Despite increasing regulatory challenges, banks are collaborating to help bridge Asia’s trade finance gap.
Asia is set to contribute 60% of the world’s economic growth in 2017, driven by growing external demand as well as domestic reforms. Yet, a recent Asian Development Bank (ADB) survey estimates that approximately US$600 billion worth of trade in the region is failing to secure the financing it needs – out of a total US$1.5 trillion of unmet demand worldwide.
This “trade finance gap” is partly due to the increased regulatory requirements introduced in the wake of the global financial crisis, which have forced many banks to withdraw or reduce business in certain countries and sectors due to compliance costs. This de-risking has disproportionately hit small and medium-sized enterprises (SMEs) in emerging markets.
It has been estimated that globally, 74% of trade finance requests by SMEs and midcap firms are rejected. Moreover, Asia and the Pacific has the highest rejection rate with 39% of global rejections.
So whilst Asia needs increased liquidity to support its burgeoning trade, banks are decreasing the amount of liquidity available. Yet, through support from multilateral lenders, the application of new technology, and local-global bank collaboration, banks can help to address the trade finance gap. They can work to ensure businesses in Asia can access the support they need to seize the trade opportunities available.
Increase in compliance checks providing obstacles to trade finance
One of the most pressing constraints on trade finance is increasing compliance checks which inflate the costs, time and labor required to on-board new clients. Know-Your-Customer (KYC) requirements compel banks to gather increased data and information on each customer, including validating primary documents and identification.
According to an ADB survey, 90% of banks cite anti-money laundering and KYC requirements as a hindrance to their ability to offer trade finance.
Moreover, available liquidity is often misplaced against what is perceived to be “high risk”, from both a financial and compliance perspective.
One example of an initiative aiming to rectify this is The ADB’s Trade Finance Program (TFP). Through the provision of guarantees and loans from partner banks, the program has supported over 9,200 SMEs and US$25.6 billion worth of trade since 2009.
This type of program can back a range of transactions – facilitating the flow of everything from consumer goods to commodities and with quick response times of as little as 24 hours. Trade finance specialists are also available to support companies in the region by providing advice on how to engage in import and export activities.
For partner banks, this type of program allows increased country credit lines, capital relief, and expanded relationships with regional correspondent banks. Such a partnership helps banks build upon their longstanding provision of Asian trade services, and bring their services to a wider range of customers across the region.
Digitalization can help
Financial technology, or “fintech”, can also help bridge the trade finance gap. Blockchain, the emerging distributed ledger technology, could potentially enable cross-border transactions to be digitized, and hence verified and recorded in a matter of minutes, rather than the current processing time of up to several days. The technology holds substantial potential to help streamline the trade process, prevent fraud and accommodate KYC requirements by providing increased transparency and efficiency when it comes to verifying parties involved in a transaction, and processing a cross-border payment.
For their part, the SMEs and companies that have access to blockchain can pinpoint where a payment is and know exactly when it will be delivered. This has the potential to increase efficiency within supply-chain processes, provide greater assurance to companies and minimize payments disruptions.
Awareness of digital solutions and their potential to improve the trade process remains lower in developing countries. But this is something many global banks are working to address.
Increased collaboration between international, local and regional banks through correspondent banking partnerships is perhaps the most important element to bridge the trade finance gap.
Not only can partnerships between local and global banks help to kick-start a renewed buoyancy in trade, they are a powerful means for banks to share expertise and capabilities in order to provide the very best for clients and their trade experiences.
Local banks often lack the investment necessary to access new technologies that global banks can offer. In turn, local banks can provide a deep understanding of regional markets, as well as the unique challenges that customers face. Through partnerships and collaboration, local and global banks can bring to bear what the other lacks. Indeed, many global banks are deeply committed to working with local banks and their clients to help support the region’s trade needs.
With the Asia-Pacific predicted to continue as the fastest-growing economic region of 2017, it is crucial that banks are able to support the needs of local businesses and global trade. Establishing partnerships to combine local experience, global connections, a breadth of knowledge, and sophisticated technology can help ensure trade opportunities are accessible.