Gaps in trade finance are becoming more concentrated among developing regions and small business, the latest research from the Asian Development Bank (ADB) has found.
In its annual Trade Finance Gap Survey, the development bank echoes themes which have dominated events and publications elsewhere in recent months: banks are moving away from riskier markets, leaving weaker residual trade.
Just this month, it was reported that ANZ is to withdraw from certain parts of Asian trade finance because the risk-return ratio is not satisfactory. And despite talk of regional banks growing their footprints and taking greater interest in trade finance as a product, the ADB’s head of trade finance Steven Beck expresses worry over the trend.
He tells GTR: “The impact of regional banks picking up some of the emerging markets business abandoned by large international players is not quantifiable based on available statistics. We hear anecdotally that this is taking place, but we don’t have any hard figures. In any case, what movements there are by regional banks are clearly insufficient to close large trade finance gaps in developing countries and among the SME segment. This is a concern.”
While trade finance availability actually improved globally, the gap remains around US$1.4tn, with US$1tn of this appearing in Asia Pacific. Again, while 80% of banks said they were increasing the number of lines available, the vast majority of these were for large corporate clients, with small businesses losing out.
As reported in the recent ICC Trade Survey, SMEs are “consistently underserved” and face much higher rejection rates as they apply for trade finance (52% of all SME applications are rejected, compared to 13% of multinationals).
While the ADB’s latest statistics – mined from the responses of 250 banks across 86 countries – are not wholly surprising, they help illuminate the ongoing conversation about bank derisking.
At Sibos in Singapore in October, Andrew Burlison, head of compliance services for Swift in Asia, told GTR: “I think generally it’s just a business rationale decision. As the cost of compliance has grown over a period of time. People are assessing their business relationship with the correspondent to see if it’s worthwhile. That’s kind of what drove the initiative with the Swift KYC Registry. If you can do the KYC on your correspondent bank at a cheaper rate, it allows you to have the comfort to continue doing business with them without the risk.”
The ADB’s data confirms that “the rising costs and complexity in complying with regulatory requirements to prevent financial crimes, including money laundering and terrorism finance” are the top impediment to trade finance and that this was most keenly felt in Africa, Russia, Central Asia and North America – partly due to ambiguity in regulations and requirements.
Beck urged the continued involvement of multilateral banks in trade finance and expressed ambition to grow the ADB’s Trade Finance Programme by way of filling the gap.
He says: “Beyond these transactional type products, we need to continue working hard on the compliance and regulatory fronts in order to make major headway on reducing gaps in developing countries. Once we stop the bleeding – exited relationships and countries – we need to ask how we get those relationships back? How do we re-establish those ties that underpin trade?”