International trade is heavily dependent on trade services as it involves certain forms of commercial risks that are often assumed by banks. These services by banks become essential since importers and exporters are often unwilling to bear these trade related commercial risks. It is well recognised that expansion of trade service activities by banks and financial institutions are connected with the expansion of cross-border trade flows and both developed and developing countries have been playing increasingly prominent role. There are indications that following a downward trend and slower pace of trade flows in the aftermath of global crisis, world trade growth strengthened in recent time. The most recent International Chamber of Commerce (ICC) survey of 2014 provided us encouraging data in which it has been reported that the availability of trade finance increased by value though the changes are marginal.
'Trade finance' is at the heart of trade services as part of which banks facilitate transactions between exporters and importers. There are also very common practices of commercial trade finance (non-bank trade financing), in which importers and exporters extend credit to each other. Even in such non-bank trade financing, banks do play role in transferring funds and other support services. In many instances banks are also legally obliged to undertake responsibility on behalf of the policy makers and traders. Trade services are the lifeline of trade, and trade finance and related services contribute to international trade in four areas: payment facilitation, risk mitigation, and financing and the provision of information about the status of payments or shipments. Trade services by banks are also relevant for strengthening business relationships; bringing reliability and speed in documentation and payments in international business; and offering appropriate expertise to help improve earnings and develop opportunities in the global market place. Every trade service transaction by banks involves some combination of these four elements, adjusted to suit the circumstances of a particular market or of a trading relationship. It is to be remembered that alongside safe features, challenges are to be kept in mind while offering trade services. Among loans, trade finance is seen as a relatively safe and liquid asset, with low default rates. However, since trade finance is self-liquidating and short-term in nature, banks can run down their trade finance portfolios quickly in times of financial stress.
Trade services products or services include the products or services related to trade payment and trade finance. There is no doubt that sometimes it is hard to make distinction between trade payment and trade financing. Some commonly used trade services techniques in international trade are cash in advance, open account, documentary collection, documentary credit (LC), standby LC or other bank guarantees, bank payment obligation, supply chain financing, factoring, forfeiting etc.
In every country, trade services operations of banks are subject to special regulations and restrictions. Alongside ensuring satisfaction of the clients, the efficiency level of bankers in trade services is connected with the compliance of these regulations and restrictions. It is widely recognised that credibility of the traders and trade service providers or banks are important factors that determine the availability, quality and efficiency of trade services; and efficiency in trade services affects trade flows and bargaining power of the traders. Adequate and reliable information are crucial in this connection.
Expansion of trade services banks are directly related to the expansion of cross-border trade activities. Following global crisis of 2008-09, Eurozone crisis in 2011-12 also affected global trade. Trade growth over the last few years has been heavily fuelled by weak overall demand in high-income countries. At the same time, in many countries, government spending and fiscal stimulus have favoured domestic products over imports. Developing countries have mitigated the decreased demand from the North by trading more with each other. The year 2013 came across some positive changes as USA and EU countries began to report stable growth, coupled with growth in import demand. As the US remains the world's largest importer and the Euro area persists as the most important trading partner for many developing countries, their recovery started pushing global trade moving forward. According to most recent ICC survey, the global trade is expected to gradually strengthen through 2016. This trend should occur on the heels of steady recovery in import demand in the US, China, Indonesia and EU, as well as continued export success amongst developing countries as they continue to trade more amongst themselves. Exporters of manufacturing products and services such as China, Malaysia, the Philippines, and Thailand, as well as economies with relatively low unit labour costs and competitive exchange rates might be benefitted most from this projected trade increase. Bangladesh might be greatly benefitted alongside Cambodia, Lao PDR, Myanmar, and Vietnam out of the trade increase.
Global trade changes were accompanied by parallel developments in trade finance and other trade service activities. In the context of overall trade finance activity the reported figures by ICC are encouraging. About 60 per cent of respondents reported an increase in overall trade finance activity. As a collective group it was interesting to see that approximately 45 per cent respondents reported an increase in demand for 'bank undertakings' which encompasses commercial letters of credit, bank guarantees and standby letters of credit.
On the import side, as a whole the use of documentary credit decreased. Commercial Letters of Credit - down from 44 per cent in 2011 to 39 per cent in 2012 and 36 per cent in 2013, as observed in the most recent ICC survey. Consistent with trends on the export side, respondents have reported an increase in the demand for guarantees to cover the potential risk of default under commercial contracts. Practices of guarantees increased from 16 per cent in 2012 to 20 per cent in 2013. The use of Standby Letters of Credit also witnessed a small increase from 8 to 9 per cent in between 2012 and 2013.
In case of export trade, commercial letters of credit as a proportion of overall trade finance products are in a slow but steady decline from 44 per cent in 2011 to 41 per cent in 2013, as shown in the ICC survey. This slow downward trend is consistent with the reported slow shift to open account or transactions structured with the risk of default covered by an independent guarantee or standby letter of credit. The growth in cross-border factoring has again been driven by an increase in open account trade, especially from suppliers in the developing world, pushed by the major retailers/importers in the developed world.
The ICC Survey observed significant differences among regions in terms of use of different payment/financing techniques. Asia-pacific region extensively rely on LC that registered highest volumes of letters of credit use covering 68 per cent of imports and 75 per cent of exports. In the context of Bangladesh, trade is the key component of international business activities, and trade facilitation is directly connected with the country's global integration. As part of trade facilitation, banks facilitate payment and finance services to the traders and thus contribute in growing global trade integration of Bangladesh and other economies of the world. As in most Asia-pacific region, LC is the most widely used trade finance/payment technique to facilitate trade in Bangladesh.
Available published data identified significant gap in the provision of trade finance, especially for the growing SME (small and medium enterprises) sectors in emerging markets. In 2014, ADB in cooperation with partner organisations, surveyed financial service providers and found that trade finance gaps are a persistent feature of the global trade landscape. Banks reported a global rejection rate of trade finance applications of 29 per cent. Geographically, much of the gap in trade finance happens within Asia where more than 90 per cent of all firms are SMEs. Malpractice in Trade Services is a critical challenge. Trade-based money laundering is a critical area of malpractice which can be accomplished through the misrepresentation of the price, quantity or quality of imports or exports. Though the malpractices (especially fraudulent activities) in trade services are not very frequent, these could, however, prove to be very costly for banks and the concerned parties. Some of the requirements of regulatory compliance related to Anti-Money Laundering and Know Your Client (KYC) are creating significant impediments to their provision of lines of credit, as claimed in some recent surveys. Globally, Asia and Africa were said to be most negatively impacted. There are opinions that implementation of Basel III regulations is to some extent or a large extent affecting the cost of funds and liquidity for trade finance. Moreover, sanctions may restrict banks' ability to perform their role as trade service providers and may confront with different sanctions regimes imposed in the multiple jurisdictions.
Dr. Shah Md. Ahsan Habib is
professor and director, Bangladesh Institute of Bank Management (BIBM). ahsan@bibm.org.bd
Trends in global trade service activities by banks
Shah Md Ahsan Habib | Published: June 23, 2015 00:00:00 | Updated: November 30, 2026 06:01:00
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