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Industry Advocacy Required to Enable Trade Finance Market Access and Growth

trade finance

Industry Advocacy Required to Enable Trade Finance Market Access and Growth

In a whitepaper released last year, the International Chamber of Commerce (ICC) urged the trade finance industry to work together to ensure that regulation does not hinder the availability of trade finance. Olivier Paul, Director, Finance for Development at ICC, explains how a fair regulatory environment across regions is key to the industry’s growth.

In the wake of the financial crisis of 2007, regulation and compliance requirements have had the unintended consequence of negatively impacting trade finance provision. As banks adapt to ever greater compliance and regulatory requirements, they seek to minimize risk by reducing their number of correspondent banking relationships. This phenomenon, known as “de-risking”, especially affects small and medium-sized enterprises (SME) in emerging markets that need financing the most.

Accessing adequate trade finance is already tough for SMEs, who often lack the collateral, documented history of past transactions and knowledge of the financial instruments available to them. This has led to a US$1.5 trillion gap between the demand and supply of trade finance – or gap – as SMEs find themselves most neglected by financiers.

In its report, Banking regulation and the campaign to mitigate the unintended consequences for trade finance, the International Chamber of Commerce (ICC) outlines how some post-crisis banking regulation has unintentionally led to the widening of this trade finance gap. The report argues that industry advocacy is necessary to ensure fairer treatment of trade finance, as several examples already demonstrate.

Unintended Consequences and Successful Advocacy

Despite well-meaning capital and liquidity requirements contributing to the resilience of the financial system, they have also limited banks’ ability to invest in cross-border relationships, leading to concerns relating to the treatment of trade finance instruments across regions.

For example, the Basel Committee on Banking Supervision (BCBS) introduced the third installment of the Basel Accords – a set of international banking regulation recommendations – in 2010. However, the BCBS does not have the authority to enforce its recommendations, leaving national – or supranational – institutions to write the recommendations into law.

What’s more, these recommendations allow significant room for interpretation, allowing each jurisdiction to adapt them accordingly. This results in inconsistencies across jurisdictions, leaving emerging market banks subject to the resulting ambiguity.

In particular, the Net Stable Funding Ratio (NSFR) for financial instruments supporting trade finance caused concern among many industry practitioners. The European Commission and Council, as well as the European Banking Authority, recommended that NSFR have a variable rate of 5%-15% depending on the maturity of the transaction. In many jurisdictions outside the European Union, however, the NSFR rate is either flat – at a maximum level of 5% – or non-existent.

This represented a clear disadvantage, and one affecting the whole market. As such, the industry-led by ICC – advocated for a fairer treatment of NSFR ratios for trade finance. This resulted in a significant reduction in the spectrum of rates which now stand at 5% for a transaction maturity of under six months, 7.5% for a transaction maturity of under a year, and 10% for maturity of over 12 months.

Early Start

To ensure the highest success rate, it is essential that discussions between industry members and regulatory authorities take place at the earliest stages of the decision-making process. With regulatory adoption and implementation processes taking up to a decade in some cases, the industry must work together with regulators and maintain a proactive approach to promoting fair regulatory treatment of trade finance.

The document outlining the finalization of the Basel III framework was published in 2017 but will only be enforced between 2022 and 2027. Action is needed today if the industry’s voice is to be heard and acted on.

Banks have already identified several areas relating to trade finance – such as the treatment of unconditionally cancellable commitments, the minimum durations to calculate risk-weighted assets and the treatment of subsidiaries in large groups – where discussion is needed. Over the next few years, banks and industry bodies will need to engage with these topics, as national regulators translate the finalization package into national legislation.

Next steps

Some 80% of international trade flows involve the recourse to a financial instrument, according to the World Trade Organization. To encourage the use of trade finance worldwide – and ensure the widest market access especially for SMEs – harmonization of regulations will be required.

Much work has already been done to promote the fair treatment of trade finance within banking regulations. However, regulations will not adapt unless all stakeholders voice their concerns. It is up to the entire industry – and ICC, as the largest and most authoritative voice in trade finance – to be at the forefront of this work.


The International Chamber of Commerce (ICC) Banking Commission’s 10th annual Global Survey on Trade Finance reveals that digitalization of the sector is increasing, although obstacles remain in the path toward efficient and paperless trade finance.

