A survey on trade finance by Clyde & Co in association with Commodities Now magazine.
With the world's population predicted by the World Trade Organisation (WTO) to be in excess of nine billion by 2050, international demand for commodities is likely to increase significantly. Enhanced trade flow is therefore essential for future world prosperity and stability, and will be significantly hampered without access to adequate trade finance.
The availability of loans to support commodity producers, processors and traders is particularly important to continue the flow of essential commodities required to meet the needs of the world's population. It is therefore a concern that since the global financial crisis in 2008, there has been a dramatic decline in the availability of trade finance. In fact bank-led trade finance has roughly halved from an estimated USD 14 trillion at its peak, to near USD 7 trillion today.
It seems that a combination of bank balance sheet restructuring after the global financial crisis, funding strains during 2011-2012 and more stringent customer and capital regulations has suppressed both banks' capacity and their appetite to lend. This means that trade finance in any form is proving more difficult to access than ten years ago, leaving a funding gap – particularly for the smaller producers and traders.
While new solutions are emerging, particularly in the Middle East and Asia, they are not seeing widespread adoption or proving entirely satisfactory for lenders or their customers – many of whom are being forced to rely on a complex patchwork of funding options to meet their needs.
There is an argument that, as demand rebuilds, the time is right for banks to redress the risk balance caused by over-exposure to synthetic trades and to return to traditional trade finance linked to actual underlying transactions. However, it seems there is a continued reluctance on the part of banks to venture back into the commodities business in anything like the numbers previously seen, a gap which alternative lenders are keen to fill. Potentially, improvements to trade finance documentation as part of the LMA framework might help facilitate the kind of closer bank-trade relationships and the more flexible, bespoke solutions that borrowers are keen to see.
Whatever the answer to bridging the trade finance gap, we believe the solution is increased dialogue, closer co-operation and a willingness to innovate. It is clear that new financing relationships need to be developed if commodity trade financing is to sustain future economic and population growth.
The following report details responses regarding the latest trends in trade finance from a wide range of producers, traders and financers. We would like to thank Commodities Now for their support in completing this survey.
Banks are becoming less active
Banks have long been involved in providing trade finance for commodity producers/suppliers, processors, traders, off-takers and end-users. Their involvement has spanned the entire supply chain, from financing the production of goods, through to tolling, transportation, storage, distribution and sales finance. Large commodity trading houses, whilst not financial institutions, have also been contributing an increasing share of lending to the commodity cycle.
There is no doubt, however, that banks have reduced their participation in this market over the past eight years. From providing up to 80% of the financing for the trading of commodities worldwide, they have scaled right back to around 50%, according to Bank for International Settlements estimates1, making trade finance significantly more difficult to access, particularly for the smaller producers and traders. This is certainly corroborated by our research, in which over three quarters of respondents said that trade finance was harder to access than ten years ago.
A combination of barriers
The combination of bank balance sheet restructuring after the global financial crisis, funding strains during 2011-2012, and more stringent customer and capital regulation appears to have suppressed both banks' capacity and their appetite to lend.
In our survey of finance providers, commodity traders and commodity producers, four fifths of our respondents identified reduction in the banks' willingness to lend, greater regulation and costs as the main factors to market contraction.
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