Closing the trade finance gap together

JOON KIM BNY Mellon Treasury Services

Collaborating and coordinating to close the trade finance gap JOON KIM AND ARNON GOLDSTEIN

The trade finance gap is a serious issue that is impacting the health of global trade and business development in many countries across the world. Trade finance is the fuel of global trade, upon which 80 to 90% of world trade relies, and if access to trade finance is compromised for certain companies, global trade will be unable to reach its full potential.

The businesses most likely to be affected are those in emerging markets, particularly inAsia. In a survey by the Asian Development Bank (ADB), the APAC region accounted for the highest number of trade finance rejections, shouldering approximately 40% of the entire global deficit in unmet demand for trade finance . Furthermore, with Asia’s economy accounting for 62% of global GDP growth, any slowdown in regional trade in Asia caused by reduced access to trade finance will likely have far-reaching consequences for the world economy.

Whilst the trade gap is not new, it has grown to an astonishing $1.5t—and could be increasing. A BNY Mellon global survey revealed that trade finance rejection rates were rising in a third of institutions that participated, and 58% of respondents in the ADB’s latest survey about gap said they expected it to rise over the next two years. This worrying trend makes the task of narrowing the gap all the more pressing. But with the chasm so vast, how can the industry best approach such a challenge?

Addressing compliance challenges Research about the gap has shown a key contributor to be increased compliance costs, which have resulted in a reluctance by many banks to undertake know your customer (KYC) procedures for lower-value or “riskier” transactions. Finding ways to tackle this issue could result in a substantial step towards reducing the gap.

This was reflected in the survey where the approaches identified directly linked with addressing compliance challenges. There were two solutions that industry participants believed could help bridge it: technological innovation and regulatory revision. Diigital innovations could have significant implications for trade finance, ultimately helping to facilitate operational efficiency, as well as boosting trade finance activity and, in turn, economic growth. In particular, sharing data through centralised KYC databases was identified by participants as the technology solution holding the most value. These platforms may remove the need for banks to undertake similar due diligence processes, potentially resulting in a far more efficient, streamlined and standardised approach to KYC. But such solutions need widespread support if they are to make a meaningful impact on the size of the gap.

Regulatory revision – engaging with regulators to address the issue at the source instead of investing in new technologies to meet compliance demands–was an equally favoured solution. By actively engaging with regulators, banks can act as advocates for the industry and communicate the needs of the market.

The survey highlights banks’ value in promoting change, as well as the ongoing value of local-global bank partnerships. Risk sharing capabilities amongst banks ranked as the most effective way to encourage additional financing opportunities, and were regarded as key to delivering trade finance solutions and facilitating trade growth.

Coordination, cooperation, collaboration Effective regulatory revision will not be achieved without proactive, meaningful dialogue between the wider industry and regulators; equally, the extent of the benefits of digital solutions will not be realised without buy-in from the global market. Working together to decide upon and carry out effective courses of action is therefore fundamental to delivering enhancements to trade on a global scale. This applies to narrowing the trade finance gap.

Asia is an engine for economic growth, with the rapid expansion of its consumer base (previously viewed primarily as a producer base) driving extraordinary prospects for trade across the region, and exciting trading companies in Asia and the wider world. Yet, taking advantage of this significant shift will require trade finance support – at the very moment such support has become constrained.

The trade finance gap continues to negatively affect global trade and will not be resolved unless the industry – banks, alternative providers, corporates, regulators, and industry and governmental bodies – comes together to implement standardised solutions that optimise trade finance support. By focusing efforts on methods judged to have the most value, we can maximise the benefits of those solutions and bring about change effectively and efficiently, and enable trade to reach its full potential.