What are the global drivers of trade finance and what are the new opportunities that are emerging? In this timely and comprehensive article, Editor Rushika Bhatia presents a compelling survey of market data…
Trade financing in current economic conditions
In 2015, four major economic factors impacted global trade flows: the decline in commodity prices; economic and political volatility across key trading markets; China’s economic slowdown; and the widening gap between the US dollar and other major currencies.
Set against this backdrop of uncertainty, interestingly, a survey by the International Chamber of Commerce (ICC) reveals that 63.3 per cent of businesses report an increase in trade financing activity. Given that global trade has been experiencing slower growth in recent times, this outcome is quite surprising. However, experts explain that this could be due to the fact that the rising volatility in international trade markets has led to an increased demand for trade finance to cover potential default risks.
Furthermore, experts point out that as a result of the global economic crisis, there is now an increased focus on implementing corrective measures and policies within the trade sector in order to help fuel economic growth and recovery. This has led to a specialised focus on trade financing, which is essential for the lubrication of global trade. Estimates suggest that trade finance enables about 80 per cent of global trade flows – with bank-intermediated trade finance supporting 30 to 40 per cent of global trade flows.
Opportunities in the UAE
Let’s take a look closer to home. Post-crisis, UAE has shown strong signs of growth in the last couple of years, and the country is predicted to further expand with particular focus on sectors such as transport, trade, tourism and real estate. There is immense opportunity for partnering in infrastructure expansion in the UAE, in light of several large-scale developments including:
• The prospective economic growth coupled with the World-Expo 2020 – Mahmoud Al Bastaki, CEO of Dubai Trade has earlier remarked that Dubai’s foreign trade is expected to touch AED four trillion by virtue of hosting Expo 2020.
• The recent announcement of the Wholesale City project in Dubai – Earlier this month, plans were unveiled to build a market worth AED 30 billion close to the city’s new Al Maktoum International Airport. Termed as the ‘Wholesale City’, this mega project will link three continents and will house about 15,000 traders spanning from Malaysia to Germany. Given its favourable geographical position, Dubai is already at the heart of prominent trade route – generating immense opportunities in cross-border transactions. However, the Wholesale City will play a pivotal role in positioning Dubai as the centre for trade and will further help achieve the country’s goals for economic diversification. In fact, the Dubai Wholesale City aims to raise the UAE’s share of the global wholesale trade sector, which is expected to grow from US$4.3 trillion to US$4.9 trillion over the next five years.
• Economic diversification agenda in a climate of low oil prices – the UAE has been one of the first GCC countries to shift its focus from an oil-dependent economy; this remit looks at alternative sectors such as tourism and trade to boost economic development. As a result, several trade reforms and initiatives are being undertaken to encourage businesses to expand overseas.
Trends shaping global trade finance
• Digitisation of trade finance – This is perhaps one of the biggest – and the most obvious – trends impacting the world of trade finance. A report released by Accenture on trade finance gives an example: “Bank Payment Obligation (BPO) is the other new kid on the block. It represents an irrevocable undertaking on the part of an importer’s bank to pay (or incur a deferred payment obligation) at maturity a specified amount to an exporter’s bank. Although the BPO product is not different from traditional trade finance products in its intent to mitigate the risks of international trade, it does so in a fully digital way, thus offering significant advantages in speed, flexibility and reduced complexity.”
• Blockchain disrupting finance – This is by far the most interesting trend in the world of trade finance as it ties in innovation with digitisation. With the pace of change the world is currently experiencing – especially with technologies such as Blockchain, it is only a matter of time before we see trade being completely redefined.
• Implementation of the Basel III banking standards – With stricter compliances in place , banks have redoubled their efforts to continue providing value added products to businesses to offset the effect of reducing availability of credit and potential increase in pricing of trade financing products.
The critical role of banks
Traditionally, banks – and the overall banking sector – have played a pivotal role in providing access to finance and managing risks for businesses. This is particularly true when it comes to trade as it exposes businesses to significant risks, especially if trading partners are based overseas and contracts fall under more than one country’s jurisdiction. Such risks are best mitigated with the help of trade finance solutions provided by a bank or financial partner. Traditionally, large global banks have been the natural choice for trade finance solutions, owing to their cross-border expertise, vast amounts of trading data and market intelligence. In fact, reports suggest that banks account for a quarter to a third of global trade finance.
Regionally, leading banks such as National Bank of Abu Dhabi (NBAD) offer a range of trade finance services, from traditional trade financing to more advanced solutions such as structured trade financing that enable the purchase and sale of goods on an international scale. In addition, the global markets experts provide advanced hedging solutions to businesses exposed to different currency transactions. NBAD experts can provide tailor made solutions after assessing your trade business mechanisms and its key areas of risk as well as liability to the third parties.
What does this mean for SMEs?
A large part of the renewed focus on trade financing has been on the imperative to allow access to adequate levels of trade financing to SMEs. It is a well-known fact that SMEs play an integral role in international trade (particularly within developing markets) and their wellbeing is essential to promoting economic development in a sustainable fashion.
While banks and financial institutions are committed to meeting the increasing demand for trade finance solutions, SMEs haven’t fully been able to reap the benefits – primarily due to strict compliance measures. The same survey by ICC reports that SMEs comprise of nearly 53 per cent of all rejected trade finance transactions. So make sure you can present audited financial statements (minimum last three financial years), your trade licence, MOA and trade related details (trading terms with suppliers/buyers and statistical trade information).
At the same time, leading banks are also seen investing in increased awareness, enhanced end-to-end customer experiences, renewed technologies and improved transparency through active data management, ultimately leading to productive solutions for their clients.
All in all, as an SME, it’s imperative to work with a reliable banking partner using a technique designed to meet the unique needs of the business; this will give you a considerable competitive advantage. This can also result in a more robust operation that reaps the benefits of releasing cash into the system as and when required, without resorting to requests for stand-alone loans at a premature stage of your SME’s lifecycle!
Rushika Bhatia Editor
Rushika Bhatia is one of the region’s leading commentators on business and current affairs issues. She is the Editor of SME Advisor magazine - the flagship title of CPI Business. She is passionate about infographics – with special emphasis on data, research and statistics. Rushika has a Bachelor’s Degree from Indiana University, USA and is also CIMA qualified.