PETALING JAYA: Some 80% to 90% of the world’s trade relies on trade finance, and there is little doubt the trade finance market will experience difficult times which will contribute to the global economic malaise.
However, the trade finance business in Malaysia is still doing well.
Chuang Boon Kheng ... ‘We believe our country’s exporters are unlikely to suffer any trade finance shortage.’
According to Harm Bots, Royal Bank of Scotland Bhd’s senior vice-president, country head, global transaction services, the bank has been expanding its trade finance business.
“There is a greater need for companies to open trade lines. We have been expanding our corporate business. On the other hand, the risk profile of most companies has increased,” he told StarBizWeek.
He said access to trade and supply chain financing had become more challenging with the onset of the credit crisis, especially in the emerging markets of Asia, due to a tighter credit environment.
“While it is tougher for banks to give out financing these days, big companies are also taking the cue and spreading their wings to work with a panel of banks,” he said.
Bots said the World Trade Organisation had estimated that there was a trade financing gap of US$49bil globally, “which means there is a shortfall of funds that are required but not available from banks.”
“Right now financing from banks is not as readily available. The pool of liquidity is smaller,” he said, adding that the pricing of trade finance instruments had also risen, reflecting higher funding costs, increased capital constraints and greater counter-party risks.
He said the types of trade finance products in demand had also changed as a result of the changing financial and business landscape.
“We are seeing a shift from open account trading, which was popular when the risk of trading account defaulting was considered small, to documentary trading using conventional trade finance products – such as letters of credit, bills of exchange and guarantees – to mitigate risk.
“Open account trading represents about 70% of the market and will always play a key part but, in the short term, letters of credit are becoming an increasingly popular way to mitigate risk,” he said.
In an atmosphere of constant uncertainty and volatility there was a growing need for financial service providers to take account of the end-to-end trade cycle to keep trade flowing, he added.
The International Chamber of Commerce had observed, based on global surveys, that about 70% of documents presented under letters of credit were discrepant on first presentation, he said.
“This is consistent with our own experience in Asia and Europe where we found about 70% to 80% of the documents being discrepant,” Bots said.
In this challenging, risky environment, it was crucial to manage risk and documentation, he said. “It is crucial for exporters to understand how to conduct trade and ensure that when you ship to stressed markets you get your money back.”
ABN Amro Bank N.V. executive director, regional head, business development Abraham Chacko said it was prevalent in volatile markets for suppliers to weasel out of their contract by looking for loopholes in documentation.
He said the UCP 600 was a set of rules used globally in documentary trade and detailed knowledge of this subject was key for exporters to manage risk and working capital efficiency.
“The UCP remains the most successful set of private rules for trade ever developed,” he said.
OCBC Bank (M) Bhd head of global trade finance Chuang Boon Kheng said the general exports demand continued to be weak but the bank was seeing early signs of improvement as seen in the trends of export letters of credit flows at the end of the second quarter.
“Given the resilience of the domestic banking system and existing trading relationships, we believe our country’s exporters are unlikely to suffer any trade finance shortage induced by the ongoing crisis,” she said.
The current financial crisis had had a visible impact on several fronts, such as the overall decrease in transaction value and volume, she said, but the capacity of banks to provide trade finance continued to be strong, as often reiterated by Bank Negara.
She said based on the bank’s experience, about 50% of letter of credit document submissions tended to be discrepant and this could have an impact on discrepant bills, including delays in payment, which may result in loss of interest, withholding of payment and exploitation of the discrepancies in an attempt to avoid payment or obtain discounts in the event of falling prices on the world market or currency fluctuations.
HSBC Bank Malaysia Bhd director trade and supply chain Lawrence Yong said the bank’s trade finance business was faring well, mainly due to its ability to leverage on the group’s strength in both import and export trade financing.
“Additionally, there is an increasing focus on more value-added transactions, especially in cross-border trade financing,” he said.
In such challenging times, there is increasing demand for risk mitigation products. HSBC has the strength and expertise in designing financial structures to cover all parties involved in the supply chain.
Yong said based on prevailing statistics, on a general basis for the banking industry worldwide, the percentage of documentary mistakes/discrepancies could be quite high.
“Discrepant documents in trade transactions can delay/affect the collection of payments. It is, therefore, important that the documents are compliant and free from mistakes,” he said.