Ashish Srivastava, senior vice-president at Arkratos Solutions, a blockchain technology solution provider based in Singapore, talks about the company’s vision for the future of trade finance.
Trade finance instruments have been around for many years but are still not widely used in the emerging markets of Asia. There are a number of reasons for this but it’s predominantly linked to the lack of basic infrastructure and landscape through which trade finance can flourish.
Trust and transparency play the most important role as they allow every participant in the trade to find out the background of the buyer and the seller. The lack of digitisation of banks and other government lending institutes hinders the development of any kind of central credit database to better understand the credit risk scenarios of borrowers.
Any reduction in trade gap needs to address these basic gaps in a structured and systematic manner before we will see any meaningful change and any improvement in job creation and employment.
Blockchain intends to solve this in various ways. Blockchain promises to make processes more cost effective. Its public implementation brings standardisation and helps it to be more inclusive by allowing various micro, small and medium-size enterprises to deploy it easily. In other robust, and highly secured option to many who did not have such a choice before. In fact, many market studies have unveiled that the most important attributes of enterprise blockchain in order of priority are transparency in the value chain, trustworthy shared data and industry standardisation.
Close to 70% of SMEs worldwide, and more specifically in the emerging markets of Asia, Africa and South America, lack funds to trade – both to purchase raw material and to sell finished goods. A major reason for this is the lack of access to trustworthy information regarding customers (both individual as well as corporates) for the lending institutes, namely the local banks.
Many multilaterals like the Asian Development Bank, the International Islamic Trade Finance Corporation and others have rolled out numerous programmes and schemes over the years, such as gredit guarantees, risk participation, risk distribution, supply chain finance, and so on, to help the growth of lending to SMEs. But these actions have shown limited improvement in the overall scenario. In fact, from 2015 to 2017, the total trade finance funding gap globally increased from US$1.5tn to US$1.7tn.
Limited credit information with respect to business payments can sometimes be offset through the use of historical data of payments for other goods and services like payment of rentals, taxes, phone bills, school fees and so on. But access to such data is either not available or difficult to integrate because of a lack of investments in updated processes, infrastructure and technologies.
With standardisation, blockchain aims to provide unified, end-to-end tracking, monitoring and reporting of objects and business processes across supply chain networks. Tracking of information is made immutable and tamper-proof, thereby building trust for a fully automated cross-company payment and settlement process – something that current ERP systems are not able to achieve. In fact, most users of blockchain view it as an opportunity and see it as a tool to improve on various business challenges such as improving corporate compliance, becoming the system of trust and replacing operational supply chain contracts entirely in the next five to 10 years.
With standardisation and economies of scale, costs are reduced along with execution risks for implementation, servicing and upgrading. This allows for faster implementation, proper maintenance and reaching the goal of providing ways to capture credit and, thus, starting to create lending history for banks to make better lending decisions, with a better understanding of risk, and at much lower costs. We should not forget that increased transparency in a country’s banking system helps to better manage the fiscal and monetary policy, which in turn helps to improve the credit rating and lowers borrowing costs for central banks. This systematic approach of fixing the core problem would go a long way in providing finance to those who require it, at the right cost, thus leading to both micro (more job creation) and macro (better access to global trading partners and integration with global trade) benefits.
The Arkratos Solutions team
Our team is highly experienced and based out of Asia but have trading experience with counterparties all across the globe, across various commodities. The team has been integrally involved in designing and implementing the trade finance document flow processes, digitisation of documents, operational risk and in capturing and minimising frauds. They have worked with all participants of the commodity value chain, including logistics companies, port handlers, financiers, stevedores, insurance companies, etc, and have incorporated all the requirements from each of their perspectives.
Emerging market limitation and uniqueness is well known to our team as they are involved in this on a daily basis. This is what helps to differentiate our product design and solution. We feel that the main reason for the gap in trade finance funding is a lack of understanding of risk and appropriate solutions from an emerging market perspective. Cost of capital is another reason, but that too can be linked to the unavailability of credit history, which again forms part of risk management. Everything else, such as legal and regulatory, can be achieved but unless the groundwork and basic infrastructure as measured from a credit perspective is not available, things are not going to improve.
The solution that we have developed incorporates all of the teams’ experience and learnings. We have designed it to be modular – namely, the level of digitisation can be controlled and customised as per the infrastructure available. It still meets the stringent goals to minimise fraud and increase traceability, but progressively, in tune with the infrastructure development of the country. For example, we have incorporated the same level of document security in our documents as is implemented in what is probably the most secure document in the world – the passport. Next, we have incorporated award-winning AI and proprietary algorithms that link the risk of default to one’s credit history, which is created in a more holistic manner using data from various sources such as everyday payment history and track record. We have also incorporated the team’s experience in social lending, community borrowing, and so on.
The credit history is then presented to a curating team, which is made up of a randomly chosen group from a pool of participants. These participants again are from across the commodity value chain – all of whom would like to participate in trades. Curating or independent voting helps in attaining a more practical and transparent way of getting a credit score from industry practitioners. The curators are randomly selected from a vast pool of volunteers. Based on the credit score, funders can decide on their willingness to fund, funding cost and so on.
The future of trade finance
We foresee a future where the roles of various agencies becomes more focused and specialised. One agency could manage and/or facilitate the infrastructure to capture the data and collect it responsibly. (Nationalised or private agencies could opt to take up this role). Using this data, the financiers and risk underwriters would then focus on analysis on whether a particular loan is possible, vote for a risk rating, pitch for a cost of the loan and eventually, finance the trade. The scope of the banks would be to understand the operations in more details versus just having a more general knowledge of the borrower’s business. The bank will also then try to minimise the cost of their capital through better risk mitigation and further pass on these savings to the borrower. And the operations, which takes most of the time and manpower for the bank, would be better utilised to perform these activities. The operations and monitoring will be controlled by blockchain and smart contracts. Access to financing will then not be a local action but anyone with the appropriate risk appetite would be able to participate.
Early adopters of our solution have seen close to 12% increases in their profitability through increased operational efficiency. These estimates are in line with a 2016 Goldman Sachs report which concluded that close to US$10bn annually is spent on trade finance for correcting operational and documentary discrepancies in trade.
With the removal of costs from operations, better understanding of risk, and better access to cheaper source of capital. This would reduce the cost of commodity and streamline the pricing and affordability of goods, improve employment and motivate towards more local manufacturing to a great extent.
About the author
IT graduate and MBA with specialisation in IT, Ashish comes with 12-plus years of IT business experience, from identification technologies to blockchain solutions. As the senior vice-president, he heads IT innovation and new initiatives for Arkratos Solutions.