This year’s International Chamber of Commerce’s (ICC) global trade and finance survey shows that small- and medium-sized enterprises (SMEs) are suffering from the lack of availability of trade finance. Despite being the backbone of the global economy with SMEs represent 95% of all enterprises and 60% of private sector jobs, they are still frequently being turned down by banks for trade financing. This has been due to a number of converging issues, including the stagnation in global trade; banks being reluctant to enter into costly and complicated transactions; and the increasing levels of red-tape.
The survey shows that 2016 is likely to be the fifth year in a row that global trade grows more slowly than global GDP. At the same time, the World Trade Organisation (WTO) has downgraded its world trade growth forecast for this year from 2.8% to 1.7%.
This slowdown has caused uncertainty amongst the G20 nations which has resulted in stricter trade controls. A WTO report showed that the G20 countries had introduced 145 new trade restrictions between October 2015 and May 2016.
For banks, these geopolitical shifts come at a time when regulation – including more rigorous anti-money laundering (AML) and know your customer (KYC) obligations – are dominating the landscape. Speaking at a European Bank for Reconstruction and Development (EBRD) conference in Frankfurt, ICC Banking Commission chair Daniel Schmand said that there are too many regulators which can cause confusion for banks. Should banks, for example, follow domestic regulation, the recipient bank’s foreign regulation or international regulation, he said. As a result of the regulatory burden and uncertainty, banks often avoid entering into some transactions altogether.
The reluctance on the part of banks to facilitate certain trade transactions has directly impacted the SME sector. The 357 banks that responded to the survey reported that 44% of all trade finance applications had been submitted by SMEs, 40% by large corporates and 16% by multinational companies – but a disproportionately high number of all applications that were rejected came from SMEs (58%, up from 54% in 2014).
Further compounding the problem has been the increased level of regulation and compliance costs over the past few years: 90% of respondents said the cost and difficulty surrounding AML and KYC was a significant impediment to doing business, while 83% expected compliance costs to increase further and 40% of banks said they had terminated correspondent banking relationships because of increased cost and the complexity of the regulatory requirements. Again the SME sector is most affected with 75% of respondents identifying that segment as the most negatively-impacted by strict regulatory standards.
Proposals for SMEs
To help stimulate and promote growth in the SME market, the ICC has proposed a number of measures. These included the harmonisation of trade finance regulation and compliance across the globe. Schmand, speaking at the EBRD conference, suggested that global bodies including the World Bank, World Trade Organisation (WTO) and the International Monetary Fund (IMF) should create a standardised set of monitoring principles for trade finance. The ICC also pointed out the continuing need for development banks who support trade transactions which would not be possible with conventional banks.
Growth in SCF
The survey said that, while SMEs can be a difficult segment to service, efforts have been made “to cater to their idiosyncratic needs in the last couple of years through greater involvement in supply chain finance programmes”.
Positive growth was seen in the use of SME-friendly trade vehicles including factoring and supply chain finance, with an 8% growth seen in international factoring. The survey found that nearly 35% of respondents reported an increase in supply chain finance deals. For commercial letters of credit (L/Cs), on the other hand, nearly 50% of respondents reported a decrease. L/Cs made up 38% of trade finance instruments in 2015 survey, down from 45% reported in 2014.
The survey noted that this was consistent with data from SWIFT which showed a fall of almost 5% in global L/C messaging. This decline, the survey said, was “likely the result of a combination of reduced trade activity and the ongoing shift from traditional instruments to open account and supply chain finance”.
The survey reported that SCF techniques and products are continuing to grow, although at a slower pace than recorded in recent years, but that 39% of respondents reported an increase in interest from their customer base in supply chain finance solutions.
“It [is] clear that trade is increasingly being viewed from the perspective of ecosystems of commercial relationships, as represented by cross-border supply chains, and thus, supply chain finance is increasingly becoming an important element of banks’ propositions in the financing and mitigation of risk around international commerce,” the report said.