Managing risk in emerging markets

June 2017 | EXPERT BRIEFING | RISK MANAGEMENT

financierworldwide.com

While the UK leaving the EU presents opportunities for exploring new trading opportunities, they are likely to be in higher-risk markets where bank appetite is declining. Can the rise of the alternative financing industry provide UK businesses with the networks, the expertise and the funding they need to trade in these regions?

Brexit has been triggered. And, according to the prime minster Theresa May, it is to be a ‘hard Brexit’ – meaning that the UK will no longer be part of the European single market. The result is that UK business will need to look further afield for export opportunities. In fact, this would have been the case anyway – not least because around 90 percent of global economic growth in the next 10 to 15 years is expected to be generated from outside of the EU. However, while these new markets are most certainly higher growth, they require a different approach to doing business.

Whether it is foreign exchange, regulation, operations, credit or supply chain issues, these same high-growth markets have high levels of risk and volatility – meaning that exporters must be more proactive in managing them. And that makes finding the right partner critical.

Banks in retreat

Yet banks – the go-to partners for such needs – are in retreat. While many companies are keen to explore emerging markets, most global banks, on the other hand, are retrenching (their term for it is ‘derisking’). Banks that claim to be universal in every other sense of the term have been withdrawing lending facilities to emerging markets – sometimes drastically. A variety of factors have been contributing to this trend. Since the global financial crisis, banks have been rebuilding their balance sheets, focusing on reducing their lending books and improving profitability.

Also, regulation and increased capital requirements aimed at improving bank resilience has made trade finance more complex and costly for banks. Additionally, anti-money laundering (AML) and know your customer (KYC) requirements are requiring banks to invest more time and resources in screening transactions against sanctions, something they are increasingly reluctant to do.

It therefore comes as little surprise that in a compliance-burdened landscape, many global banks are shying away from the risks and costs associated with cross-border lending to riskier markets. The fallout has been severe. Findings from the International Chamber of Commerce (ICC)’s annual Global Trade and Finance survey reported that 90 percent of respondents surveyed cited anti-financial crimes compliance as a significant impediment to the provision of trade finance. The survey also points to a ‘trade finance’ deficit that is estimated (by the ADB) to stand at over $1.6 trillion.

Beyond the bank

But, of course, where there is a demand, innovative players will find a way. And that is certainly the case here. Much has been made over the past few years of the emergence of challenger banks and alternative finance. For instance, last year, the non-bank finance industry provided more than £3.2bn of funding to British businesses – a figure that is certain to rise in the coming years. Now, it is the trade and commodity space where the major banks are being challenged. In many cases the same attributes apply. Specialist financiers are able to make quick decisions and provide innovative financial solutions – perhaps being more imaginative when it comes to security. More importantly, these challengers are ambitious. They want to lend to British businesses while building their resources, networks and expertise – in many cases employing former bankers – in order to do so. And by combining trade experience with a local, on-the-ground presence and an extensive network, specialist financiers are increasingly assisting UK businesses through the provision of financial solutions that are carefully structured to mitigate key risks.

Pre and post-shipment facilities, for instance, are designed to help businesses execute confirmed export orders, without affecting cash flow. Meanwhile, inventory funding can be a lifeline – helping businesses access additional cash to buy stock that can be used to generate additional sales and fulfil export orders.

More importantly, specialist financiers take a more flexible approach than traditional lenders by looking beyond credit history and counterparty risk to the transaction itself. They may also consider factors such as sales performance. Indeed, such flexibility is critical for those exporters which may not have perfect credit but are showing strong year-on-year sales growth. It is for these reasons that fast-moving, securely-funded challengers are increasingly stepping in to fill the gap, enabling businesses to meet a much wider variety of financing needs.

New pools of funding

The need for businesses to look beyond traditional lending models is even more important given the uncertainty in the financial services industry. In particular, the loss of ‘passporting’ rights in the EU could become a cause of concern for banks – many of whom are delaying investment decisions with respect to UK expansion, as well as considering relocation.

This heightened uncertainty, coupled with volatile fluctuations of the pound, not only poses a risk to financial stability of the sector, but also the cost and availability of finance for UK businesses. Yet businesses still need to trade. And, more importantly, they need to have a solid financial platform in place as they target new opportunities. As such, businesses of all sizes should look to minimise their risk and avoid overreliance on any one lender.

Diversifying funding sources through the use of alternative finance is one way to achieve stability and guard against any fallout from Brexit. In fact, UK businesses are already turning to non-traditional forms of lending, with invoice financing breaking the £20bn barrier for the first time in the UK in 2016.

Ultimately, what the changing financial environment highlights is that businesses need lenders they can trust and rely on to support them – and their growth ambitions – through what is already proving to be a turbulent period. As companies enter emerging markets, specialist financiers are on hand to help them evaluate and manage risks.

Emma Clark is Head of Business Development at Falcon Group. She can be contacted on +44 (0)20 7337 6200 or by email: emma.clark@falcontradecorp.com.

Emma Clark

Falcon Group