Global trade finance gap $1.6tr in 2015 ISLAMABAD: The global trade finance gap for 2015 has been estimated at around $1.6 trillion, with about $692 billion of this being in developing Asia, a survey released on Wednesday said.
The Asian Development Bank in its ‘2016 Trade Finance Gaps, Growth, and Jobs Survey’ said inability of financial institutions to provide $1.6tr in support to buyers and sellers of goods across countries resulted in forgone growth and job creation in 2015.
Among developing regions, Asia and the Pacific continues to have both the highest proposal rate (40 per cent of global proposals) and the highest rejection rate (34pc of global rejections) for trade finance.
Both developing Asia and advanced Asia recorded lower rejection rates as a percent of total global rejections than in past years. However, their total proposals were also lower.
Small and medium enterprises (SMEs) are the only client segment that is more likely to have a transaction rejected than supported. They continue to generate the highest number of proposals and to face rejection rates above their proposal share (44pc of all proposals, 56pc rejected).
Multinational corporations (MNCs) and large corporates are both rejected at a lower rate (10pc and 34pc rejected, respectively). Export credit insurers, both private firms and official export credit agencies report a similar distribution.
Changes in the number of credit lines also indicate that de-risking is not over. Seventy-two per cent of banks report that the number of credit lines remained the same or slightly increased in 2015. However, of the banks that reported decreasing lines of credit, the primary reason was “more stringent credit criteria being applied” for all client types.
In 2015, fewer respondent banks reported terminating correspondent relations due to the cost or complexity of anti-financial crimes regulatory compliance (40pc in 2015 versus 45pc in 2014). This is most likely because banks have already undertaken a mass exiting of correspondent relationships.
Bank-to-bank relationships underpin trade, particularly in emerging markets, so the fact that so many of these relationships have been terminated, at least partly due to unintended consequences of regulation, is of concern and needs to be monitored.
According to the bank survey, SMEs in all regions continue to face constraint in the trade finance space. How do they cope in an environment where their requests for trade finance are more likely to be rejected than funded? In addition to financial institutions, this study also surveyed companies seeking trade finance support, which provided three insights.
Globally, digital finance solutions can help to narrow market gaps. Though in the early stages, digital finance targets market segments that have the most difficulty accessing bank-intermediated trade finance including niche exporters and SMEs. Recognition is low, but among firms that are familiar with digital finance, uptake of peer-to-peer in particular is strong.
According to the brief, trade finance gaps persist in part due to the cost and complexity of compliance with banking regulations, with 90pc of surveyed banks citing anti-money laundering and know-your-client requirements as impediments to their ability to expand trade finance, especially for small businesses.