Bridging Asia’s trade finance gap

October 2017 | EXPERT BRIEFING | BANKING & FINANCE

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The Asian Development Bank (ADB) predicts that Asia will contribute 60 percent of the world’s growth this year – making Asia the region most in need of increased liquidity with respect to trade finance. Yet, recent ADB figures estimate up to $692bn in unmet trade financing demand throughout Asia.

This ‘trade finance gap’ is partly an inevitable consequence of the region’s rapidly expanding trade frontiers. But it is also due to a decreasing appetite in funding trade in developing countries, as increased capital and regulatory requirements introduced after the global financial crisis continue to impede the provision of trade finance. Luckily, new financiers are helping bridge the gap.

Asia remains ahead

Asia’s economic growth over the past decade has remained rapid despite China’s slow down – expanding by an average of 5.7 percent for the second year in a row, with some Association of Southeast Asian Nations’ (ASEAN) economies set to grow by over 6 percent. This is despite global GDP growth of just 3 percent this year.

One reason for this growth is the level of domestic and foreign direct investment (FDI) the region has received in recent decades. India and China have both heavily increased their state investment to improve infrastructure and manufacturing capabilities, while FDI into ASEAN economies has grown exponentially in recent decades.

The opening of frontier economies and a lack of infrastructure has presented huge opportunities for investors. Additionally, low labour costs, growing domestic demand and infrastructure improvements have increased manufacturing capabilities – causing manufacturing to become one of the most attractive sectors for FDI.

In fact, many Asian, and particularly ASEAN, economies, such as Singapore, have become heavily export reliant. Yet, while demand for Asian exports has been high, many suppliers throughout the region cannot find funding to finance their trade – producing the aforementioned gap.

New regulations continue to stall bank lending

With respect to the gap, while demand has certainly increased, supply is also in decline, especially following the 2008 crisis and its regulatory aftermath. Basel III, in particular, has prompted significant changes to banking frameworks aimed at preventing the reoccurrence of another global financial crisis. Basel III requires banks to hold more capital on their balance sheets, which escalates the cost for clients while disincentivising banks from making funds available to all but the highest-rated borrowers.

The resultant dearth in lending has hit emerging markets particularly hard due to the risk-weighting on non-OECD countries. For instance, under Basel III, developed economies – OECD member states – are assigned a 20 percent risk-weighting, while, according to the Bank for International Settlements (BIS), emerging economies are often subjected to risk-weightings of 150 percent. This means that banks are much more likely to lend to larger corporations in developed economies than to SMEs in emerging markets, with everyone in between also having to fight more to win less.

While pan-regional trade, which is often not bank-financed, does bring in a percentage of revenue, the majority of demand and revenue for most Asian economies comes from external regions, such as the EU, where financing is required. Indeed, international sales, compliance, distribution, shipping and order fulfilment involves much greater investment than pan-regional and domestic trade.

New solutions for expanding markets

There has been a strong institutional response. Export credit agencies (ECAs), regional and multilateral development banks (MDBs), insurers and alternative financiers have made strenuous efforts to fill the gap through various funding initiatives. For example, the Development Bank of Singapore (DBS) has developed a strong presence in Southeast Asia by strengthening supply chains and helping regional companies improve their working capital. Credit insurers are also providing increased capacity to help exporters cover risks, such as political upheaval or default.

And, in addition to these market players, specialist financiers are rapidly becoming mainstream options for Asian corporates looking for more innovative and flexible ways to finance growth. Certainly, these non-bank financiers have begun to play a much larger role in the current financial and economic environment, and have undoubtedly increased their product and geographic range.

Certainly, specialist financiers are subject to less regulation than traditional banks, so are more flexible with respect to lending. For example, banks traditionally tend to consider two things when it comes to lending – credit history and available collateral. Specialist financiers, meanwhile, take a far more transactional approach to lending so can more easily adapt to corporates’ needs.

Because of this, specialist financiers specialise in constructing bespoke solutions specifically to suit companies’ expansion goals. This results in more businesses in the region being able to pursue their expansion agendas with reduced risk of cash flow complications and restrictions.

Moreover, the opportunity for alternative financing in Asia has grown extensively. For instance, one report by the International Banker finds that alternative finance in the Asia-Pacific region (excluding China) grew by 313 percent from 2014 to year end 2016.

Collaboration is key

That said, while specialist institutions play an increasingly important role in plugging the trade finance gap, the deficit is too large for one kind of player alone. Corporates are now able to combine the flexibility and local expertise of a specialist financier, with the resources of a traditional bank. Therefore, specialist financiers should not be considered competitors of local, regional or global banks – but rather partners.

Moreover, a financial environment built on many collaborating partners means that companies wishing to expand within Asian markets have access to a more diversified and sophisticated funding base than ever before. Certainly, the emergence of alternative financing alone, or combined with bank lending, has the potential to create an abundance of possibilities for growth throughout the Asian region. It can also help bridge that disabling trade finance gap.

Emma Clark is head of business development, UK and Europe at Falcon Group. She can be contacted on +44 (0)207 337 6200 or by email: emma.clark@falcontradecorp.com.

Emma Clark

Falcon Group