Briefs No. 11March 2013 Key Points Asian Development Bank • A gap in trade finance is represented by unmet demand for lending and guarantees to Trade Finance Survey: support $1.6 trillion in trade, $425 billion of which is in Major Findings developing Asia. • Availability of trade finance impacts economic growth and job Steven Beck Qifeng Zhang creation. Head of Trade Finance Principal Financial Sector Specialist • According to the findings of Private Sector Operations Department Office of Regional Economic Integration the survey, an increase of 5% in availability of trade finance could Asian Development Bank Asian Development Bank result in an increase of 2% in Shigehiro Shinozaki Elnora Mangampat production and 2% more jobs. Financial Sector Specialist (SME Finance) Investment Officer • Trade finance programs of Office of Regional Economic Integration Private Sector Operations Department multilateral development banks Asian Development Bank Private Sector Financial Institutions Division help fill trade finance gaps, Asian Development Bank both globally and in Asian developing economies. Maria Isabel Ferino Consultant Asian Development Bank Executive Summary A survey was conducted in the fourth quarter of 2012 to see whether any gaps for trade finance could be identified and quantified, and what, if any, is the relationship between these gaps and business expansion and job creation, both of which are crucial to economic growth and poverty reduction. Findings from this study will help stimulate debate on the importance of trade finance and draw attention to its implications on growth, jobs, and poverty reduction. The survey may also stimulate more rigorous and in-depth study in this area. Banks surveyed said they rejected a substantial percentage of requests to finance imports and exports. According to the survey, this meant that $1.6 trillion of demand for global trade finance was unmet, with $425 billion unmet in developing Asia. The companies participating in the Asian Development Bank (ADB) survey indicated that a 5% increase in trade finance support would mean a 2% growth in their business and a requirement to hire 2% more staff. The same companies said that a 10% increase in trade finance support would result in 5% more production and 5% more jobs. Reducing unmet demand for trade finance will result in economic growth and job creation. Surveyed banks identified a number of factors inhibiting their financial support for trade, including poor payment records by correspondent banks, low country ratings in ISBN 978-92-9092-992-5 (Print) ISBN 978-92-9092-993-2 (PDF) ISSN 2071-7202 (Print) * The authors are grateful for contributions made by banks and companies that participated in this survey. Standard Chartered Bank was especially helpful in identifying companies to complete surveys. The authors ISSN 2218-2675 (PDF) would also like to thank Changyong Rhee, Chief Economist at the Asian Development Bank (ADB), for his Publication Stock No. ABF135535 guidance. This report contains major findings of selected items in the survey conducted by ADB. 2 aDB Briefs developing countries, and weak banking systems. Another Introduction factor aggravating trade finance support identified by banks was more stringent Basel III regulatory requirements. On ADB conducted a survey in the fourth quarter of 2012 average, surveyed banks indicated that they would reduce to identify and quantify trade finance gaps,1 if any, and to support to trade finance by about 13% if Basel III is fully better understand the relationship, if any, between these gaps implemented. Since the survey was concluded, Basel and business expansion and job creation, both of which are announced more lenient liquidity requirements for banks. very important to economic growth and poverty reduction. This is expected to ease but not eradicate the perceived negative impact that Basel III may unintentionally bring The survey questionnaires were issued online to two broad about to trade finance. groups of targeted respondents: banking institutions that are ADB’s partners in the TFP, and companies that are users of To fill market gaps in trade finance, multilateral development trade finance provided by ADB’s partner banks under the banks (MDBs) have developed trade finance programs, TFP. The former consisted of 147 banks, while the latter which provide guarantees and loans to commercial banks to included over 500 companies. The survey targeted partners support trade, particularly in the most challenging countries and users of trade finance supported by ADB’s TFP not where country ratings are low and banking systems are weak. only on account of their familiarity and firsthand experience with the subject, but also because of ADB’s intent to Over 70% of banks surveyed indicated that ADB’s Trade systematically garner feedback on a number of critical issues Finance Program (TFP) is important or very important from its clients and other beneficiaries of the TFP. Such to supporting trade in developing countries. While the feedback will be instrumental to mapping out the future of TFP operates in 18 countries and is focused on the poorest this program or designing additional programs related to markets, its six most active countries are Bangladesh, trade