Trade finance rejection rates are increasing in a third of institutions and underscore the challenge many businesses face when it comes to accessing funding for trade
BNY Mellon has released its “Overcoming the Trade Finance Gap: Root Causes and Remedies” report, which finds that the trade finance gap remains a significant issue for global trade, according to 100 global, regional, and domestic banks, specialist trade providers and other market participants responding to its survey. The $1.5 trillion global trade finance gap is affecting development and investment flows and financial inclusion, and businesses appear to be facing an increasingly uphill struggle in accessing the resources and support needed to fulfill their trade needs.
The report, conducted between April 2018 and January 2019, found that trade finance rejection rates accelerated in more than one-third of institutions surveyed in the past year. Additionally, nearly three-quarters of respondents cited compliance constraints and the inability for applicants to provide quality know your customer (KYC) as a key factor influencing the volume of rejection rates. As a result, banks have had to be more selective in who they do business with and subsequently move away from geographies and sectors that appear to hold greater risk for less reward.
“Our survey has shown that a significant proportion of institutions are increasingly unable to provide trade finance due to heightened regulatory requirements as well as several other trends,” said Joon Kim, Head of Global Trade Product and Portfolio Management, BNY Mellon Treasury Services. “This could have serious implications such as potentially widening the trade finance gap, compounding the lack of access to finance already being experienced by many businesses in emerging markets, and impacting the strength of global trade.”
Further, participants identified technology and regulatory revision as two potential approaches that could help to narrow the trade finance gap. Specifically, centralized KYC databases could provide a technology-based solution, according to nearly two-thirds or (61%) of respondents, while regulatory revision would most benefit from greater collaboration between banks and regulators, according to more than half or (55%) of respondents. Additionally, risk sharing partnerships with correspondent banks is seen as the most effective way of encouraging additional financing capability, while educating local banks and acting as advocates for trade finance are also key roles for correspondent banks in helping to alleviate the gap.
Paul Camp, Chief Executive Officer, BNY Mellon Treasury Services, confirms that “addressing the trade finance gap is a priority for the industry, and it is important that we work together to find the solutions that will be most effective in achieving this. There are efforts underway, but more work is required to ensure significant progress is made. We hope our survey will serve as a catalyst for driving further industry discussion and help to identify the areas of focus that will allow us to make tangible steps towards improving financial inclusion – and closing the gap.”