The survey, which gathered insights from 251 respondents in 91 countries, indicates that a key barrier to digitalization is the lack of standardization throughout the sector.

This indicates work is still needed to drive forward the digital agenda, although progress to date has been positive.

Download the full ICC Global Survey on Trade Finance at:

The move toward paperless trade finance has been a long-standing objective for many in the industry. And, as our 10th annual survey indicates, digitalization is beginning to gain significant traction. Some 45 percent of respondents to this year’s survey indicated they intend to prioritize digital trade and the development and deployment of platforms over the next one to three years.

In a related development, interest in supply chain finance (SCF) is also gathering momentum. SCF, which usually involves financing through an online platform, is providing a growing number of banks with a strong alternative to traditional trade finance. What’s more, some 56 percent of bank respondents that offer SCF stated they had already developed their own proprietary systems rather than rely on an outsourced platform.

Nonetheless, the benefits of implementing technology solutions in trade finance processes have not been felt by all banks, with only 9 percent of respondents agreeing digitalization had improved efficiency to date. Divergent standards are cited as a key reason for the lack of improvement. This is apparent within SCF platforms and their lack of common standards for exchanging data.

As a result, some 32 percent of respondents with proprietary systems reported issues due to the lack of interoperability. Nevertheless, over 60 percent of banks said they were moving toward further digitalization, while just 7 percent indicated they had no plans to implement technology solutions in their trade finance offerings.

Enduring Problem: The Trade Finance Gap

Certainly, digitalization of the trade-finance sector is aimed at improving efficiency and processes, which should allow for greater trade finance capacity. And that should help relieve one of the greatest concerns for trade finance: the trade finance gap.

The difference between the demand and supply of trade finance currently stands at US$1.5 trillion, according to figures from the Asian Development Bank. What is more, some 22 percent of respondents expect the unmet demand to increase in the next 12 months.

Nonetheless, the survey indicates a positive outlook on the current and future provision of trade finance. Two thirds of respondents declared the amount of traditional trade finance they provided in 2017 was higher than the previous year. SCF provision is also increasing, with 43 percent of respondents indicating their SCF business grew in the past year.

In total, respondents to the survey provided over US$4.6 trillion in traditional trade finance and US$813 billion in supply chain finance last year. Over the next one to three years, some 41 percent of respondents expect the trade-finance gap to shrink.

Regulation: Key Barrier to Provision

Unfortunately, regulation remains one of the major barriers preventing the bridging of the trade-finance gap. The survey revealed that regulatory compliance requirements are still inhibiting banks’ ability to provide trade finance.

Some 90 percent of respondents highlighted regulatory compliance as a major obstacle to growth. Know Your Customer and Know Your Customer’s Customer (KYC/KYCC) obligations remain an issue for trade finance providers, with 18 percent of respondents to the survey citing compliance with KYC/KYCC regulations as the reason for a decrease in their provision of trade finance. What’s more, some 40 percent of respondents revealed the requirements were already a persistent challenge for SCF delivery.

The survey also outlines regulation to counter the financing of terrorism (CFT) as a key concern. Some 56 percent of respondents have serious concerns about the impact of CFT regulations on their ability to provide adequate trade finance in support of cross-border trade.

While practitioners recognize the need for adequate compliance measures, the lack of clarity surrounding regulatory expectations has led to overly stringent, self-imposed industry measures. Fulfilling all these regulatory requirements consequently represents an unnecessarily resource and time-heavy burden for banks.

Looking Ahead: What to Expect?

Despite these issues, the survey revealed a generally positive outlook on the future of the trade-finance sector.

Some 73 percent of respondents to the survey expect trade financing to grow over the next 12 months. Banks, especially, see the potential for SCF, with 91 percent of bank respondents expecting revenue growth from SCF in the next one to three years.

Regarding the potential for future digitalization, respondents agree that continued investment is necessary, with 46 percent believing the long-term focus should be on implementing and leveraging the opportunities from new technologies.

Importantly, the implementation of common standards is necessary to increase efficiency and market capacity, while enabling cost-effective due diligence.

Olivier Paul is head of Policy at the International Chamber of Commerce.