In his ‘Review of Global Banking Regulation’, published by the UK regulator, the Financial Services Authority (FSA) in March, Lord Adair Turner recommended greater control over bank lending generally, but implied that global banks should now make working capital more readily available across the world.

Dean Francis, head of document management services, trade finance at 3i Infotech, an IT software company based in the UK, believes that moves to encourage the provision of capital at bank branches worldwide – a departure from the current practice of banks pooling cash in countries where they are headquartered – would significantly boost the provision of trade finance globally. It would be a real benefit to emerging market exporters and importers, which have been hardest hit by the credit crisis.

“It is very important that we take the lead on this as the UK is perceived as having one of the world’s largest financial services industries but, at present, our banks are battening down the hatches,” says Francis. “If we were to stipulate that banks should just make cash available in those countries that need it the most, then we would have to make it available in emerging market economies. This would make a major difference for businesses around the world that trade with these countries.”

Whereas trade finance is still more readily available in developed western economies, a number of CEE countries such as Poland, Hungary, Slovakia and Ukraine, which were experiencing huge growth in exports before the credit crunch, are now struggling to find working capital. They have been hit by higher rates of interest in what are now more limited, uncompetitive markets for trade finance.

Exiting Africa

The situation is worse for a number of African trading economies, such as Tanzania and the Gambia. Certain major western banks have decided to pull out of these countries altogether on account of the small proportion of business they represent, and the perceived risks.

“One of the biggest problems is that we are not facilitating trade with these countries at all. In fact, one or two UK mid-tier banks have made the decision not to provide trade finance in particular African countries. For these reasons our global banks have to intervene,” says Francis.

“At the moment, Lord Turner has only made proposals, and nothing is yet mandatory. The banks are highly powerful and if they see no benefits in making their capital more globally available, then they can decide not to do this. However, it is important to remember that about 10 global banks account for a large proportion of the trade finance made available, and if they were to take Turner’s recommendations on board, it would make a major difference.”

Francis adds that by making trade finance capital more readily available via their emerging market operations and elsewhere in the world, global banks, headquartered in the UK, would also improve prospects for British exporters, whose activities are expected to play a major role in stimulating the UK’s economic recovery next year.

Demise of open account
In line with today’s tougher financial and economic climate, many banks are also going back to the old practice of insisting on letters of credit from trading companies abroad – particularly those located in emerging markets – to mitigate the risks inherent in trade finance.

According to Francis, a number of UK banks have increased their use of letters of credit by 10-15% over the last few months, although some have seen a decrease – largely because they have stopped providing trade finance in certain countries.

However, Francis considers the movement towards letters of credit as “a step backwards on open account trading”, and points out that they can have an error rate as high as 70-80%.

“Often letter of credit application forms are sent back to the banks that require them with information missing. Also, important pieces of documentation required, such as the insurance policy covering shipment, are not included. As a result, using letters of credit can prove a complex and timely process, which involves vast amounts of paperwork. If you opt down this route, it is vital that you get hold of all the right information from the company you are trading with as early as possible in the process.”

Companies and banks making increased use of letters of credit can benefit from 3i Infotech’s DataFlo solution, an application which automates the receipt and initial assessment of letter of credit documents to ensure that all the relevant information is included.

The system captures data held on letter of credit application forms as soon as they are received, identifies if, and where, there are gaps in the information provided, and then automatically alerts the sender of the need to provide further details.

Francis points out that since the credit crisis began, there has been a renewed interest in such systems.

“Due to the increase in letters of credit, we are seeing a number of further enquiries from organisations looking to streamline and automate the trade finance function,” he says.

“The real benefits are derived from the need to reduce turnaround times of letters of credit and enhance customer service. The electronic capture, movement and management of paper are a fundamental part of the trade finance process.”