The global trade finance gap is at risk of getting bigger amid an upswing in trade finance transaction rejections, according to a newly-published survey by BNY Mellon, with support from the International Chamber of Commerce (ICC).
The gap, which represents the difference between trade finance supply and demand, is estimated by the Asian Development Bank (ADB) to be a massive US$1.5tn. Given that 80-90% of world trade relies on trade finance, according to the WTO, this gap is holding back vast amounts of potential flows, hampering investment as well as business and economic growth. Although addressing the trade finance gap has in recent years become a priority for many in the trade finance industry, BNY Mellon’s findings suggest that the situation is worsening rather than improving.
The survey, which was carried out between April 2018 and January 2019, quizzed more than 100 global, regional and domestic banks, specialist trade providers and other market participants to help pinpoint the factors that are driving the gap and what might be done to address them.
Strikingly, one-third of survey participants said that the rejection rate for trade finance transactions has accelerated in the past 12 months. When asked if they had noticed a rise in rejection rates from other institutions, this figure rose to over half. Digging deeper into the data, it appears that regional and domestic banks are the worst affected by the trend. A whopping 53% of respondents from those banks said that they have seen an increase in trade finance rejection rates within their own institutions over the last year, as compared to 24% of respondents from global banks. Almost two-thirds of them said that they have also noticed an increase in rejection rates from other institutions.
Speaking at an event on closing the global trade finance gap held by the IFC and the WTO in October last year, Roberto Azevêdo, director-general of the WTO, cautioned that in half of the countries of the world, access to trade finance is one of the top three obstacles to exporting. “It is of particular concern that this gap affects developing countries and smaller businesses the most. Today, 60% of trade finance requests by SMEs are rejected. In many developing countries, and especially in least-developed countries, the alternatives to bank financing are scarce. When rejected by banks, the transaction is abandoned,” he said.
For the banks involved in the survey, compliance constraints are the biggest barrier for approving transactions, with 71% of respondents citing the inability of applicants to provide adequate KYC as either the first or the second reason for a transaction to be rejected. Poor credit quality and inability of applicants to provide financial statements also gets in the way, with 21% of respondents pointing to this as the main reason.
“Our survey has shown that a significant proportion of institutions are increasingly unable to provide trade finance due to heightened regulatory requirements as well as several other trends,” says Joon Kim, head of global trade product and portfolio management at BNY Mellon Treasury Services. “This could have serious implications such as potentially widening the trade finance gap, compounding the lack of access to finance already being experienced by many businesses in emerging markets, and impacting the strength of global trade.”
Given KYC and other compliance requirements are unlikely to go away anytime soon – indeed, regulatory scrutiny of banks and other financiers is rising as opposed to falling – the survey demonstrates that there is an urgent need for solutions to be found to overcome these hurdles and get trade finance to where it’s needed most. Speaking to GTR, Olivier Paul, head of policy at the ICC Banking Commission, says: “Growing regulatory and compliance requirements, while totally justified, are part of the contributors. BNY Mellon’s survey provides useful insight into how we as an industry can help to increase access to finance. Results reveal that technology and digitalisation will play a significant role in this respect – two key areas of focus for ICC in its global strategy and mission as a worldwide business organisation.”
Mention “technology and digitalisation” around any trade finance banker nowadays, and “blockchain” will likely come into the response. Indeed, a whitepaper put together by blockchain platform provider R3 last year, titled Can Blockchain Make Trade Finance More Inclusive?, said that “as it spreads, [blockchain] will improve the potential for trade finance to be more inclusive and available”.
But the BNY Mellon survey found that, despite the hype around distributed ledger technology within the industry, it is still a long way from being able to address the trade finance gap, with 43% ranking it as the least effective approach, largely due to the solution still being in its infancy.
What respondents did think would help to reduce the trade finance gap and in particular the compliance barriers that contribute to it would be a revision of the regulatory environment and greater adoption of available technology solutions. A fifth of respondents called for “collective lobbying of government trade bodies regarding the benefits of trade finance solutions”, and just over three-fifths of respondents pointed to KYC databases, such as Swift’s KYC registry, as a way of tackling the high trade finance rejection rate.
According to BNY Mellon, correspondent banking also remains a powerful means for local and global banks to share expertise and capabilities to ensure the ongoing provision of trade finance, and the survey backed this up, with 23% of respondents calling for “education of local banks on deal structuring taking account of the underlying transaction, rather than simply obligor/market credit risk”.
While there are no instant solutions, the results of the survey illustrate that, in the view of industry participants, the trade finance gap remains a significant issue, and if trade finance rejection rates continue to accelerate, the implications for global trade as a whole, as well as the wider economy, could be very serious indeed.