finance. Mongolia, Pakistan, Sri Lanka, Uzbekistan, and Viet Nam. The TFP is in the process of expanding to Myanmar. In Answers were required from senior management of the 2012 alone the TFP supported $4 billion in trade through surveyed banks and companies, in charge of trade finance 2,032 transactions involving 1,577 small and medium-sized or imports and exports. Respondents from the targeted enterprises. banks and companies are 106 (or 72%) and 138 (or approximately 28%), respectively. Surveyed banks indicated that without the ADB TFP, their trade finance support to companies in TFP’s 18 countries Quantifying Trade Finance Gaps of operation would decline by at least 13%. This suggests that ADB TFP supports production and jobs. Moreover, 1.1 Globally, what was the approximate total value of the catalytic impact of ADB, and presumably other MDB proposed trade finance transactions your bank received trade finance programs, is substantial in terms of its ability in 2011? to mobilize private sector capital to support trade, economic growth, jobs, and ultimately poverty reduction in developing 1.2 In 2011, approximately how many of the proposed countries. global transactions for trade finance (as provided in 1.1) did your bank reject (in % terms), mainly due to In conclusion, findings from the ADB survey suggest that the obstacles driving the trade finance gap? trade finance gaps exist and need to be addressed because of the strong links between trade finance, business expansion, 1.3 Among Asian developing economies, including where and job creation. The survey underscores the importance of your bank is domiciled, what was the approximate total further study and collaboration among MDBs, government, value of proposed trade finance transactions your bank financial institutions, and companies to ensure maximum received in 2011? (Value must be less than the global financial support to trade is available, given that the trade finance transactions in 1.1). interlinked component parts of trade finance, business expansion, and jobs need coordination to create as much 1.4 In 2011, approximately how many of the proposed growth and poverty reduction as possible. transactions for trade finance in Asian developing 1 Defined in the survey questionnaire as “a financial institution’s inability to meet the demand for any form of trade finance. The ‘gap’ represents the amount of trade finance that is not available to support imports and exports and therefore there is less trade than would be if there were no gap (no lack of trade finance).” Asian Development Bank Trade Finance Survey: Major Findings 3 Table 1 Proposed trade finance, globally and in Impact of Gaps on Growth and Jobs Asian developing economies Total 1.5 Suppose your company has more trade finance support Region ($ bil) for its import/export activities. With the following % increase in finance, what corresponding % increase, if Global any, would you attribute to the following? Value of proposed trade finance 4,598.08 Value of trade finance rejected 1,643.76 1.6 Suppose your company has less trade finance support Asian Developing Economies for its import/export activities. With the following % decrease in finance, what corresponding % decrease, if Value of proposed trade finance 2,076.01 any, would you attribute to the following? Value of trade finance rejected 424.72 Key findings: Increasing or decreasing trade finance support to companies will result in corresponding increases or economies, including where your bank is domiciled (as decreases in their export activities, production, as well as job provided for in 1.3), did your bank reject (in % terms), levels. For instance, a 5% increase in trade finance support mainly due to the obstacles driving the trade finance would result in increase of exports by 2%, production level by gap mentioned in section 2.1? 2%, and staffing by 2%. Key findings: The total value of trade finance requests received in 2011 by the banks responding to the survey Increasing or decreasing trade amounted to about $4.6 trillion. Of this total amount, more than $1.6 trillion was rejected. finance support to companies will Among Asian developing economies, the proposed trade result in corresponding increases or finance transactions received in 2011 by the banks responding decreases in their export activities, to the survey amounted to almost $2.1 trillion, of which almost $425 billion was rejected. production, as well as job levels Figure 1 Correlation between trade finance growth and exports, production, and jobs Exports Production Jobs 50 43 43 40 30 35 30 22 23 20 14 20 10 7 11 11 2 5 8 2 2 5 6 0 0 25 50 75 100 Availability of more trade finance (%) More production and jobs (%) 4 aDB Briefs Figure 2 Correlation between contraction in trade finance and exports, production, and jobs CoCnontrtaraccttioionn iin tradee ffininaanncec e(% ()%) –100 –75 –50 –25 0 –2 0 –5 –2 –9 –9 –3 –9 –7 –10 –13 –11 –19 –13 –12 –21 –22 –20 –20 –23 –26 –30 Exports Production Jobs Obstacles Aggravating Trade Finance Gaps Key findings: For international banks, the main factor that was perceived to aggravate the trade finance gap is previous 2.1 Please rate how significant each obstacle is in dispute or unsatisfactory performance of