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The Financial Express

Growing challenges of trade financing by banks

| Updated: October 01, 2021 20:59:47


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As expected, changing trends and volumes of trade transactions due to Covid-19 disruptions have implications for trade services. It is known that trade services are particularly vulnerable during a crisis, and policy measures are particularly crucial during such disruptions. In most instances, these disruptions have also been self-fulfilling. However, the Covid-19 scenario has proven to be comprehensively different and unpredictable. Financial regulators and trade service-providing banks have also been struggling in ensuring effective and operative monitoring and supervision environment for ensuring compliance and restricting trade-based financial crimes in this unprecedented scenario. In the context of Bangladesh, banks have considerable involvement in trade services, and trade service-providing banks in Bangladesh undertake extensive responsibilities in legal enforcement and commercial risk minimisation in trade facilitation. The regulatory provisions for international trade facilitation in the country expedite greater involvement of the trade services departments of banks with greater risks and better opportunities to earn. In the context of growing business complexities, compliance requirements, technological adoption, market expectation, and financial crimes, trade services are becoming increasingly challenging for the banks of the country.

It is believed that about 80 to 90 per cent of international trade transactions rely on trade finance. Responding to the crisis, global banks have been trying to come up with strategies to survive and consolidate. Based on the responses of 346 banks from 85 countries, ICC's 2020 Global Survey (the most recent one) highlights respondents' ambitions to expand their trade-finance arrangements to new clients, products and geographies as well as increase their digital offerings. Some 77 per cent of respondents acknowledged that they are considering the transition to digital for their trade-finance models, while 61 per cent indicated that they are planning to grow their product offerings and 54 per cent to expand their market participation.

Despite extensive policy support and strategic changes, trade service-providing banks are struggling to address several newer challenges alongside a number of traditional trade finance-related complications.

Huge surge in freight charge is a critical challenge during Covid-19 period. It is well known that challenges associated with trade logistics and associated costs have notable implications for trade services. Shipping rates are a major component of trade costs, and the new hike in the rates poses an additional challenge to the world economy as it struggles to recover from the worst global crisis. The impact on freight rates has been the greatest on trade routes to developing regions, where consumers and businesses can least afford it. For example, according to the UNCTAD website, by early 2021, freight rates from China to South America jumped 443 per cent, and 63 per cent on the route between Asia and North America's eastern coast.

It is evidenced that SMEs are amongst the worst sufferers resulted from Covid-19 economic and trade devastations. Despite remarkable efforts in both developed and developing nations, SMEs are struggling with access to finance. In line with that trade finance gap worsened for SMEs.  Before the uncertainty caused by the Covid-19 pandemic, the trade finance gap facing SMEs was an estimated USD 1.5 trillion; and the World Economic Forum estimates this gap could reach USD 2.5 trillion by 2025. According to a Trade Finance Global's estimation in 2020, the SME finance gap in developing countries is estimated to be approximately USD5 trillion -- 1.3 times the current level of  SME lending; and women-owned firms fared the worst when accessing trade finance, and the situation worsened during Covid-19. 

Trade-Based Money Laundering (TBML) was reshaped during the pandemic. TBML took different shapes in the Covid-19 situation. Reporting from FATF members, observers and open sources indicate that criminals have attempted to profit from the Covid-19 pandemic through increased fraudulent activities associated with international trade. There was a significant increase in seizures of counterfeit and unauthorised face masks and hand sanitisers during a collaborative enforcement effort by the WCO, Interpol, Europol, customs administrations, police forces, and other law enforcement agencies. In this context, FATF and Egmont Group released a new publication 'Trade-Based Money Laundering-Risk Indicators' in March 2021.

High and growing regulation and compliance requirements are a key challenge associated with trade financing. The development is changing the cost structure and priorities of the trade finance providing banks.  In response to these increasing regulatory and compliance requirements, "decrease in the trade finance businesses" is the most common concern revealed by the banks. According to the  ICC survey, 56 per cent of survey respondents indicated that their banks were significantly concerned both by understanding and implementing compliance procedures and with capital and regulatory requirements. While there was widespread similarity across banks on capital and regulatory requirements, there was a more pronounced divide between different types of banks in respect of compliance.  It is not easy for the smaller banks to keep pace with the growing regulatory compliance requirements. Level of technology infrastructure is also crucial in this context.

While digitisation is widely seen as very important, a survey by the Global Trade Finance shows a clear divide between banks that have the vision, capacity, and commitment: 'While 83 per cent of global banks have a digital strategy, only 46 per cent of local banks have, only 17 per cent of respondents have successfully implemented digital solutions, with a surprising one in five not yet seeing any tangible benefits; 22 per cent of banks said that they have tried to implement technology solutions but that it has been imperfect, while a further 19 per cent are currently struggling to even match that. The survey also finds, 'the volume of zero-touch trade finance processing remains limited: import and export LC 7-8 per cent; export-import loans-9 per cent ; performance guarantee 6 per cent '.

There are common claims that tarde digitisation is yet to get adequate support from the regulatory provisions till date.  According to the most recent ICC survey, for most trade documentation, over 50 per cent of respondents mentioned that documentation was no longer mandated to be paper-based in the context of trade financing; and there are evidences that local regulations and requirements remain a barrier to paperless trade in several instances. A recent Finastra survey finds that over 700 financial institutions and banks around the world highlight the problem of regulatory barriers to growth, and almost half of the respondents believe that regulations are holding back innovation.

Complexities, work burden, work from home, and transformation efforts are the obvious outcome of the Covid-19 crisis that banks are confronting in Bangladesh as well. And global trade finance challenges are also more or less relevant for the trade finance banks of the country. Remarkable market interventions and operational supports by the government and Bangladesh Bank brought relief to the trade service providing banks. However, uncertainty remains with the future potential of extended of Covid-19 waves. Stimulus and refinance schemes offered comfort to the traders and banks, and several short term goals were attained on the way to support international trade. There are still scepticisms on the sufficiency and efficient use of stimulus funds, and potential challenges associated with moral hazard in near future.

In a circumstance of 'Work from Home', banks with centralised trade services and improved technology infrastructure managed the situation in a better fashion. During the 1st lockdown, centralised trade operations of the country were able to readjust their work plan and manage the operations. However, this was not the case for banks having decentralised trade operations. Banks with weak technology infrastructure and decentralised trade operations confronted notable challenges and disruptions. Technology adoption and centralised trade operations are the areas to address by a big section of banks of the country to minimise risk of any such future disruption. It is also crucial to work on the minimising the trade finance gap of SMEs of the country.

 

Shah Md Ahsan Habib, PhD is Professor [Selection Grade], Bangladesh Institute of Bank Management (BIBM).

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