About US$1.6tn out of the US$4.6tn global trade finance demand was not met in 2011, an Asian Development Bank (ADB) survey reveals.
Of the US$1.6tn gap, nearly US$425bn was on trade finance transactions in developing Asia, where total demand reached US$2.6tn.
The 106 banks surveyed mentioned that reasons for rejecting trade finance proposals could include the poor payment records of their correspondent banks, low country ratings in developing countries, and weak banking systems. They also indicated that if fully implemented, Basel III could reduce bank support further, by an average of 13%.
Steven Beck, head of trade finance at the ADB, tells GTR: “The survey was conducted at the end of 2012, just prior to the Basel committee loosening liquidity requirements for banks, which I suspect will help them in general support more economic growth.
“But the main concern in the trade finance community has always been that if there isn’t enough of a distinction between trade finance and other forms of finance, then there may be a natural inclination for banks to move away from low-margin trade finance transactions and into higher-margin higher-risk type transactions.”
He hopes that initiatives by the ADB and the International Chamber of Commerce (ICC) – such as the trade finance register – will help educate banks, but also regulators, on the asset class that is trade finance.
“The initial impetus for us in creating the trade finance register was to substantiate our argument to Basel to treat trade finance as a unique asset class, and that continues.”
In the survey, 138 companies said a 5% increase in trade finance support would result in an increase of production levels by 2%, and staffing by another 2%, highlighting the strong links between trade finance, economic growth, and job creation.
“This survey is the first ever attempt at quantifying gaps and linking those gaps to growth and jobs. We really didn’t know what to expect in terms of the results. We created the trade finance programme because we knew there were gaps, and we focused on the most challenging markets. In 2012 we did US$4bn in turnover through over 2,032 transactions, so we’ve always known that there were gaps, but had no idea to what extent. In that context this has been a very interesting exercise for us,” says Beck.
In order to fill that gap and make development banks’ trade finance programmes redundant, he recommends an industry-wide effort to produce broader and more statistically significant data to disseminate knowledge and encourage private sector players to get involved in transactions.
The ICC will be releasing the third trade finance register report at its next meeting in Lisbon on April 15-18.