issuing banks terms of aggravating any trade finance gap, where (83%). The issuing bank’s low credit ratings, low country “1” means “very insignificant” and “5” means “very ratings, and Basel regulatory requirements also play a significant”. significant role in limiting trade finance (79%). Figure 3 Obstacles aggravating the trade finance gap for international banks Previous dispute or unsatisfactory performance 3% 7% 7% 28% 55% [4.2] of issuing banks Issuing bank’s low credit ratings 3% 17% 41% 38% [4.1] Low country credit ratings 3% 17% 41% 38% [4.1] Basel regulatory requirements 7% 14% 48% 31% [4.0] Issuing bank’s weak capacity 11% 18% 25% 46% [4.1] Lack of dollar liquidity 21% 14% 10% 34% 21% [3.2] Constraints on your bank’s capital 19% 15% 37% 22% 7% [2.9] High transaction costs or low fee income 4% 32% 39% 18% 7% [2.9] 1 2 3 4 5 Very Very insignificant significant Note: Numbers in brackets are weighted averages of ratings. The closer the average rating is to 5, the higher the level of significance. An average rating close to 1 indicates a low level of importance. DDeeccrereaassee i nin eexxppoorrttss,, pprroodduuccttiioonn,, aanndd jjoobbss ( %(%)) Asian Development Bank Trade Finance Survey: Major Findings 5 2.2 Roughly, by how much would your bank reduce its Table 2 Reduction in bank support support for trade finance if Basel III is fully implemented? if Basel III is fully implemented Banks Key findings: Table 2 shows the distribution of percent % reduction in bank support (%) reduction in trade finance that will be made by banks if 0 22 Basel III is fully implemented. On the average, respondent banks indicated they would reduce support to trade finance by 2 1 about 13%, with about 48% of the banks indicating that they 3 2 would reduce trade finance support by either 5%, 10%, or 20%. 5 14 10 19 Role of Multilateral Developments Banks 15 6 to Fill Gaps 20 15 3.1 If you believe there is a lack of trade finance globally, 25 7 please rate to what extent trade finance programs of 30 9 multilateral development banks (MDBs) help fill gaps 35 1 for trade finance, where “1” means “not at all” and “5” means “very great extent”. 40 2 50 1 3.2 If you believe there is a lack of trade finance in Asian 60 1 developing economies, please rate to what extent trade Total 100% finance programs of multilateral development banks (MDBs) help fill gaps for trade finance, where “1” n 96 means “not at all” and “5” means “very great extent”. Average 13% Key findings: Over 60% of the banks responding to the survey indicated that trade finance programs of MDBs have helped fill the gaps for trade finance to a great extent, both globally and in Asian developing economies. 3.3 Overall, if the ADB TFP no longer existed, by how Trade finance programs of much would your bank’s trade finance support decrease in ADB TFP active countries, including where your MDBs have helped fill the gaps bank is domiciled? for trade finance to a great extent, Key findings: If the ADB TFP no longer existed, both globally and in Asian international banks would decrease their trade finance support in concerned countries by 13%. developing economies Figure 4 Impact of MDB trade finance program s Asian developing economies 11% 27% 37% 25% [3.8] Global 6% 31% 34% 27% [3.8] 1% 1 2 3 4 5 Not at all Very great extent Note: Numbers in brackets are weighted averages of ratings. The closer the average rating is to 5, the gr eater the extent of impact. An average rating close to 1 indicates no impact at all. 6 aDB Briefs Conclusion Moving forward, the following measures may help reduce unmet demand for trade finance and result in long-term The survey provided useful information and market feedback economic growth and job creation: from a unique perspective of direct or indirect clients of the ADB TFP. In particular, the survey suggests the following: • Following from this ADB TFP survey, more rigorous collection of data in bigger sample pools over longer • A gap in trade finance is represented by unmet time series for in-depth analysis and correlation demand for lending and guarantees to support between trade finance and economic growth and job $1.6 trillion in trade, $425 billion of which is in creation should be undertaken. developing Asia. • A continuation, along with broader and deeper statistics • Availability of trade finance impacts economic growth from the International Chamber of Commerce Trade and job creation. Finance Register, and further study of other evidence that could (i) encourage the private sector to invest • According to the findings of the survey, an increase of more in trade finance, and (ii) help align regulatory 5% in availability of trade finance could result in an requirements with the low risk nature of trade finance. increase of 2% in production and 2% more jobs. • Further collaboration among MDBs, governments, • Trade finance programs of MDBs are perceived to be financial institutions, and companies to enable more helpful in filling trade finance gaps, both globally and availability of trade finance to create as much economic in Asian developing economies. growth and jobs as possible. Asian Development Bank or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. 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