Global demand for trade finance is rising, but SMEs are failing to get the funding they need from their banks, a new report from the ICC has found.

In a survey polling some 482 banks from 112 countries, the chamber’s Banking Commission found that whereas 79% of large corporations have their trade finance transactions accepted, the equivalent figure for small businesses is just 53%.

The so-called “trade finance gap” is widening, with 46% of banks severing their correspondent banking relationships as a result of new regulatory measures, which require increased checks around KYC and anti-money laundering (AML) legislation.

So while 63% of banks are reporting an increase in their trade finance activity, 80% are concerned that the increased regulatory pressure will force them to reconsider and to err on the side of caution, when choosing the markets and sectors in which to operate.

The Asian Development Bank (ADB) provided the research on SMEs for the survey and has been banging the drum about the trade finance gap in Asia for many years. Head of trade finance at the ADB Steven Beck tells GTR that the decline in correspondent banking is “alarming”.

He says: “As you can see from the study, our research indicates that banks are severing correspondent relationships at an alarming rate. We’re concerned that ‎the termination of correspondent banking relations may exacerbate trade finance gaps, isolate developing countries from an ability to trade, and therefore inhibit growth and job creation. SMEs are a big part of that story. This is a concern and something that we’re trying to understand better through research and discussion with banks, companies and others involved in trade.”

The issue of correspondent banking has become a burning one, with large banks tending to view smaller counterparts as adding risk to their portfolio, particularly in markets deemed to be higher risk. Whereas it was voguish for a number of years post-financial crisis to expand such networks, a reversal has been underway more recently.

“This year that snapshot has highlighted the severity of the trade finance gap,” Vincent O’Brien, ICC

Large companies will be usually be followed everywhere by their banks. It’s the smaller exporter who is likely to be impacted most by the cutting off of trade finance through correspondent banking networks.

“It is of concern to see that 70% of this year’s respondents report declined transactions due to KYC and AML regulations, with 46% of respondents reporting experiencing termination of correspondent relationships due to related costs and complexities. Going forward, it is worrying to observe that 91% of respondents expect compliance requirements to increase over the next year, up from the 81% in 2014,” the report reads.

Vincent O’Brien, the chair of the commission’s market intelligence department, says: “This year that snapshot has highlighted the severity of the trade finance gap – which continues to be impacted by regulation, despite the low-risk nature of trade finance – and particularly its impact on SMEs. This is crucial given SMEs constitute over 95% of all firms and account for approximately 60% of employment worldwide.”

Other key findings in the report were reported by GTR from its launch in Singapore in September. They point to a continual decline in global trade, with Swift trade volume falling by 1.79% in 2014.

The report revealed that exporters are reverting to letters of credit in a bid to mitigate risks, while Asia Pacific continued to be the most active trading bloc in the world over the course of last year.