SPEECHES — DG ROBERTO AZEVÊDO
Remarks by DG Azevêdo
Ladies and gentlemen,
It's a pleasure to co-host this event on trade finance with the IFC today. Thank you for joining us.
Over the past few years our institutions have strengthened our dialogue on trade finance. This initiative today is another important addition to those efforts.
There is no doubt that trade finance is a very important policy issue.
80% of global trade transactions require some sort of financial credit or a guarantee.
This means that, to finance 18 trillion dollars in annual flows of trade, there needs to be a well-functioning trade finance market of about 14 trillion dollars.
This is about a quarter of the world's short-term capital movements. Around 9 trillion of this market is served by banks, the rest is inter-company lending.
Despite the importance of trade finance, a number of problems have emerged since the financial crisis. Supply and demand have become unbalanced. Perceived regulatory risk, combined with the low capacity of the financial sector in some countries, has resulted in big gaps in provision.
Today, the Asian Development Bank estimates that the global gap in trade finance is about $1.5 trillion. This represents the amount of trade finance that has been requested by importers and exporters, but rejected.
The World Economic Forum estimates that the trade finance gap could widen further still, reaching 2.5 trillion dollars by 2025 as supply chains move away from China to poorer developing countries.
The gap we see today already represents a significant barrier to trade. Surveys suggest that in half of the countries of the world, trade finance represents one of the top three obstacles to exporting. (Other key obstacles include transport infrastructure and efficiency of border administration.)
It is of particular concern that this gap affects developing countries and smaller businesses the most. Today, 60% of trade finance requests by SMEs are rejected.
In many developing countries, and especially in least-developed countries, the alternatives to bank financing are scarce. When rejected by banks, the transaction is abandoned.
We had a WTO team in Cambodia just a few weeks ago, helping the government look at the situation in trade finance. And it provides a useful illustration.
In Cambodia, SMEs account for 90% of exports. However, those who want to export have to pay for their inputs in advance, and lending locally is collateralized by land. This means that land-less, cashless businesses end up excluded from access to essential trade finance.
This is just one example, but the same story plays out in many other economies. Opportunities for growth and development are being lost.
So it's clear to me that action is needed. And over recent years we have been building a coalition to that end.
Philippe and I joined forces and started reaching out to the heads of the regional development banks, the Chair of the Financial Stability Board, and many others. Together I think we've taken some important steps.
Let me highlight some specific areas where progress has been made.
Firstly, we have enhanced existing trade finance facilitation programmes.
In 2016, these programmes supported around 22 billion dollars in trade transactions. In 2017, this amount increased to 30 billion. And in 2018, it is estimated that over 35 billion dollars of trade will be supported by these programmes. This would amount to an increase of more than 50% compared to just two years ago.
That is important progress.
The Asian Development Bank supported trade transactions of more than 2,500 SMEs last year – covering countries such as Myanmar, Pakistan and Bangladesh. And they continue to see very strong demand. In fact, the Board of the Asian Development Bank has increased the limit of guarantees to be provided under the bank's programme by 350 million dollars. This is an increase of around 20%.
I understand that the African Development Bank is also seeking an enhancement of its guarantee programme for trade.
In addition, we are seeing banks working more closely together to provide better coverage. In July 2017, the heads of Islamic Trade Finance Corporation and IFC met at the WTO and signed a memorandum of understanding to pursue joint financing in Africa.
All of this is very positive. We need to keep making progress on enhancing these programmes.
So that's the first area.
The second area we need to tackle is addressing knowledge gaps in local financial institutions.
Again we have some encouraging news.
We have been working with partners to pool existing efforts. Multilateral development banks have boosted their capacity building work on trade finance, in collaboration with the International Chamber of Commerce. Together they trained nearly 2,600 people in 2017, across 85 countries.
This is very impressive. I hope that we can further expand the reach of these programmes by bringing new partners on board.
And that brings me to the third area I wanted to highlight – which is increasing dialogue with regulators.
A renewed regulatory dialogue could help build capacity in smaller, local banks to respond to the trade finance demand. And it could help to encourage larger banks potentially to return to markets that they withdrew from after the financial crisis.
The heads of the FSB, IFC and I agreed that our organizations should work together to see how we could address some of these aspects.
In fact, the FSB has made progress in the past couple of years in updating and clarifying regulatory expectations – notably on anti-money laundering and know-your-customer regulations. We are also looking at the possibility of joint technical assistance missions, helping to build knowledge on trade finance and on compliance requirements.
We should also explore ways to help overcome issues related to trust and confidence-building between SMEs and financial operators. New technologies can be important here – such as blockchain for example. Innovations such as the FSB’s new legal entity identifier may also make a difference here.
So that's where things stand today.
We have made huge progress, but of course, there is still a lot of work to do.
We need to make global trade more inclusive. But trade inclusion needs financial inclusion.
So we need to continue developing concrete ideas and solutions that make a real difference.
Working with a range of partners – including the private sector – can help provide momentum to this work. So I'm glad to have you all here today.
I look forward to our discussions – and to seeing what more we can achieve by working together.