The move towards paperless trade has been a longstanding objective for the trade finance sector.
Results from our 10th Global Survey on Trade Finance reveal that banks are starting to make significant progress in this area, despite remaining obstacles and concerns. In Africa, banks are showing particular optimism about this shift, as well as the potential growth digitalisation can induce.
The survey, which gathered responses from over 250 respondents in 91 countries, revealed that almost three quarters of banks globally are hopeful about growth in the trade finance sector. Most encouragingly, 89 percent of bank respondents in Africa believe that growth in the sector will accelerate in the next 12 months, while none of them expect a decline in growth.
Yet, one area where African bankers are distinctly less optimistic, is the future of the so-called ‘trade finance gap’. This discrepancy between the demand and supply of trade finance is currently estimated to stand around $1.5 trillion globally, according to research by the Asian Development Bank. What’s more, results from the survey indicate that banks in Africa are twice as likely to expect the trade finance gap to widen compared to the global average, with almost 50 percent of respondents in the region believing the gap will increase over the next three years.
Such findings are not surprising – the region has one of the highest rejection rates out of the seven regions surveyed. Some 17 percent of all African trade finance requests are declined. Micro, small and medium-sized enterprises (MSMEs) are the most affected, with African banks rejecting 46 percent of MSME trade finance requests in 2017. Rejections are often linked to a lack of collateral and documented history of past commercial transactions, alongside concerns relating to regulatory and compliance requirements.
The impact of regulation
Certainly, regulation and compliance are one of the most highly-cited concerns for banks, according to the survey. Some 93 percent of respondents globally and 62 percent of respondents in Africa declared such measures as a barrier to the provision of cross-border trade, as well as sector growth.
While banks recognise the need for robust regulations, concerns have arisen as they try to increase efficiency and drive down costs while at the same time invest resources to ensure compliance across a range of sometimes inconsistent regulations.
Regulations aimed at countering the financing of terrorist activities (CFT) are some of the most problematic, according to the survey. In Africa, 57 percent of bank respondents indicated they were “extremely concerned” about the impact of CFT requirements on growth in the sector. Meanwhile, these concerns are actively impacting banks’ willingness to provide trade finance, especially to emerging markets and MSMEs.
What’s more, as the sector increasingly shifts from the use of traditional trade finance processes – such as documentary letters of credit – towards the use of supply chain finance (SCF), which involves online trade platforms, one of banks’ major concerns has continued to be that of know-your-customer (KYC) and know-your-customer’s-customer (KYCC) regulations. Some 44 percent of banks in Africa declared these an obstacle to the implementation of SCF solutions, for instance, and they consistently rank among the top reasons for rejecting trade finance requests.
Yet African banks are embracing digitalisation of the sector, despite their residual concerns over regulation. During 2017, 16 percent of their existing client base exhibited a shift from traditional trade finance solutions towards SCF processes, our survey found. And, encouragingly, almost 40 percent of new clients on-boarded chose to use SCF solutions over traditional products. In total, 61 percent of banks in Africa saw an increase in SCF provision from 2016 to 2017, well above the global average of 43 percent. In addition, 38 percent saw a decrease in the use of traditional trade finance processes, further cementing the move towards paperless trade.
Digitalisation and new technologies
In turn, the push for digitalisation and the growing adoption of new technologies into trade finance processes is expected to help alleviate some of the sector’s regulatory concerns, helping to increase efficiency and decrease costs. The continued overhaul of the trade finance sector will allow for banks in Africa to engage more efficiently with their clients, and allow them to process higher amounts of trade finance than ever before.
Further still, the development and deployment of technologies into trade finance processes could help bridge the trade finance gap. Digitalisation and the introduction of distributed ledger technology (DLT) can cut costs and broaden financial access to SMEs, who often find themselves excluded from traditional trade finance processes due to cumbersome levels of paperwork and bureaucracy. For example, smart contracts will enable money to transfer automatically as merchandise ships across international borders triggering predefined commercial and financial events.
Yet the transition towards paperless trade will take time and effort. Governments worldwide should align their policies and embrace the use of new technologies. Common rules will need to be implemented to ensure interoperability of online systems. Such issues have already caused major challenges, with some 56 percent of banks based in Africa indicating the lack of interoperability and common standards as a major obstacle to the provision of SCF solutions.
Ultimately, until all component parts of trade finance transactions have been digitised and made inter-operable, the widespread adoption of new technologies is bound to be slow and limited. Encouragingly, however, some 39 percent of bank respondents in Africa would already class their implementation of technology as “mature”.
In the next three to five years, 71 percent of banks in Africa have earmarked the development of new and emerging technologies, such as distributed ledgers, as a strategic priority. The survey also noted digital trade and online trade platforms are a major focus for the long-term. Priorities are shifting although the sector will need to work collectively to ensure a smooth transition to paperless trade, which all participants can benefit from.
Download the full ICC Global Survey at http://www.iccwbo.org/global-survey-report