MSMEs suffering, dying for lack of trade finance; Shortage more acute in Africa; Banks reject 60% applications, finds ICC Global Survey
By TIOL News Service
PARIS, OCT 09, 2016: AS per the ICC 2016 Global Survey on Trade Finance, the growing number of banks have expressed inability to finance global trade. They rejected as high as 60% SME applications for finances. The Survey points out acute shortages of trade finance in Africa. Small- and medium-sized enterprises (SMEs) and African countries are suffering the most from a deepening global trade finance gap.
According to this year's Global Survey - which received 357 responses from 109 countries worldwide - 61% of respondents reported a global shortage of trade finance. Only 52% of respondents reported an increase in trade finance activity, compared to 63% in 2015 and 80% in 2012. Furthermore, the perceived shortfall came predominantly from regional and global banks - 78% and 56% respectively, compared to 41% of national banks.
Small- and medium-sized enterprises
ICC Secretary General John Danilovich said: " We must emphasise the importance of trade finance. It is often forgotten - trade finance has dropped off the international agenda. We need to do more to communicate its central importance to the global economy ."
The Global Survey also shows that SMEs face 58% of total rejections - despite submitting 44% of all trade finance proposals, in contrast to 40% submitted by large corporates (33% of rejections) and 16% by multinational corporations (9% of rejections).
Impediments
In addition, 90% of Global Survey respondents cited the cost and complexity of compliance requirements relating to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulation as barriers to the provision of trade finance, up from 81% in the 2015 Global Survey. Indeed, 40% of respondents reported terminating banking relationships due to compliance requirements , with 83% expecting compliance costs to increase in 2016. Other impediments to trade finance noted by respondents included low issuing bank credit ratings (86%), low country credit ratings (82%), regulatory requirements (76%), and low obligator or company ratings (70%).
Instruments
A decrease in the use of traditional trade finance was also evident in this year's Global Survey report, with nearly 50% of respondents reporting a decrease in commercial Letters of Credit, while nearly 35% reported an increase in supply chain finance deals.
Urgent action is required to limit the effects of such requirements on trade finance provision, and to help meet the needs of global SMEs, which are being disproportionately affected.
Challenges
"Year on year, the Global Survey continues to provide a snapshot into market trends, ensuring that the trade finance industry keeps pace with an ever-changing banking environment and remains fit for purpose ," said Daniel Schmand, Chair of the ICC Banking Commission that conducted the Survey. " This year's Survey highlights the challenges ahead, revealing that compliance is one of the main impediments to trade finance provision - with the majority of industry players only expecting complexity and cost to increase further over the rest of the year. Urgent action is required to limit the effects of such requirements on trade finance provision, and to help meet the needs of global SMEs, which are being disproportionately affected. "
Digitization
This year's Global Survey also highlights the benefits that digitization brings to the industry - particularly by automating processes and reducing the cost and complexity of trade finance. Despite this, only 7.4% of banks reported that their trade finance processes had been digitized "to a great extent" , while 43% reported "very little" advancement, with global banks the most likely to embrace digital solutions. However, the Global Survey predicts an acceleration towards digitization in the years to come for the trade finance industry.
Africa
The increasing engagement of African economies and businesses in international trade is also a key focus of this year's Global Survey. While intra-African trade has shown signs of significant growth - accounting for nearly 18% of the region's total trade in 2014, an upward trend from 10% in 2010 - intra-African investment accounts for only 12% of the total value of investment in Africa, in comparison to 33% in Asia. In addition, 66% of businesses find access to finance a significant obstacle to trade in Africa .
Africa needs to attract much-needed financing to support trade and meet the significant trade finance deficits.
" Africa has a trade finance shortage estimated at between USD 110 to USD 120 billion - a range far higher than the previous estimate of USD 25 billion," said Vincent O'Brien, a member of the ICC Banking Commission Executive Committee. "In particular, the unprecedented fall in commodity values has created liquidity gaps for many banks across the region. Initiatives that facilitate internal and external trade should be fully encouraged, while Africa also needs to attract much-needed financing to support trade and meet the significant trade finance deficits ."
ICC Global Survey
ICC's Global Survey - released every year since 2009 - is enriched by data, insights and expert commentary from a variety of partners, contributors and specialists in trade, financing and development. It provides a unique perspective on the foregoing issues in business and trade, and can inform the decision of bankers, financiers, business executives and entrepreneurs, as well as policymakers at national, regional and international levels - with the objective of helping to restore trade as a driver of economic growth, value-creation and development.
Data from this year's Global Survey was put under the spotlight at a SIBOS Banking Commission meeting, which focused on the debate around trade and trade finance. In addition, the report findings aim to inform the high-level discussions at WTO, IMF and World Bank annual meetings occurring this week in Washington.
