TRADE FINANCE--HAVES AND HAVE NOTS

The Haves and Have Nots for Finance

David Gustin

- November 14, 2017 1:11 AM |

Categories: Trade Credit Commentary | Tags: Asian Development Bank, crowdfunding, Fintech

All I ever hear about is Gaps in Finance. This creates our haves and have nots.  There is:

• The SME funding gap – According to World Bank, more than 50% of SMEs lack access to finance, which hinders their growth.
• The Infrastructure Shortage gap- Asian Development Banks says Asia needs to invest $26tn by 2030 to resolve a serious infrastructure shortage
• The Trade Finance Market gap - The Asian Development Bank (ADB) runs a survey that quantifies the market gaps for trade finance and its impact on jobs and growth. They claim that Financial Institutions failed to provide $1.6 trillion in needed capital.
• And then there’s the US$1.5 trillion trade finance Small Business gap according to Harvard.

What is driving these Gaps?

According to the ADB, there are three forces driving the US$1.5 trillion trade finance gap:

• High number of rejected trade finance applications from the Asia Pacific (APAC) region

• High rejection rate of applications from SMEs and midcap organizations

• Reduced lending by banks to SMEs due to perceived risk (Know-Your-Customer issues) and declining profitability in trade financing

Banks are also cutting the number of correspondent banking relationships due to KYC regulations and the cost of being in compliance in each country. Between 2013 and 2016, the number of correspondent banking relationships declined globally by a large amount, from 360,785 to 223,247, representing a 38% decrease. The second reason relates to Basel costs and the costs of liquidity and restrictions on leverage. Smaller banks and emerging market banks are more challenging to serve under new capital guidelines.  This is evidenced by the Top 4 banks and new capital surcharges for systemically important institutions, the Federal Reserve’s annual bank stress-testing regime, and the enhanced enforcement of anti-money-laundering rules.  Add to this the costs to serve SMEs and their relative high loss rates, and you see why small business lending has declined at big banks.
I am really starting to wonder the potential drag on the economies with all these gaps. And we haven’t even felt the impact from the Fed’s tightening program on banks shrinking their assets, or the impact of rising rates on hurdle rates and therefore approval rates for loans, or the impact of a downturn in the credit cycle.
So yes, these gaps exist and are painful for those that are finding it difficult to access credit.
And while FinTech has started to help – crowdfunding options help raise cash, dynamic discounting from P2P networks, new digital lending options for invoice finance, and of course the small business lending solutions from the likes of Kabbage, OnDeck, Prosper, etc. it is still a very small market.