Do more to boost Islamic trade finance
AS the World Trade Organisation (WTO) reaffirmed commitment to its Aid for Trade initiative at its 2017 Global Review in Geneva this month, the outlook for global trade over the next two years is indeed mixed.
WTO is forecasting that global trade will expand by 2.4 per cent this year and between 2.1 to four per cent next year, reflecting the continued uncertainty and risks associated with a stuttering global economy underpinned by low commodity prices, albeit slightly improving this year, which in turn has had a dampening effect on trade finance.
Trade and SMEs (small- and medium-sized enterprises) are regarded as the backbone of any self-respecting economy. Trade is a significant determinant and function of sustainable development. Not surprisingly, the theme of WTO’s Geneva gathering was “Promoting Trade, Inclusiveness and Connectivity for Sustainable Development”.
A GAP IN GLOBAL TRADE FINANCE OF AROUND $1.6 TRILLION PER YEAR
Latest survey results and analyses by the Asian Development Bank (ADB) point to a gap in global trade finance of around US$1.6 trillion annually—much of it in developing markets, particularly in Asian developing countries. The concern is that, according to “2017 Rethinking Trade & Finance”, the latest report of the International Chamber of Commerce (ICC): “It is increasingly clear that banks will be unable to materially close this gap in Trade Financing, and that there is a misalignment in the availability of funds and liquidity”.
With worldwide trade developing at a fast speed, trade finance is the “oil in the engine” of international commerce, and tool number one for treasury managers. The banking sector has recovered from the last financial crisis, and liquidity seems to no longer be an issue.
Banking Commission Survey confirms trade finance supply/demand imbalance
The International Chamber of Commerce (ICC) Banking Commission has released its 2017 report entitled Rethinking Trade and Finance. Based on the Global Survey on Trade Finance – with 255 responses from banks located in 98 countries, as well as insight and commentary from expert contributors – the report is the most comprehensive gauge of the trends and outlook of the global trade finance industry.
Now in its ninth year – 2017’s Survey marks a significant change in both emphasis and presentation. The aim is to provide both enhanced context – highlighting the potential strategic and tactical implications for the industry – and to be more forward looking. The approach is aided by the launch of a new Editorial Board comprising senior specialists and practitioners, supported through contributions from a wider range of partners across global trade.
The Report – emphasising ICC’s and the Banking Commission’s support of open, rules-based and inclusive multilateral trade – encompasses four major sections of content linked to the pillars of the Banking Commission’s strategy. It focuses on the state of the trade finance market; trade and supply chain finance; policy, advocacy and inclusiveness around global trade; and digitalisation and the state of FinTech. The 2017 Survey’s findings show that:
- Some 61% of banks report more demand than supply for trade finance in the global market. ICC Banking Commission and the Asian Development Bank estimate the level of unmet demand for trade finance stands at over US$1.6 trillion a year – a figure now officially recognised by the United Nations General Assembly.
- Only a minority (21%) see traditional trade finance showing growth in the future. However, overall trade finance revenues have increased, with ICC partner The Boston Consulting Group’s trade finance model (included in the report) predicting revenue growth of around 4.7% a year.
- Over 68% of respondents point to compliance and regulatory requirements as having the highest adverse impact on trade finance in the short-term, while only 11% pointed to capital constraints as a matter of significant concern.
- Some 50% expect most of trade flow processes to be digitised by 2027 – while an almost equal portion expect the evolution to take from 10-25 years. In addition, nearly 44% of respondents identify digitalisation and technology as priority areas of focus – including FinTech and fast-emerging platforms.
- While there is optimism with respect to the digitalisation of trade finance, only 12% of respondents perceive a degree of market uptake and nearly 40% see limited progress in this area – with almost 18% reporting that technical capabilities and technology are ahead of trade finance business practice.
- The discourse around FinTechs is evolving from competition to collaboration, with only 1.4% of respondents viewing the competitive offering of FinTechs as a threat to banks’ positions as the key providers of trade finance.
- More than one-third of respondents consider supply chain finance a high priority and predict significant growth, and over 21% view it as under analysis and consideration.
- Over 57% report an improvement of their operational risk management and reduced error rates, while only 2.7% note a slight deterioration.
- Some 46% identify multinational and large corporates as the highest priority client segment for their trade finance business, with a quarter favouring middle market clients and less than 20% identifying Micro, Small and Medium Enterprises (MSMEs).
- Some 57% of respondents believe traditional trade finance will exhibit little or no growth – while 22% think it will decline outright year-on-year.
- Cost control pressures are considered the biggest challenge facing trade finance units. These are cited by 23% of respondents, followed closely by the availability of specialist skills (21%), and limits posed by traditional technologies (18%).
- The report highlights the key role that correspondent banks play in global trade and economic activity, with IMF data indicating that the volume of correspondent banking relationships grew by almost 30% between 2011 and 2015.
Commerzbank steps up focus on trade finance transformation
Commerzbank is to work with the Fraunhofer-Institute for Material Flow and Logistics (IML) in Dortmund to test and develop new scenarios for digitisation of trade and supply chain finance using distributed ledgers and the Internet of Things.
Commerzbank says new concepts in digital trade finance based around distributed ledger technology, IoT and smart contracts constitute the basis for new trade ecosystems, new supply chain finance concepts, faster transaction processing and new solutions in working capital management.
Bernd Laber, group executive trade finance & cash management corporate clients, Commerzbank, comments: “We are working on several projects and in a number of consortiums also with other international banks on the digitisation of bank products and bank services, and on applications for blockchain technologies. As a corporate bank the focus on future supply chains of our customers is of paramount importance and we will develop this in co-operation with Fraunhofer Institute.“
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