There’s a trade finance gap as SMEs seek access to capital to fund everyday operations and to grow. But many of these companies don’t get a chance to use trade finance. Here’s what Vincent O’ Brien, of the International Chamber of Commerce, says the trade industry must do to close the gap between firms large and small.
In the wake of a report on trade financing earlier this month from the International Chamber of Commerce (ICC) Banking Commission, it has become clear that access to capital — in terms of both timeliness and affordability — is a major concern for small and mid-sized enterprises.
Against this backdrop, PYMNTS caught up with Vincent O’Brien, the organization’s market intelligence chairman, to discuss the issues facing smaller players as they seek continued funding to improve, and in some cases, launch, their operations.
PYMNTS: One of the biggest findings the ICC highlighted in the new trade finance report is the struggle faced by SMEs in accessing this type of funding. How can the report help fill that gap, if at all?
VO: Half the challenge in resolving a problem is being aware of the problem. This 2015 report adds substance to anecdotal evidence of the financing challenges for SMEs. In the 2015 survey report, the Asian Development Bank provided a lot of data for the survey report focusing on the “trade finance gap.”
For instance, it was reported that 45.8 percent of proposed trade finance applications had been submitted by SMEs, 39.6 percent by large corporates and 14.6 percent by multinational companies. Many of these trade finance proposals were declined by banks.
Of all the declined trade finance proposals, over half of them, or 53 percent, were submitted by SMEs. By way of contrast, 79 percent of large corporates had their trade finance proposals approved.
PYMNTS: Compliance was singled out as a top challenge for SMEs in search of trade finance. While the report is global and regulations vary by jurisdiction, what are some common hurdles SMEs face regarding regulation when they need trade finance?
VO: Compliance as an increasing challenge has surfaced in this year’s survey — not only for SMEs, but clearly SMEs are more acutely affected.
It is of significant concern to see that 70 percent of this year’s respondents report seeing declined transactions due to Know Your Customer/Anti-money laundering regulations, with 46 percent of respondents reporting experiencing termination of correspondent relationships due to related costs and complexities.
Going forward, it is also worrying to observe that 91 percent of respondents expect compliance requirements to increase over the next year, up from the 81 percent in 2014.
With SMEs now accounting for such a large part of growth in economies, many banks are now evolving an SME-focused strategy, and this is one good outcome.
SMEs are a harder party to lend to in terms of trade finance than an established multinational, for example. Often, they don’t have a significant trading track record, and they may not have the management experience in preparing trade finance applications, setting out their trade cycle and trigger points for requiring trade finance.
PYMNTS: The ICC notes that while trade financing is generally a low-risk process for banks, the gap in access to trade finance has widened. What about trade finance makes it low-risk, and why have banks not taken that into account to increase their trade financing to SMEs?
VO: Why is trade finance considered low-risk financing — that is a good question! The answer is not technical, it is practical.
First, most of the trade financing is short-term in nature — that is, less than one year and, in fact, a huge proportion less than 180 days.
Clearly, a short-term risk is less risky than longer-term risks. Second, trade finance is based on real shipments of goods, usually on a recurring basis and very often self-liquidating. This means that, on one hand, the financing can be transaction-based, step by step, but at the same time, the party financing the trade can understand the trading cycle needs of the parties involved.
The fact that much of trade finance is undertaken based on standardized rules of practice also brings a significant amount of certainty pertaining to the obligations of the parties involved.
This has been one of the key success stories of the ICC — the development of globally accepted rules of practice.
PYMNTS: What technological or innovative trends have you witnessed in trade financing? For example, has the rise of online banking and accounting services helped improve access to trade financing?
VO: Large companies and SMEs have been slow adopters of technology for trade finance. Some commentators say the international trade banking sector has been slow off the mark.
However, we are now seeing traction with many companies initiating trade transactions through online bank platforms. The Bank Payment Obligation (BPO), which is electronic data-driven, is gaining traction with 21.5 percent of respondents reporting an increased interest in the BPO.
Supply chain finance is also optimized by electronic platforms, and in this year’s survey, 40.7 percent of survey respondents reported an increased interest in supply chain finance.
PYMNTS: Can you comment on the ongoing debate over the U.S. Export-Import Bank’s trade financing stoppage? What impact does this have on global businesses, if any?
VO: It has been reported that U.S. exports are on track to decline this year for the first time since the financial crisis — this is not good news in the context of the U.S. economy, nor for the world at large. The U.S. Export-Import Bank helps finance exports of U.S. goods and services, so in effect this trade support mechanism has been effectively derailed for more than three months now.
In simple terms, by supporting trade credit risks that commercial banks might not take, the U.S. makes it easier for buyers in foreign markets to buy U.S. goods, which, of course, are denominated in U.S. dollars. It does not take an economist to work out that the consequences of an inoperative Export-Import Bank for the U.S. export sector can only be negative.
The impact on emerging market buyers is also negative as it means that they are not in a position to purchase advanced U.S.-made technical equipment or supplies to retool or restructure manufacturing in their own country.
PYMNTS: The 2015 survey makes for interesting reading, and this year’s survey highlights many challenges and some opportunities, but does it really have any positive effect in the global market place?
VO: I do not take these figures as all “doom and gloom.” Once a problem or challenge is clearly identified, then that is half the battle as stakeholders can take steps to address them. The ICC Global Trade Finance Survey 2015 was undertaken in partnership with the key stakeholders in financing international trade. It will lead to inspired action.
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