Regulatory compliance costs contribute to a growing global shortage of trade finance, particularly in emerging markets.
Bankers are worried about the ability of the financial system to deliver the financing needed to help restore international trade as a driver of economic growth. Partly due to the cost and complexity of compliance requirements of anti-money-laundering and know-your-customer rules, there is a worsening global shortage of trade finance, according to the Paris-based International Chamber of Commerce (ICC).
The shortage is hitting hardest at small and midsize enterprises, particularly those in emerging markets. At a time when African economies and businesses are increasingly engaging in international trade, and intra-African trade shows signs of significant growth, the lack of trade finance is a major obstacle.
Africa has a trade finance shortage of perhaps as much as $120 billion, according to the ICC. This is far higher than its previous estimate of $25 billion. The group’s latest annual survey in 2016 found a decrease in the use of traditional trade finance instruments and an increase in supply-chain finance deals.
“We must emphasize the importance of trade finance,” says John Danilovich, ICC secretary general. “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.”
According to the ICC’s 2016 trade finance survey, 90% of the 357 banks in 109 countries that responded said compliance requirements are barriers to the provision of trade finance. That was up from 81% in the previous survey.
Some 40% of respondents said they had terminated banking relationships as a result of compliance requirements. Other impediments to trade noted by respondents included low credit ratings of banks, as well as of countries and companies.
From the companies’ perspective, the commoditization of trade finance has reduced differences between providers, according to Greenwich Associates. Companies can easily shop among providers for the best price.
In its recent survey of Asian trade finance, the firm says the region remains a buyer’s market—for now. Japanese banks, regional Asian banks and local country providers are competing for new corporate relationships by aggressive pricing.
“Global banks will be auditing relationships on a case-by-case basis, assessing both the return on capital as well as the linkage between lending and other parts of the wallet served,” says Paul Tan, managing director at Greenwich Associates. Global banks are focusing on key clients: large corporations whose needs go beyond plain vanilla letters of credit and into functions like supply-chain management and working-capital management that are more complex, sticky and profitable.
Any retrenchment on the part of global banks has not yet been enough to offset the continued influx of capital into the trade finance business from banks eager to get their feet in the door with large Asian companies, Tan says. Some banks also are looking to capitalize on the pullback of their global competitors and are keeping prices low, at least for now, says Greenwich Associates vice president Gaurav Arora.
Global Finance editors, with input from industry analysts, corporate executives and technology experts, selected the best trade finance banks in 83 countries and nine regions. In addition, we selected the best bank for trade finance globally as well as the best banks in various service categories, such as document management and export finance. We polled our corporate readership to increase the accuracy and reliability of the results.
Criteria for choosing the winners included trade-related transaction volume; scope of global coverage; customer service; competitive pricing; risk management and innovative products, services and technology. The winners are those banks that best serve the specialized needs of corporations as they engage in cross-border trade.