Asia’s trade finance positivity persists, despite the challenges

By Olivier Paul

Findings from the 10th Global Survey on Trade Finance by the International Chamber of Commerce (ICC) reveal Asia-Pacific to be the world’s largest trade finance provider as well as one of the most optimistic about future growth.

Following the announcement that the U S is to impose tariffs on a variety of Chinese goods, questions have arisen as to whether Asia-Pacific’s status as a premier global trading hub can survive.While the region’s premier position is currently undeniable – banks in the region processed $6.3 trillion out of a global total $9.7 trillion worth of trade finance transactions in 2017 – such concerns are not unfounded.

Indeed, the implementation of tariffs and protectionist policies poses a real concern, not only for the U S and China, but for the entire global economy. Such measures impact global economic and political uncertainty, causing friction and affecting supply chains, consumers and businesses worldwide. Indeed, Taiwan, South Korea and Southeast Asian economies such as Singapore and Malaysia nations are among the largest exporters of components to China, which then assembles and exports finished goods to the U.S. Anything that hurts Chinese exports, therefore, will impact these economies similarly.

Although findings from ICC’s 2018 Global Survey on Trade Finance, which gathered responses from 251 banks in 91 countries, highlighted protectionist and trade-restrictive measures as a significant obstacle to trade finance growth – and hence trade itself – banks in Asia Pacific are not despairing. Indeed, even though some 58% of respondents based in Asia Pacific indicated they are concerned about such measures impeding growth, this stands below the global average of 64%. Most interestingly, out of the seven global regions surveyed, Asia Pacific is the least concerned about such issues.

Positive outlook for growth

Moreover, banks in Asia Pacific are some of the most optimistic about trade finance growth. While 73% of respondents globally believe that trade finance growth will increase in the year to come, some 81% of banks based in Asia Pacific responded positively to the same question.

As banks increasingly look to expand their trade finance operations, outlook on business growth in Asia Pacific is especially positive. While 83% of respondents reported exploring at least one new market in the past year, 88% of those banks explored new markets in Asia Pacific. Banks in all regions also reported Asia Pacific as one of the top three areas where they are exploring new markets.

Interest in Asia Pacific is also apparent in terms of expected revenue growth. Building on the positive outlook for the next 12 months, 76% of banks in Asia-Pacific expect revenue growth in the next three years from traditional trade finance (TTF), which uses tools such as documentary letters of credit. And an impressive 91% of respondents based in the region expect the same from supply chain finance (SCF), which typically involves financing through an online platform.

Challenges for the sector

Notwithstanding such positivity, the region still faces a variety of challenges. One area of concern remains that of regulation and compliance. Indeed, some 66% of respondents based in Asia-Pacific indicated they were extremely concerned that regulatoryrequirements were an obstacle to growth, which is above the global average of 58%.

International sanctions and regulations aimed at countering the financing of terrorism (CFT)are another source of disquiet – with some 68% of banks in Asia-Pacific stating they are extremely concerned by the impact such regulations could have on their ability to provide trade financing in support of cross-border trade.

Indeed, research from ICC and other organisations has revealed the potential negative impact that regulation can have on banks’ abilities to provide trade finance and how the unintended consequences of well-meaning regulations can make it harder for smaller companies and traders to access trade finance.

Around 40% of micro, small and medium-sized enterprises (MSMEs) – both globally and in Asia-Pacific – have their trade finance requests rejected. What’s more, some 18% of trade finance rejections globally in 2017 were directly linked to incomplete or failed due diligence checks, specifically related to Know Your Customer and Know Your Customer’s Customerrequirements, which can impede significantly on MSMEs’ abilities to access trade finance.

More positively, the sector has seen an increased uptake in SCF solutions as banks increasingly move away from TTF. In Asia-Pacific, some 17% of existing clients exhibited a shift from TTF to SCF in 2017, while 23% of new clients were on-boarded utilising only SCF solutions.

As the sector increasingly moves towards paperless trade financing, banks are progressively implementing technology solutions as part of their offerings. However, issues have arisen from a lack of standardisation, with some 32% of respondents globally indicating problems due to a lack of common standards for exchanging data between proprietary systems.

Notwithstanding this lack of interoperability, most banks have implemented technology solutions to some extent within their trade finance processes, with 60% of respondents indicating they are moving towards further digitalisation. In Asia-Pacific, results are especially encouraging, with over 50% classifying their implementation as “mature”.

Encouragingly, with one of the highest uptake rates out of the regions surveyed, the implementation of digitalisation in Asia-Pacific indicates that a favourable, forward-thinking and innovative environment persists in the region, helping it to cement its position as a leading trade finance provider – an optimism that islikely to persist despite the current concerns.

Olivier Paul is Head of Policy at the International Chamber of Commerce Banking Commission.

Download the full ICC Global Survey at www.iccwbo.org/global-survey-report

Categories:
Keywords: trade finance, regulations, revenue growth, global supply chains, tarrifs
Institution: International Chamber of Commerce (ICC)
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