Trade Finance Constraints Harmful to SMEs
Complying With Sanctions and Counterterrorism Regs the Major Challenge
The International Chamber of Commerce’s 10th annual Global Survey reveals that counter-terrorism and other international regulations are significantly inhibiting the ability of SMEs to trade internationally.
According to the latest ICC Global Survey – of 251 banks in 91 countries – trade finance remains constrained, with a key reason for the constraints being lenders’ requirements to comply with international regulations. Of particular concern are regulations countering the financing of terrorism (CFT) as well as international sanctions stipulations. Some 87 percent of the respondents reported that complying with counter-terrorism and international sanctions regulations is a “major challenge” with respect to their ability to offer trade finance. And that this is especially harmful for small and medium-sized enterprises (SMEs).
The constraints arise from the huge increase in resources banks must invest to ensure compliance with a wide range of often inconsistent regulatory requirements and expectations across jurisdictions. Perhaps more challenging, the interpretation of regulatory requirements can vary between senior policymakers and examiners assessing compliance. The effect is that banks apply large internal resources and incur cost to ensure compliance with standards that are at times unintended and unnecessarily stringent – a burden banks increasingly consider only worthwhile for their largest clients, leaving SMEs unsupported.
“Everyone accepts that access to finance is critical for business growth, particularly for SMEs,” says Chris Southworth, ICC United Kingdom’s Secretary General. “Yet here we see an example of well-meaning regulation having unintended consequences in the real economy. So while innovation and digital trade continue to support financial inclusion for SMEs by providing new ways of delivering finance to business, a more proportionate regulatory regime for the treatment of low risk trade finance would unlock more resource to fund trade, which will benefit the global economy.”
World Trade Organization Director General, Roberto Azevêdo, added his concern regarding financial inclusion for SMEs, including micro companies with less than 10 employees. “Around half of MSME requests for trade finance are rejected by banks,” he said, “and in more than 70 percent of the cases they seek no alternative financing, simply because it is not available. Persistent gaps in trade finance can mean exclusion from the trading system and that major trade and development opportunities are missed.”
The Global Survey concludes that SME exclusion is a major cause of the “trade finance gap” (calculated by the ICC and Asian Development Bank at $1.5 trillion in 2017) between the demand and supply of trade finance.
“This year’s Global Survey consistently shows that regulatory issues are among respondents’ top concerns,” wrote John Denton, General Secretary of ICC in the survey’s foreword. “Looking at further research from ICC and other actors, it is also clear that some financial regulations governing banks have had the unintended consequence of widening the trade finance gap, making it more difficult for smaller companies and traders in the developing world to access much needed financing.”
However, the Global Survey findings also reveal strong positivity among trade-supporting lenders with respect to trade finance growth trends. Nearly three quarters of banks presented an optimistic outlook for the next 12 months, with respondents headquartered in Africa and Asia Pacific the most positive, at 89 percent and 81 percent respectively.
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