Boost trade finance for Asia's poorer countries and smaller companies

TRADE finance is the lifeblood of international trade which has powered Asia's economic growth over the past decades. The availability of trade finance fell sharply during the global financial and economic crisis - and the hangover is still being felt several years later. The worry from a development standpoint is that Asia's poorer though economically promising countries and smaller firms across the region are especially struggling to obtain finance from commercial banks to guarantee trade transactions and manage trade risks.

Yet, expanding access to trade finance - and making it more inclusive - is an excellent business proposition. Asia's exports and imports nearly quadrupled in value since 2000 and intraregional trade - accounting for some 55 per cent of the region's total trade - is growing briskly. But in many cases, international banks continue to shy away from some developing countries in Asia. The Asian Development Bank (ADB) estimates the shortfall in trade finance in the region at US$425 billion.

Greater recognition of the low risk associated with trade finance is needed in the banking community. The evidence for this is strong: the 2013 International Chamber of Commerce Global Risks Trade Finance Report shows average default rates at an extremely low 0.02 per cent on a transaction basis, a pattern that held even during the global economic crisis. A recent evaluation of ADB's trade finance programme showed zero defaults. A well-standardised framework for this type of financing, collateral underlying trade transactions and short tenors are the main reasons why trade finance is a safe bet, all things considered.

Multilateral development banks engaged in Asia have significantly expanded their trade finance programmes in response to tighter credit conditions and financial shocks. ADB and other development banks are working to improve regulatory conditions for trade finance, including on the recognition of the relatively low risk of trade finance in the Basel III global banking rules and the provision of market information.

POWERFUL DRIVER FOR INCLUSIVE GROWTH

The trade finance programmes of multilateral development banks now need to be focused on the region's poorer economies, such as Cambodia and Myanmar, even as larger economies such as Pakistan and Vietnam continue to face challenges and need support. Special attention is required for smaller banks with limited banking networks, and small and medium-sized enterprises (SMEs). Ensuring greater levels of liquidity to support these businesses could be a powerful driver for more inclusive growth, as some 60 per cent of Asia's jobs are in this segment. But it is precisely smaller businesses that, especially during downturns, have a hard time getting letters of credit for imports - a widely used trade finance instrument in Asia - confirmed by international banks.

The trade finance programmes of ADB and other development banks can demonstrate to the wider banking community the benefits and low risk of well-managed trade finance. Singapore's large banks are well positioned to become door openers given the significant concentration of the region's financial activity there, and Singapore's trade-based economy.

Companies are the other side of the trade finance coin, but smaller ones often lack information on trade finance services. Here, there is a role for development banks to improve awareness of trade finance, and to use their knowledge resources to better understand the extent to which the large gap in the supply and demand for trade finance in Asia is inhibiting trade. Indeed, a reason why the already large gap may widen is that these companies are becoming more integrated into regional and global value chains.

Realistically, businesses and banks in Asia's poorer but often rapidly growing economies will continue to struggle even during normal times to obtain trade finance from private sources, making it imperative that development banks continue with their trade finance programmes and, where necessary, scale them up. Doing so where possible in partnership with others would stretch precious development resources.

Although trade is shifting to an open-account basis in many parts of the world, in Asia it continues to be financed using traditional transactions based on trade finance instruments, such as letters of credit for imports. The stability gradually returning to parts of the global economy is an opportunity for governments and their development partners to dedicate resources to build safety nets for trade finance to prepare for the next downturn.