The findings have important policy implications. Many trade promotion programs focus on country-level risks, export incentives, or large multinational firms. However, the study suggests that younger, smaller, and less experienced firms face the greatest barriers to accessing trade finance.

For governments, this means that expanding the availability of trade finance alone may not be enough. Policies should also help firms build market intelligence, improve risk management capabilities, and develop trusted international business relationships.

For development institutions such as the World Bank, IFC, regional development banks, and export credit agencies, the research highlights the need for more targeted interventions. Rather than broad national programs, support could be directed toward first-time exporters, SMEs, and domestic importers that struggle most with accessing trade finance.

Opportunities and Risks for the Private Sector

The study also presents opportunities for banks and financial institutions. Better assessment of firm capabilities could help lenders expand trade finance services to underserved businesses while managing risks more effectively.

At the same time, the research highlights risks. Younger and less experienced firms often face higher borrowing costs and greater information barriers. Without improved risk assessment tools, expanding trade finance could increase exposure to defaults.

Looking ahead, the authors recommend combining trade finance support with advisory services that help firms understand foreign markets, evaluate trading partners, and navigate international regulations. The central message is clear: closing the global trade finance gap requires more than reducing country-level risks. Success will depend on helping individual firms develop the capabilities needed to participate confidently in global trade.