The most recent economic reality looks to be one of a backlash against trade on a global scale, as governments around the world launch protectionist economic policies and tear through trade agreements. The development of certain countries and regions is likely to hit the openness and free trade policies of other countries soon, and thus might affect trade volumes, prices, and the status and intensity of trade services as well in near future.
Today, it is well recognised that expansion of trade service activities by banks and financial institutions is connected with the expansion of cross-border trade flows in an efficient manner, both in developed and developing countries. In regard to the changing environment, KPMG, a professional service company, in a recent publication noted that evolving regulations and trade policy as well as variable economic, market, and competitive forces drive global businesses to continually adapt to a changing playing field. Moreover, involvements of banks in trade service facilitations have also been very crucial in terms of exercising operative monitoring and supervision environment for ensuring compliance and restricting trade based financial crimes.
Trade services by banks, more specifically trade payments, trade finance and others associated banking services, are clearly linked with global trade regulations and trade volumes. The WTO's latest World Trade Outlook Indicator released in February 2018 unveiled the trade recovery pointers in 2017 that indicate steady merchandise trade volume growth with the positive changes in air freight, container shipping and increased export orders. Banking industries are coping up with the changing trade scenarios with newer approaches, channels, products and services. In spite of the expansion of banking services to facilitate trade recovery and expansion, trade-finance gap for the relatively small trade enterprises remain worrying, as found in the most recent International Chamber of Commerce (ICC) Trade Finance Survey.
In the global context, most trade is conducted on open account terms, and therefore, enabled through techniques of Supply Chain Finance (SCF). Open account is an arrangement between the buyer and seller whereby goods are manufactured and delivered before payment is required. There are also some instances of cash in advance where sellers enjoy notable bargaining power. In cash in advance, the buyer places the funds at the disposal of seller (exporter) prior to shipment of goods in accordance with the sales/purchase contract. In case of cash in advance and open account, involvements of banks are generally insignificant, and traders have relatively greater freedom in handling the process at reasonably low cost. In considerable instances, international trade is facilitated by trade services of banks and financial institutions covering documentary credit (LC), documentary collection, standby LC or other bank guarantees, bank payment obligation, factoring, forfeiting etc.
Involvements of banks are significantly higher in the trade services techniques like LC, bank guarantee, standby LC and documentary collection. Especially through LC, banks offer payment, financing and risk management services to the clients. It is a classic form of trade facilitation technique that substantially reduces risks for both exporter and importer. It is an undertaking or commitment issued generally by a bank to pay the exporter a certain amount provided that the documentary conditions of the LC are complied with. A standby LC is functionally equivalent to demand guarantee or international bank guarantee, but differs in terms of structure. International guarantees may serve several purposes from indefinite range of payment, performance or non-performance obligation. Documentary collection is basically a payment tool having 'documents against payment' and 'documents against acceptance' techniques that provides a means of payment whereby the exporter can ensure that the buyer should not be able to take possession of the goods until it has paid or given a payment undertaking.
Some of the trade services/finance products are relatively recent developments like Bank Payment Obligation (BPO), and Supply Chain Financing techniques like factoring, forfeiting, invoice financing etc. BPO is a payment tool offering a level of security similar to that of LC. It is an irrevocable undertaking on the part of an obligor bank (typically that of a buyer) to recipient bank (typically that of a seller) to pay a specified amount on agreed date on condition of a successful matching of electronic data according to rules adopted by the ICC. Using SCF, banks provide technology and other services to facilitate payments and financing within supply chain of enterprises. The objective of such a platform is to bring within a single unit financial services related to supply, storage, cross-border relations between sellers and buyers, distribution and final sales to customers. International factoring is the sale of assignments of short-term accounts arising from an international sale of goods or services. The technique is associated with handling risk in open account trade. Forfeiting is used to denote the purchase of obligations falling due at some future date, arising from deliveries of goods and services. Factoring is suitable for financing smaller claims for consumer goods, whereas forfeiting is used to finance capital goods exports.
The World Trade Organisation and others suggest that as much as 80 per cent of annual global merchandise trade is enabled through some form of trade financing, including both traditional trade finance and SCF, and encompassing both financing and a range of risk mitigation solutions. Regarding payment and financing products, it is not always easy to have clear distinctive lines. Of the payment techniques, it is recognised that open account is the most popular form of trade payment method, followed by commercial letter of credit. Of the financing products some are particularly aligned with particular methods of payment. Factoring is particularly linked with Open Account. Packing Credit, Forfeiting, Invoice Financing, Bill Purchasing, LTR, UPAS, Back-to-Back LCs, Red Clause LCs are used at different stages of supply chains. Standby LCs and Bank Guarantees support trade payment and performance issues alongside so many other purposes.
Of the different regions, LC is particularly popular in Asian markets. The recent availability of SWIFT data demonstrate that in terms of LC business, Asia-Pacific accounted for a 72 per cent share for import and a 76 per cent share for export messaging as a proportion of world LC traffic. Growth in trade finance transactions both in volume and value are no longer predominantly driven by China. An increase in activity in South-East Asian countries is noticeable, with Vietnam, in particular, powering ahead. In connection with the country practices, countries that imported the most using LCs transmitted through the SWIFT network are South Korea, Bangladesh, China, India and Hong Kong; and countries that exported the most on the basis of export LCs received through SWIFT include China, Hong Kong, India, Singapore and Japan.
Dr Shah Md Ahsan Habib is Professor and Director (Training), BIBM. email@example.com
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