My thanks to the Chair, Ambassador Maruping, for organizing this workshop.
Let me also express my appreciation to the other speakers for agreeing to attend today’s event, including our colleagues from the IADB, IFC, AfDB and the UPU. A particular word of thanks to Roland Dominicé of the Symbiotics Group for agreeing to give an overview of trade finance from a micro-credit perspective.
I am happy to be here with you this afternoon to discuss the topic of “addressing trade finance access issues through Aid for Trade”. It gives me a welcome opportunity to reflect on the development dimension of trade finance and how our collective efforts to address access to trade finance are bearing fruit.
It is also, I believe, a good moment to reflect on the lessons which efforts in this area hold for the Aid for Trade initiative more generally.
Accessing trade finance — collateral and confidence
I see this afternoon’s workshop as a useful complement to the on-going work within the Working Group on Trade, Debt and Finance, which is the natural home within the WTO system for work on this issue.
Between 80 to 90 per cent of world trade relies on commercial financing, mostly of a short-term nature. But only a third of the poorest countries benefit regularly from the services offered by trade finance programmes.
And even where trade finance is available, it does not mean that access is universal. In practice, access varies significantly, both between countries and within countries. Least-developed countries in Africa and Asia typically fare the worst, although they are not alone. And micro, small and medium-sized enterprises (or MSMEs) face serious challenges.
In short, there are a series of “structural access” issues which affect the market for trade finance.
To understand these structural access issues, a good starting point are the submissions made during the past ten years of the WGTDF’s operations or the reports which have emerged from the past five years of the Expert Group on Trade Finance, which I have convened.
In the interests of brevity, however, let me recap the issue in two words: collateral and confidence.
Where banks and their exporter customers lack adequate collateral, markets lose confidence. In the absence of confidence, one of two outcomes occurs: a high level of risk is priced into transactions, making them unaffordable to all but a few, or no price is offered at all. The service is not provided.
The conundrum of trade finance is that it is one of the safest forms of finance around. Research by the International Chamber of Commerce, the International Finance Corporation and others has underlined just how infrequently defaults occur.
Dealing with market failure
Of course, when the spectre of global financial crisis enters the frame, as it did in 2008, collateral and confidence issues can get badly misaligned. The credit crunch which grew out of the financial crisis also drove liquidity out of the trade finance market. Collateral and confidence issues in the trade finance market risked amplifying the downturn in global trade.
Fortunately, we were able to galvanize action on these issues. One brake was the absence of market information. The WGTDF and the Expert Group that I put together have played a key role here by shedding light on the evolving market situation and recommending steps to address evolving risks.
The most eye-catching of these steps was the action taken by the London G-20 which committed to make US$ 250 billion available to underwrite trade transactions. But just as important has been our less high-profile advocacy work in other areas, such as with the Basel Committee on Banking Supervision, to ensure that rules governing trade finance are commensurate with its low-risk profile.
An important part of these advocacy efforts is of course Aid for Trade. And this afternoon, we will learn more from the practitioners: the institutions and experts who actually provide assistance to developing countries in this area.
For trade finance markets to operate efficiently, sound monetary and banking policies, transparent fiscal and financial regimes, and functioning capital and insurance markets need to be in place — as well as the necessary legal and regulatory frameworks to encourage domestic and foreign investment. That way, collateral is ensured and confidence maintained. Aid for Trade can play a catalytic role in this regard by helping address trade finance access and architecture issues.
From the pioneering EBRD facility, other multilateral development banks have initiated their own programmes. Until recently, the exception among development banks was the African Development Bank. But here I am happy to note that the banks have learnt from each other’s experiences. As the IADB and IFC learnt from the EBRD’s pioneering programme, so the African Development Bank is now learning from the experience of its counterparts in Manila. Best practice in action. And we also have the Islamic Trade Finance Corporation providing Sharia-compliant services.
Getting the mix right
Trade finance is a commercial activity. Aid for Trade can help address market failure, but it cannot, nor should it, substitute for the commercial character of the market. One of the challenges that we face is to ensure that while helping to overcome access issues, we do not at the same time crowd out the very private sector actors we need to make markets work effectively.
The fastest growing market for trade finance is suppliers’ credit. Trade finance follows the patterns of global trade. It should not come as a surprise therefore that the vast majority of trade finance operations cover trade in intermediate products — the inputs and parts which constitute consumer goods.
The heavy volume of transactions which intermediate trade needs has led suppliers and their banks to change their modus operandi. Open account formats, whereby liquidity is granted against proof of order, contract or bills of exchange are becoming the norm in trade finance. Existing instruments like letters of credit are still used, but are less adapted to the high volume of orders and deliveries generated by geographically fragmented value chains.
As trade finance adapts to these new realities, so must the Aid for Trade initiative take on these insights more generally. In the lead-up to the next Committee on Trade and Development meeting, I am asking the Aid for Trade team to consult with you on this issue. In my view, private sector development, with a focus on the development potential of global value chains, could form the central theme of next year’s fourth Global Review.
Thank you for your attention.