Inclusive and green is the way to go

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Optimism about the prospects for a rapid recovery in world trade has been boosted, with merchandise trade rising sharply by 15% in the first quarter of 2021. According to a World Trade Organization estimate, trade volume global merchandise market is expected to increase. by 8% in total in 2021.

The trends for 2020 and 2021 clearly show massive slowdowns and fluctuations in response to the multiple waves of Covid-19 and the associated economic and logistical challenges.

Therefore, recent trends in trade recovery have notable implications for trade finance activities by banks and financial institutions. However, there are some key factors that need to be addressed meticulously to achieve sustainable trade finance in this new business and economic environment.

Access to trade finance can enable small and medium-sized enterprises (SMEs) to participate in international activities through exporting and participation in global value chains. However, it is well known that SMEs face several challenges or obstacles inherent in their access to finance.

In the context of trade finance, exporting and importing SMEs are exposed to significant risks as most SMEs have limited capacity and resources to engage in a “due diligence” process. SMEs are also often limited in working capital and prefer payment before shipment or purchase of raw materials to meet expenses for the production of goods or services.

In practice, SMEs need special treatment from policymakers and financial institutions to address financing constraints and ensure adequate access to trade finance.

The SME trade finance gap has widened in the face of the challenges of Covid-19. Before the coronavirus pandemic, the trade finance gap facing SMEs was estimated at $ 1.5 trillion; and this gap could reach 2.5 trillion dollars by 2025, according to an estimate by the World Economic Forum.

The trade finance gap for SMEs in developing countries has widened dramatically, where women-owned businesses have been the worst off.

In the context of Bangladesh, the volume of imports was significantly low during the first containment (April to May 2020). After that, the import volume slowly rebounded from June 2020. The country has seen substantial growth in import volume since the start of 2021.

However, the lion’s share of imports were made by the country’s large companies. The participation of SMEs was relatively low.

The volume of exports shows a positive growth because the exporters were supported in time by the stimulus packages. The geopolitics between China and the United States has also played a supporting role in favor of our exporters. But it is the big exporters who seem to be the first beneficiaries. Small traders were already struggling and Covid-19 created another commercial services gap for them.

Green strategy

The greening strategy in trade finance has received renewed attention in the context of the Covid-19 crisis. As a result, banks are required to support sustainable trade and to integrate sustainability into their trade finance policies which broadly include environmental, social and governance issues. Several European banks are leaders in this area, three quarters of them having a sustainable development strategy.

The most recent International Chamber of Commerce (ICC) trade finance survey reveals that green and sustainable strategies have been adopted primarily because of credit and reputation risk (38 percent), customer expectations (35 percent) and regulatory requirements (24 percent).

The ICC survey also reported on sustainable development priorities and interventions in different forms adopted by a considerable number of global banking institutions. 63% of the institutions surveyed focus on climate change in their financial products, 58% on the environment, waste management and pollution, 45% on support for sustainable supply chains, 39% on projects of financial inclusion, 36% on social issues, 31% on awareness of trade finance sustainability, and 14% on related sustainability reports.

In accordance with the general policy framework, trade finance activities should integrate environmental risks into their operations. Therefore, it is not only lending instruments to finance green projects, but also sustainability related trade finance products: international bank guarantee, letter of credit and supply chain products.

In the context of Bangladesh, the Green Transformation Fund is a relevant initiative taken by Bangladesh Bank in 2016. In April 2020, Bangladesh Bank expanded the facility by adding € 200 million to the fund. This long-term financing is admired by all manufacturing and industrial companies for importing eco-friendly and energy-efficient / green machinery and accessories (including purchase credit).

Digitization efforts

Once accomplished, the benefits of digitization efforts will be many. Digitization and adoption of technology are expected to bring incredible changes in banks’ approaches to trade finance with remarkable implications for their sustainability approaches.

According to a recent survey of major banks, there are common expectations of more than 10% cost savings through digitization over the next five years. The survey also observed that digitization could improve the quality of customer service and secure superior risk mitigation benefits, which could improve the future of trade finance. This means that banks capable of implementing digital solutions would control a higher market share and have a competitive advantage.

It is also estimated that the global trade finance gap could be reduced by $ 1 trillion, if digital ledger technology is used effectively in the near future. In addition, digitization can increase SMEs’ access to trade finance by improving the efficiency of processes and the quality of trade finance.

Additionally, digitization efforts could be a significant force in solving Know Your Customer (KYC) challenges and associated costs. Replacing the current paper model with an automated, fast and secure process can significantly reduce costs.

Innovative solutions based on distributed ledger technologies can play an important role in this transition. As in several other global economies, Bangladesh banks are experimenting with blockchain to facilitate business services.

In August 2020, Standard Chartered Bank issued a letter of credit (LC) for a ready-to-wear exporter on a blockchain network. In November 2020, HSBC Bangladesh executed the very first cross-border blockchain LC transaction in Bangladesh – a development that would reduce LC processing time from 5 to 10 standard days to less than 24 hours. In addition, Prime Bank becomes the first Bangladeshi bank to run LC blockchain interbank transaction partners with HSBC Bangladesh.

Closing the trade finance gap and managing environmental and sustainability concerns should be the next agendas for banks providing trade finance. To achieve this, it takes time to adopt relevant policies and operational strategies. Adopting the right technology might be the most crucial way to ensure inclusiveness and address sustainability concerns in the trade finance sector.


The author is a professor at the Bangladesh Institute of Bank Management (BIBM)


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