Compliance and regulation have been the biggest barriers for access to trade finance according to over 90% of banks surveyed for the International Chamber of Commerce’s (ICC) latest annual review, leading the organisation to call for an independent global body to tackle the issue.
The cost and complexity of regulatory requirements such as anti-money laundering (AML) and know your customer (KYC) were highlighted by the 357 global banks that took part in the survey. Meanwhile, 77% of respondents considered the Basel III regulatory requirements as a significant impediment. Further, 83% say they expect compliance costs to increase this year while 40% say they terminated banking relationships due to compliance requirements.
This number comes just weeks after the Asian Development Bank reported that unmet global trade finance demand is nearing US1.6tn. The ICC reports that 61% of banks in its survey agree that there is a global shortfall.
The survey found that SMEs were the hardest hit, with 58% of declined applications falling into this category. This compared to 33% for large corporates and 9% for multinational corporates. Geographically, the highest rejection rates are faced by clients in Russia, Mena, and Sub-Saharan Africa.
Chair of the ICC Banking Commission, Daniel Schmand, called on authorities to create a global body to work jointly with the industry and regulators to deal with the compliance issue.
Speaking at an EBRD conference in Frankfurt, ahead of the results being officially announced, Schmand suggested organisations such as the World Bank, World Trade Organisation (WTO), and the International Monetary Fund (IMF) should work to set up a standard set of transaction monitoring principles for trade finance.
There are currently too many regulators, making it unclear to banks whether they should be following domestic regulation, the recipient bank’s foreign regulation, or international regulation. As a result, they avoid the transaction altogether, and the collateral damage of this needs to be brought to the attention of politicians and regulators, he explained.
The number of respondents that reported an increase in overall trade finance activity during 2015 was down to 52% compared to 63.3% in 2014. Close to 50% of respondents reported a decrease in the use of letters of credit (LC), compared to 35% in the year prior. However, around 35% of respondents reported an increase in supply chain finance (SCF) deals.
The insights come on the back of WTO figures which report that between October 2015 and May 2016 there were 145 measures that directly restricted trade. The average of 21 measures a month is the highest level of trade restrictions since the organisation began monitoring this in 2009.
According to the IMF, global trade volume growth was nearly 7% per year on average during the 1990s, roughly 2.2 times world real GDP growth. From 2008-2014, since the financial crisis, international trade grew at less than half that rate. In 2015 it dropped to 2.7%, the lowest since 2008.