The trade finance gap is a serious issue that is impacting the health of global trade and business development in many countries across the world. Trade finance is the fuel of global trade, upon which 80 to 90% of world trade relies, and if access to trade finance is compromised for certain companies, global trade will be unable to reach its full potential.
The businesses most likely to be affected are those in emerging markets. This is particularly true for Asia. In a survey undertaken by the Asian Development Bank (ADB), the Asia Pacific region accounted for the highest number of trade finance rejections, shouldering approximately 40% of the entire global deficit in unmet demand for trade finance . Furthermore, with Asia’s economy accounting for 62% of global GDP growth, any slowdown in regional trade in Asia caused by reduced access to trade finance will likely have far-reaching consequences for the world economy.
Whilst the trade gap is not new, it has grown to an astonishing US$1.5t. What’s more, it could be increasing. A recent BNY Mellon global survey, Overcoming the Trade Finance Gap: Root Causes and Remedies, revealed that trade finance rejection rates were rising in a third of institutions that participated, and 58% of respondents in the ADB’s latest survey into the trade finance gap said they expected the gap to increase over the next two years. This worrying trend makes the task of narrowing the gap all the more pressing. But with the chasm so vast, how can the industry best approach such a challenge?
Addressing compliance challenges
Research into the trade finance gap has shown a key contributor to be increased compliance costs, which have inadvertently resulted in a reluctance by many banks to undertake know your customer (KYC) procedures for lower-value or “riskier” transactions. Finding ways to tackle this issue could result in a substantial step towards reducing the gap.
This was reflected in BNY Mellon’s survey – a key purpose of which was not only to examine the causes of the gap, but move the conversation towards resolution – where the approaches identified directly linked with addressing compliance challenges. There were two solutions in particular that industry participants believed could help bridge the gap: technological innovation and regulatory revision.
With respect to technology, digital innovations could have significant implications for trade finance, ultimately helping to facilitate operational efficiency – standardisation in terms of the client experience, optimised processes and more frictionless trade – as well as boosting trade finance activity and, in turn, economic growth.
In particular, sharing data through centralised KYC databases was identified by participants as the technology solution holding the most value. These platforms may remove the need for different banks to undertake the same due diligence processes on the same companies, potentially resulting in a far more efficient, streamlined and standardised approach to KYC. But such solutions need widespread support if they are to make a meaningful impact on the size of the gap.
Alongside technology, regulatory revision – engaging with regulators to address the issue at the source, as opposed to investing in exploring new technologies to meet increased compliance demands – was an equally favoured solution. Greater collaboration between banks and regulators was viewed as being particularly effective in helping to drive developments in regulation. By actively engaging with regulators, banks can act as advocates for the industry and communicate the needs of the market.
Certainly, banks have an instrumental role to play in bridging the gap. The survey highlights their value in promoting change, as well as the ongoing value of local-global bank partnerships. Risk sharing capabilities amongst banks ranked as the most effective way to encourage additional financing opportunities, and were regarded as key to delivering trade finance solutions and facilitating trade growth.
Coordination, cooperation, collaboration
Effective regulatory revision will not be achieved without proactive, meaningful dialogue between the wider industry and regulators; equally, the extent of the benefits of digital solutions will not be realised without buy-in from the global market.
Working together to decide upon and carry out effective courses of action to address common goals is therefore fundamental to delivering enhancements to trade on a global scale. This, of course, applies to narrowing the global trade finance gap.
Asia is an engine for economic growth, with the rapid expansion of its consumer base (previously viewed primarily as a producer base) driving extraordinary prospects for trade across the region, and exciting trading companies in Asia and the wider world. Yet, taking advantage of this significant shift will require trade finance support – at the very moment such support has become constrained.
The trade finance gap continues to negatively affect global trade and will not be resolved unless the industry – banks, alternative providers, corporates, regulators, and industry and governmental bodies – comes together to implement standardised solutions that optimise trade finance support. By focusing efforts on methods judged to have the most value, we can maximise the benefits of those solutions and bring about change effectively and efficiently, and enable trade to reach its full potential.
The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Joon Kim is Global Head of Trade Finance Product and Portfolio Management at BNY Mellon Treasury Services.
Arnon Goldstein is Regional Head of Relationship Management APAC, at BNY Mellon Treasury Services.
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