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KYC is persistent problem in trade finance

The global trade finance gap – or unmet demand for trade finance, measured by bank-reported rejection rates for trade finance transactions – remains fairly stable at $1.5 trillion in 2017, compared with $1.6 trillion last year. This is according to the Asian Development Bank's 2017 Trade finance gaps, growth, and jobs survey. It also found that 40 per cent of the unmet demand for trade finance is in Asia Pacific, while those bearing the brunt of difficulties in obtaining trade finance are small and medium enterprises (SMEs) and businesses owned by women. Anti-fraud and money laundering due diligence regulatory requirements are also deterring banks from providing trade finance to smaller companies, according to the survey.

Rejected trade finance a drag on economic growth

The research found that firms in Asia are most likely to ask their banks for financing and are also most likely to have their proposals rejected – see the ADB's graph below. However, rejected requests for trade finance mean that deals are not completed in 60 per cent of the cases, according to the ADB's survey. It said: “Firms were asked what happened to the trade transaction after rejection. About 60 per cent of responding firms reported that they failed to execute the transaction when their application for trade finance was rejected. This reflects one of the negative impacts of trade finance shortfalls: in the aggregate it will be a drag on overall economic growth.” It added that the remaining 40 per cent of firms were able to complete the sale/trade without bank-intermediated trade finance.

KYC a deterrent to trade finance

Not all the requests that were rejected were for trades that banks would consider viable – in fact, only about 36 per cent of rejected trade finance transactions were considered viable. That is still a considerable portion of viable trade that isn't receiving financing. The survey found that these viable transactions were rejected due to low profitability (15 per cent) or the need for additional client information or collateral (21 per cent). A further 29 per cent of rejected transactions were refused due to know your customer (KYC) issues, notably that banks weren't willing to spend time and money on KYC compliance, especially for smaller companies that represent low profit for the bank. The ADB's report noted that: “The reluctance of banks to undertake KYC for low-value transactions has been a persistent problem in the trade finance sector since the global financial crisis.”

It adds: “The cost of regulatory compliance can lead banks to exit client relationships (40 per cent in the 2016 survey and 45 per cent in the 2015 survey), including the withdrawal of correspondent relationships.”

The key findings from the report include:

  • The global trade finance gap is estimated at $1.5 trillion.
  • 40 per cent of the gap originates in Asia and the Pacific.
  • 74 per cent of rejected trade finance transactions come from SMEs and mid-cap firms.
  • Female-owned firms report higher rejection rates, and are less likely to find alternatives in the formal financial sector.
  • At least 36 per cent of rejected trade finance may be fundable by other financial institutions.
  • A 10 per cent increase in trade finance could boost employment by 1 per cent.
  • 80 per cent of banks report digitisation will cut costs, yet no evidence that savings translate to additional trade finance capacity.

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This item appears in the following sections:
Trade & FSC Management
Trade Finance

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