A lack of trade financing – the loans and guarantees needed to support import and export transactions – for international deals within developing Asian countries such as Cambodia is restricting opportunities for growth, a survey by the Asia Development Bank (ADB) has found.
Of 106 banks surveyed, those within developing Asian economies had rejected $425 billion of a potential $2.1 trillion requested in trade finance in 2011.
Additionally, 138 companies who were users of trade finance said that a 10 per cent increase in trade finance would enhance both their production and staff numbers by five per cent.
ADB deputy country director Peter Brimble said trade finance is critical in supporting the export transactions of Cambodian small and medium-sized enterprises (SMEs), which do not have access to financing from parent companies abroad.
“Such locally owned firms need trade finance to cover the costs of purchasing raw materials and parts to support their production, prior to receiving funds or letters of credit from abroad,” Brimble said.
The survey found that for international banks the most common factors restricting trade finance approval were the poor performance of the issuing bank, the low ratings of developing countries and regulations that can restrict credit.
Grant Knuckey, chief executive of ANZ Royal Bank, one of the largest trade finance banks in Asia, acknowledged there are barriers to overcome, and said that, while guarantees are useful in reducing risks associated with lending, there is still more work to do.
“General credit guarantees are often sub-optimal for banks because they only make sense for credits that a bank would not be prepared to finance on a stand-alone basis, and hence require a bank to effectively lower its lending standards to utilise,” Knuckey said.
Cambodian-based SME-development consultant Lun Yeng said that SMEs would need support from government and multi-national development banks to assist with the capital needed to acquire funding.
“The government and development agencies, for example the ADB, can put in some money as a guarantee for the commercial bank, while the SME can contribute 25 per cent as well as a good business plan and contract of sale,” Yeng said.
Brimble said Cambodian exporters are not used to accessing trade finance, while Cambodian banks often perceive it as too risky to lend.
In partnership with ACLEDA Bank, the ADB fills trade finance gaps by providing guarantees or loans themselves.
“Eventually, firms that develop the capacity to acquire trade finance and use it to expand their operations will grow faster and become more resilient to market shocks and shifts,” Brimble said.