Trade finance rejection rates increased by around one-third last year. How can the US$1.5trn gap be plugged?
There is a US$1.5trn global trade finance gap, and it’s getting wider. A new report from BNY Mellon Treasury Services indicates that the massive shortfall is largely due to heightened regulatory requirements placed on market participants.
With support from the International Chamber of Commerce (ICC), BNY Mellon’s recently published “Overcoming the Trade Finance Gap: Root Causes and Remedies” survey called upon 100 global, regional, and domestic banks, specialist trade providers and other market participants.
Conducted between April 2018 and January 2019, it found that 71% of respondents saw compliance constraints and the inability for applicants to provide quality know your customer (KYC) as a key factor influencing financing decisions.
The survey also indicates that banks have become more selective in who they do business with. Trade finance rejection rates increased in 33% of institutions in the last 12 months. Many have also moved away from certain geographies and sectors, particularly those in jurisdictions with limited financial markets.
The challenge many businesses are now facing when attempting to access funding for trade is affecting development and investment flows and financial inclusion, the report claims. These businesses appear to be confronted by an increasingly uphill struggle in accessing the resources and support required to fulfil their trade needs, it continues.
“A significant proportion of institutions are increasingly unable to provide trade finance due to heightened regulatory requirements as well as several other trends,” comments Joon Kim, Head of Global Trade Product and Portfolio Management, BNY Mellon Treasury Services.
“This could have serious implications such as potentially widening the trade finance gap, compounding the lack of access to finance already being experienced by many businesses in emerging markets, and impacting the strength of global trade.”
The report offered some good news. Participants identified technology and regulatory revision as two potential approaches that could help to narrow the trade finance gap.
Specifically, centralised KYC databases could provide a technology-based solution, according to 61% of respondents. Regulatory revision would most benefit from greater collaboration between banks and regulators, according to 55% of respondents.
Additionally, risk sharing partnerships with correspondent banks is seen as the most effective way of encouraging additional financing capability. Educating local banks and acting as advocates for trade finance are also key roles for correspondent banks in helping to alleviate the gap.
