How to close the trillion-dollar trade-finance gap

Mark Evans

Managing Director Transaction Banking, ANZ

The gap in the annual financing requirement for global trade is thought to be roughly $US 1.5 trillion – a gap which hurts the sector and has a direct impact on the global economy. For the industry to thrive in the future something has to give.

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Photograph by Arsineh Houspian. +61401320173 arsineh@arsineh.com

The capital exists – that’s not the problem. The problem is many businesses - particularly small and medium-sized enterprises (SMEs) - are unable to access the financial support they need in a cost-efficient and easy manner.

"There is a need for trade to be de-categorised from other debt products and recognised as a lower-risk product group, freeing up more funding.”

The challenge is not just a question of risk for funders. SME access to trade finance is also restricted by a huge variety of compliance and regulatory obligations – most of which are targeted at countering financial crime.

More than 90 per cent of respondents from the ICC Global Survey 2018 said regulation and compliance was an obstacle to growth.

Critically, there is a need for trade to be de-categorised from other debt products and recognised as a lower-risk product group – freeing up more funding and removing administrative burdens – while recognising compliance and prevention of financial crime are critical.

Collaborate

On the trade front, financial institutions and regulators need to better collaborate to combat trade-based money laundering. There is an opportunity for the two to work closely and develop further consistency with global regulations.

Where this doesn’t happen negative outcomes can occur, such as financing and remittances being pushed underground and out of sight of the regulators and authorities.

The use of trade finance and banking products can provide rich data to help manage risk and ensure compliance. However, existing processes for providing information to banks is often seen by corporates as cumbersome. This either results in companies seeking alternate means of transacting or ignoring cross-border trade opportunities.

There is scope for international bodies to get involved and educate at a local level. They have a vital role to play in setting standards and ensuring banks, companies and regulators are speaking the same language.

The Financial Stability Board (FSB) has been conducting an annual monitoring exercise to assess global trends and risks in the shadow banking system since 2011 and recently published the Global Shadow Banking and Monitoring report, using 2016 data.

The report estimates global financial assets at $US340 trillion with shadow banking at $US45.2 trillion.

It is important to find the balance between existing trade solutions and what technology can deliver in the absence of one big central solution – the latter being an unlikely outcome given the various geographies and numerous parties involved in international trade.

Shifting the dial

Many emerging markets’ banks and international trade participants remain years away from making effective use of technology and existing legacy systems don’t communicate efficiently across borders.

Digitisation and innovation has helped shift the dial on this front. Proof of concepts are becoming a reality and moving into production mode.

Initiatives such as the Trade Information Network, Singapore Networked Trade Platform and eTradeConnect in Hong Kong are making financial tools accessible for more businesses by moving away from the current paper-based processes.

The progress towards trade digitisation is a steady one. Mass adoption will require additional effort and the parties involved, including financial institutions and regulators, will have a key role to play.

Digitisation of trade also presents an opportunity to streamline processes, reduce transaction time and cost, mitigate fraud risk and, in some cases, increase transparency of the transaction for the parties involved.

But it’s not just about saving money. Trade digitisation can aid in keeping pace with the changing regulatory landscape by providing the flexibility to adapt and change efficiently.

Currently it takes a substantial amount of manual input to ensure end-to-end compliance and incorporation of auto compliance checks can ease the pressures in this area.

It is encouraging to see bodies such as the Monetary Authority of Singapore and Hong Kong Monetary Authority engaging in dialogue regarding interoperability.

Regulators, financial institutions and international bodies need to improve the dialogue and make concerted efforts towards embracing digitisation that facilitates trade finance and prevents financial crime across all segments of the business.

Mark Evans is Managing Director, Transaction Banking at ANZ

This is an edited version of comments made at the Regional Consultative Group (Asia) in Sydney in November, hosted by the Financial Stability Board.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.