Dubai
A great deal of factors afflicting global trade is linked to slower global growth, antiquated processes and rising protectionism. However, the role of financing gap in the industry is becoming more pronounced in the recent years.
According to estimates by Asian Development Bank, currently global trade faces a financing gap of $1.5 trillion, hugely impacting trade finance to emerging markets and small and medium enterprises (SMEs). The trend of unmet demand for trade finance continues in the context of rising concerns in the banking industry over compliance, regulation and stringent capital adequacy requirements.
According to a recent Euromoney Trade Finance report, as much as two thirds of the unmet demand is accounted for by SMEs in remote regions of emerging markets without the creditworthiness or collateral to make them bankable.
In the context of ever rising compliance requirements banks have been on a de-risking mode to comply with know-your-customer (KYC) and anti-money laundering (AML) requirements. While Base III capital requirements have significantly eroded banks’ balance sheet space for lending, de-risking has emerged as key reason for decline in correspondent banking relationships (CBRs).
Blyth believes trade finance institutions around the world should work together to enhance finance access to SMEs across the world, particularly those in emerging markets. While it is an accepted fact that well managed corporates with strong balance sheets have access to trade finance, there has to be a mechanism at regional levels to collect and share the data on SMEs so that they become more visible to potential financiers.
According to a paper published recently by McKinsey and the Global Legal Entity Identifier Foundation (GLEIF), banks could make collective annual savings of between $250 million and $500 million if LEIs were used to identify international entities and support the automation of the issuance of letters of credit.
While LEIs can reduce costs, it will go a long way in reaching out finance to deserving SMEs around the world. Wide adoption of distributed ledger technology along with artificial intelligence, robotics and digitisation of trade related data Blyth believes trade finance can become an investible asset class that can open up huge liquidity pools to trade.
Making trade finance assets available to institutional investors such as pension funds and sovereign wealth funds can unleash the power of liquidity to bridge the financing gap while freeing up bank balance sheets. On the other end of the spectrum, trade finance related assets can work as a viable low risk short tenor asset class with variable interest rates offering attractive yields.
According to the latest data published by the ICC Trade Register, which covers 17 million transactions worth over $9 trillion of exposures, default rates for short-dated import and export letters of credit are close to negligible, at 0.08 per cent and 0.04 per cent respectively, rising to 0.21 per cent for export/import loans and 0.19 per cent for performance guarantees. In the case of medium and long-term transactions covered by OECD-backed export credit agencies (ECAs), the average default rate is a modest 0.44 per cent.
“Making trade finance as an investable asset class is clearly a solution in addressing the trade finance gap. Regional and local banks will have a very important role to play. They could package trade finance assets and get guarantees from the multilateral trade financing institutions and they could sell these assets to global banks,” said Blyth.
