Emerging Markets Trade Finance | Special Report

Author: Rebecca Brace

IMPACT OF REGULATORY CHANGE

The last year has seen some positive developments for banks in terms of regulation. Concerns had been raised that Basel III would have an adverse impact on the pricing and availability of trade finance, in turn affecting global trade flows. In January, however, bank and corporate lobbying paid off, with amendments to the leverage ratio providing more-favorable treatment for letters of credit—namely, applying a credit conversion factor of 20% rather than 100%.

However, regulation continues to affect the availability of trade finance in emerging markets. Steven Beck, head of trade finance at Asian Development Bank (ADB), says that financial crimes compliance is a key concern. “Particularly after 9/11, a plethora of regulatory requirements came into play around anti-money-laundering (AML) and know-your-customer (KCL) compliance,” he notes. “But over the past few years, these regulations have developed differently in different jurisdictions, making it difficult and costly for banks to comply with them. At the same time, much of this regulation is unclear, so banks do not always know exactly what they are supposed to comply with.”

Corporates will... have to find intelligent and indigenous ways to extract working capital requirements from their own operations, rather than relying on bank debt.

~ Sam Sehgal, Citi

 

With many high-profile fines levied on financial institutions in recent months, Beck says that financial crimes compliance is associated with a significant fear factor, with many financial institutions exiting relationships with other banks as a result. A survey published in July by the International Chamber of Commerce (ICC), “Rethinking Trade and Finance 2014,” found that 68% of respondents had declined to do transactions as a result of KYC and AML concerns; 31% had closed down correspondent (banking) account relationships for the same reasons.

These factors are contributing to a gap between supply and demand for trade finance around the world. The ICC’s survey found that 41% of respondents believed there to be a global shortfall where trade finance is concerned. And research published by the ADB last year found that there is unmet demand for trade finance to the tune of $1.6 trillion—with $425 billion of that figure relating to developing Asia.

While top-tier multinational corporations are unlikely to suffer as a result of this shortfall, some organizations may struggle to access the finance they need, Beck points out. “This is affecting small and medium-size enterprises (SMEs) and emerging markets in a disproportionate way, with corporations struggling to access the finance they need to do business,” he observes.

The ICC’s survey identifies SMEs as being particularly at risk of being unable to access trade finance: “It remains clear that SMEs, particularly in emerging markets, continue to rely on loans in local currency or overdrafts to finance their international trade activities with the consequent restriction on their ability to trade at optimum level during these challenging times.”

“Financial institutions certainly don’t want to support financial crime,” says Beck. “But the lack of clear regulation in this area is leading to unintended consequences and is increasing the market gap for trade finance—which ultimately results in less trade and less economic growth. As an industry, we need to obtain hard data so that we can continue to make a convincing argument to regulators and demonstrate these issues.”

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