Global study finds trade finance shortage deepening

There is a growing global shortage of trade finance, with more banks concerned about their ability to finance global trade according to the International Chamber of Commerce (ICC).

The ICC’s newly-published 2016 Global Survey on Trade Finance canvassed opinion from 357 respondents in 109 countries worldwide. The Paris-based organisation’s survey has been issued annually since 2009.

This year’s edition shows that 61% of respondents – national, regional and global banks with trade finance functions – reported a global shortage of trade finance. The percentage reporting an increase in trade finance activity decreased to 52%, from 63% in 2015 and 80% in 2012. The perceived shortfall came predominantly from regional and global banks; 78% and 56% respectively, compared to 41% of national banks.

“We must emphasise the importance of trade finance,” commented ICC secretary general John Danilovich. “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 2016 survey shows that small to medium enterprises (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 (MNCs), which only received 9% of rejections.

Nine out of 10 survey respondents cited the cost and complexity of anti-money laundering (AML) compliance requirements and know-your-customer (KYC) regulation as barriers to the provision of trade finance, against last year.

Forty percent of respondents reported terminating banking relationships due to compliance requirements, with 83% expecting compliance costs to increase in 2016. Other impediments to trade finance cited by respondents included low issuing bank credit ratings (86%), low country credit ratings (82%), regulatory requirements (76%), and low obligator or company ratings (70%).

Decreased use of traditional trade finance was also evident this year; nearly 50% of respondents reporting a decrease in commercial Letters of Credit (LCs) and nearly 35% reporting an increase in supply chain finance (SCF) deals.

“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,” said Daniel Schmand, chair of the ICC Banking Commission.

“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.”

Slow progress for digitisation

A more positive trend revealed in the 2016 survey is the benefits of digitisation to the industry, particularly by automating processes and reducing the cost and complexity of trade finance. However, only 7.4% of banks reported that their trade finance processes had been digitised “to a great extent”, while 43% reported “very little” advancement, with global banks most likely to embrace digital solutions. The ICC nonetheless expects acceleration towards digitisation over coming years for the trade finance industry.

The increasing engagement of African economies and businesses in international trade is also a key focus of the 2016 survey. While intra-African trade has shown signs of significant growth – accounting for nearly 18% of the region’s total trade in 2014, against 10% in 2010 – intra-African investment accounts for only 12% of the total value of investment in Africa, against to 33% in Asia. In addition, 66% of businesses find access to finance a significant obstacle to trade in Africa.

“Africa has a trade finance shortage estimated at between US$110-120bn, a range far higher than the previous estimate of US$25bn,” 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.”

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