Global trade finance gap hits $1.6 trillion, says ADB

Global trade finance gap even wider than last year – but should banking regulations shoulder the blame?

Red tape and a lack of financial backing to buyers and sellers of physical goods around the world are blighting national job-creation plans and slowing the progress of SMEs, according to a new report from the Asian Development Bank (ADB).

In a poll of 337 banks in 114 countries, together with 791 corporates in 96 countries, the ADB found that in 2015, the global trade finance gap widened to $1.6 trillion from the $1.4 trillion recorded for 2014.

The data indicates that trade finance gaps persist largely because of the cost and complexity of complying with banking regulations – with 90% of financial respondents citing anti-money laundering and KYC requirements as impediments to their ability to expand trade finance, particularly to small firms.

Basel III banking regulations, which set liquidity requirements for bank finance, also fell foul of respondents, with 77% highlighting them as a major barrier against the funding of new trade.

ADB Trade Finance Programme chief Steven Beck said: “The survey shows that both globally and nationally, regulators and policymakers should increase support for trade finance through smarter banking regulations, more transparent and comprehensive credit ratings systems, and capacity building for local banks.”

However, previous research indicates that banks and financial institutions themselves are partly to blame for trade finance failing to reach growing firms, thanks to an apparent bias towards larger players.

As The Treasurer reported in May, a report from the World Trade Organization (WTO) noted that globally, more than half of SME trade finance applications are turned down – compared with a rejection rate of just 7% for multinationals.

That is despite research in the 2013 International Chamber of Commerce Trade Finance Loss Register, which showed that the average default rate on short-term, international trade credit is no more than 0.021% – of which 57% is typically recovered through the sale of the underlying assets.

Further statements from senior figures at heavyweight trade bodies suggest that there are multifactorial causes behind hindrances to trade finance.

In a July blog, the International Centre for Trade and Sustainable Development chief Ricardo Meléndez-Ortiz argued that shortcomings in cross-border data flows are a limiting factor for some territories.

He also noted: “Where countries put in place strong enabling environments, including around infrastructure, education [and] enterprise development… value chains – both regional and international – can offer opportunities for economic upgrading and diversification critical for growth and development,” in economies of all sizes.

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