May 2017

When the ICC Banking Commission held its annual meeting in Jakarta, trade finance for SMEs and harnessing technology to help it get there in a world of repositioned supply chains were popular panel topics. Flow reports on some of the discussions.

ICC commission

Asia’s trade momentum

SME financing and financial inclusion with trade finance digitalisation as the connector between banks and borrowers were key themes in keynote speeches and panel sessions at the ICC Banking Commission’s annual meeting 3-6 April 2017 in Jakarta, Indonesia.

“We are at a true inflection point and we are on the verge of the digital revolution in trade finance,” declared the body’s chair, Daniel Schmand, Global Head of Trade Finance at Deutsche Bank.

In his welcome speech, Schmand made the point that there was a choice between continuing as “we have done in the past” and running the risk of being marginalised or “we become the incubator of the digital revolution which takes place as we speak, whether we like it or not”. He declared, “We have the capacity, in particular the mandate and deep knowledge to embark with you on that journey”.

This was the first time in its 80-year history that the ICC Banking Commission held the annual meeting in Indonesia, and the Asia trade opportunity illustrated by almost 600 delegates in attendance from 60 countries (55 of whom came from Bangladesh).

The role of the ICC as a rulemaking body was addressed along with where things had got to with “paperless trade” in later panel sessions, but it was the scope for supply chain finance transformation in Asia that underpinned a number of the breakout sessions.

Alliances to drive business

Trade flows in Asia are no longer about large European and US corporates sourcing from Asian suppliers. “They are setting up manufacturing subsidiaries in Asia for Asian consumers and sourcing from Asian suppliers,” said one panellist Shivkumar Seerapu, Deutsche Bank’s Regional Head of Trade Finance Asia1.  He explained, “For example you have Indian corporates selling into the Indonesian market and buying from Indonesian suppliers in local currency. This means banks have to provide multi country and multi-currency solutions”.

Seerapu went on to remind delegates of how private enterprise and governments (with Singapore being a prime example) are engaging in the fintech revolution. “We already have companies such as Amazon and Alibaba coming up with working capital finance solutions, or providing short-term working capital to suppliers selling goods on the platform.” he said. In his opinion, there is an opportunity for banks to work with platform providers of this kind with market reach into the small businesses. “I think the only way for banks to partner together to make supplier finance accessible to the SME is to use such platforms – and this is the best place in the world to do that,” concluded Seerapu.

Dominic Broom, BNY Mellon’s Global Head of Trade Sales (an ICC Banking Commission Executive Committee member) said that this was a topic “close to the heart of the ICC Executive Committee” in terms of ongoing advocacy and financial inclusion, and that one of the sparks for renewed thinking has been the role fintechs are playing in financial services. They are bringing, said Broom, “new thinking and technology to play in fields such as transaction banking and, increasingly, in trade finance”. Part of the new order is collaboration. “You are starting to see something akin to what has happened in manufacturing business and, over the past couple decades, in the airline industry, alliances of institutions who use each other’s services in order to drive business from one end user to another through the most efficient channels for their clients.”

ICC Banking Commission Advisory Board member, Asian Development Bank’s Head of Trade Finance Steven Beck added there was no question that the fintech revolution would “transform the trade finance business by eliminating tens of thousands of middle and back-office positions”. While he agreed this would drive down costs for banks, he was less convinced that it would contribute to reducing market gaps for trade finance, “particularly in the most under-served segments of the market”. As for SMEs, he was doubtful fintechs would have this impact unless, in addition to cost reduction, their contribution “facilitates a deeper understanding of the under-served, a more efficient and granular way of conducting due diligence on credit and KYC. “It’s still an aspect of fintech people are most excited about, but it is also more difficult and elusive. There is still a lot of work to do in this space,” he concluded.

Infrastructure engines such as SWIFT’s gpi were highlighted as an accelerator of transactional data transfer, “helping to lower cost while at the same time providing a greater richness of data and solutions”

Asia growth and world trade slowdown

Former Minister of Trade of Indonesia and ICC Executive Board Member Mari Pangestu summarised the current “new normal” if global trade growth having fallen below global GDP. “This is a fundamental structural change we should be concerned about and it happened because of the collapse in investment and changes in global value chains.” She also touched on the increase in protectionism and the move away from globalisation: “Post Brexit, the prospect of increased protectionism has slowed trade growth,” she said, but with ASEAN the seventh largest economy in the world if all ten member countries were put together, she went so far as to suggest that “Asia might be the only game in town for regional trade agreements”.

ADB’s Beck agreed. "Intra-Asian trade constitutes about 14% of world trade. That's a huge contribution that has claimed substantially over the past decade and no doubt the trend will continue."

WTO Economic Counsellor Marc Auboin provided more detail on trade growth inhibitors during his update where he reminded delegates that before the global financial crisis, trade had been growing twice as fast as global GDP2.  “This is because the external sector of the world’s economies were growing faster than the domestic sector. Imports and exports grew faster than consumption, investment and government expenditure,” said Auboin. He added, “2016 was one of the weakest years where global trade grew by around 1% to 1.2%, which is below GDP growth at the local level.”

Auboin went on to explain that the EU is a huge trader, so when EU consumption falls, this has a multiplier negative effect on world trade – intra and extra EU represents around 30% of world trade. Meanwhile, Asia is pushing forward and rebounding, but taking Indonesia as an example of a typical shift, as people spend more on education, rent and healthcare, they spend less on durable goods – which affects trade in manufactured goods.

While broadly optimistic that 2017 would be better than 2016, he expressed his concern about “weak investment”. “Without investment you have a strong element missing for trade,” concluded Auboin.

SWIFT’s Head of Trade and Supply Chain Huny Garg confirmed that SWIFT message data supported this. Global trade volumes for SWIFT messages (documentary credit messages but not open account trade) were down 4.7% in 2016. However, while the slowdown in Europe was 8%, it was only 2% in Asia compared with the 2015 data. “China, South Korea and Taiwan are still the largest exporters and, going West, India and Bangladesh are still in the top five,” said Garg.

Schmand reminded delegates that triple whammy of geopolitical uncertainty, sanctions and low commodity prices interrupted the transfer of natural resources wealth into infrastructure investment. “Low commodity prices, no infrastructure investment”, he said. Although oil and other commodity prices are back at a level he termed “OK-ish”, the oil industry needs, he said, to be around US£60/bbl to invest further.

He also made the point that inter-company trade does not show up in the statistics and that “most European corporates have a set-up in China or Taiwan. But banking on China is short-sighted, he said. “The global economy needs to work on a broader basis and there are some good signals – the workbench of the world is moving to Bangladesh and the shoe industry to Ethiopia”.

Watershed year

In other words, the global architecture of international trade is being reshaped by numerous dynamics, including shifting trading patterns and developing trade corridors, the increasing focus on supply chains and their supporting networks of commercial relationships, economic inclusion, not to mention the tensions between multilateralism and protectionism.

It was agreed that 2017 had every chance of being watershed year in trade.

1Moderated by TFR’s Katharine Morton, and also included Azim Walli of Bank of Tokyo Mitsubishi and Ferry Robbani of Bank Mandiri
2Moderated by Steven Beck of ADB, and also included ICC Chair Daniel Schmand,  Huny Garg of SWIFT, Oke Nurwan of the Ministry of Trade of Indonesia and Shezad Sharjeel of IFC

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