A much-publicised US$1.5 trillion global trade finance gap, identified by the Asian Development Bank (ADB), continues to present challenges for global trade, says BNY Mellon.
The bank says that the size of the gap is affecting development and investment flows and also financial inclusion, which in turn, is impacting business and economic growth. Addressing the gap is, therefore, understandably a key concern and a priority for the trade finance industry.
This lack of financial inclusion could have a detrimental impact on the wider economy, with persistent trade finance rejections potentially cutting off some businesses from the trading ecosystem—particularly those in certain small countries with limited financial markets.
An uphill struggle
In its just-released report Overcoming the Trade Finance Gap: Root Causes and Remedies, BNY Mellon finds that the trade finance gap remains a significant issue for global trade, according to 100 global, regional, and domestic banks, specialist trade providers and other market participants responding to its survey.
Businesses appear to be facing an increasingly uphill struggle in accessing the resources and support needed to fulfil their trade needs, the report concludes. Conducted between April 2018 and January 2019, it finds that trade finance rejection rates accelerated in one in three third of the institutions surveyed in the past year.
Seventy-one per cent of respondents cited compliance constraints and the inability for applicants to provide quality know your customer (KYC) as a key factor influencing the volume of rejection rates. As a result, banks have had to be more selective in who they do business with and subsequently move away from geographies and sectors that appear to hold greater risk for less reward.
“Our survey has shown that a significant proportion of institutions are increasingly unable to provide trade finance due to heightened regulatory requirements as well as several other trends,” said Joon Kim, head of global trade product and portfolio management, BNY Mellon Treasury Services.
“This could have serious implications such as potentially widening the trade finance gap, compounding the lack of access to finance already being experienced by many businesses in emerging markets, and impacting the strength of global trade.”
Narrowing the gap
Survey participants identified technology and regulatory revision as two potential approaches that could help narrow the trade finance gap. Centralised KYC databases were cited by 61% of respondents as potentially providing a technology-based solution, while regulatory revision would most benefit from greater collaboration between banks and regulators, according to 55% of respondents.
Risk sharing partnerships with correspondent banks is seen as the most effective way of encouraging additional financing capability, while educating local banks and acting as advocates for trade finance are also key roles for correspondent banks in helping to alleviate the gap.
Paul Camp, chief executive officer, BNY Mellon Treasury Services, confirms that “addressing the trade finance gap is a priority for the industry, and it is important that we work together to find the solutions that will be most effective in achieving this.
“There are efforts underway, but more work is required to ensure significant progress is made. We hope our survey will serve as a catalyst for driving further industry discussion and help to identify the areas of focus that will allow us to make tangible steps towards improving financial inclusion - and closing the gap."
Trade finance network options increasing and overlapping
Trade Information Network launched by seven banks to transform trade finance
New trade finance deals and developments at SIBOS
Voltron on R3 formal launch; Commerzbank improve trade finance processing; PrimeRevenue new comprehensive reseller programme for banks
Lack of trade finance for SMEs is damaging global economy – WTO report
Ensuring that more trade finance provisions reach small and medium-sized enterprises is an essential component of boosting the global economy, according to a report from the WTO.
Banks run trade finance pilot on Marco Polo blockchain
Germany’s Commerzbank and LBBW used the international trade finance network for digital data transfer.
BNY Mellon forms tech alliance with BlackRock
By integrating customer data with each other rather than competing, both groups are aiming to boost growth.