As Asian SME suppliers to Landmark Group get a working capital boost with Deutsche Bank/ADB supply chain finance deal, flow reviews the annual US$1.5trn trade finance gap and measures underway to reduce this
Deutsche Bank AG has teamed up with the Asian Development Bank (ADB) to provide more than US$200m a year in financing to small and medium-sized enterprises (SMEs) across developing Asia.
These are suppliers to United Arab Emirates-headquartered Landmark Group, a large Middle East retailer. Most of the suppliers that stand to benefit from the arrangement are located in Bangladesh, the People’s Republic of China, India, Sri Lanka and Vietnam.
Announced on 22 November 2017, the deal will run under the ADB’s Supply Chain Finance Program that works with corporates and partner financial institutions (PFIs) to enhance access of SMEs to working capital.
While the programme provides guarantees in supply chain finance (SCF) structures, its scope also covers funded supply chain financing as well. It is anticipated that this will help contributed to SME growth in the region and the creation of jobs in the home markets of those companies.
“We would like to thank our partners ADB and Deutsche Bank for developing this supply chain finance programme,” sayd Rajesh Garg, Group Chief Financial Officer of Landmark Group. He added, “This will enhance our relationship with Asian SME suppliers and pave the way for other such programmes.”
Commenting on the expansion of SCF throughout Asia, ADB’s Head of Trade and Supply Chain Finance Steven Beck said, “Supply chain finance is an innovative way to bring support to SMEs in emerging markets and close the financing gap that holds back growth, job creation, and helps achieve many of the Sustainable Development Goals. That’s why we’re keen to expand SCF throughout Asia.”
Trade finance gap
The Addis Ababa Agenda on Financing for Development set out in the resolution adopted by the United Nations General Assembly on 27 July 2015 highlighted the difficulty micro, small and medium-sized enterprises, “particularly those that are women-owned”, often “have difficulty in obtaining financing”. The resolution document commits the UN to “work to strengthen the capacity of financial institutions to undertake cost-effective credit evaluation”.
Deutsche Bank’s Head of Trade Finance, Daniel Schmand, co-chaired a trade finance expert group meeting with ADB’s Steven Beck at the UN in New York on 16 November. Its objective was to address the US$1.5trn shortfall in global trade finance that, according to ADB research persists despite changes in the trade finance ecosystem as a result of new market entrants in the form of fintechs and ongoing developments in distributed ledger technology.
The shortfall is based on survey results conducted by the development bank of more than 500 banks and 1,300 corporates, and the while the gap has reduced from the former US$1.6trn to US$1.5trn it is still an inhibitor of emerging economy growth. The expert group looked at how trade finance had the potential to contribute towards meeting the UN Sustainable Development Goals – with goals 8 (decent work and economic growth), 9 (industry, innovation and infrastructure) and 17 (global partnerships) being particularly relevant.
According to the ADB, 40% of global trade finance rejections are in Asia Pacific (including China), reflecting the high dependence of the region on traditional documentary credits. The development bank states, “77% of global export letters of credit originate in Asia and the Pacific”. It goes on to point out in a blog that SMEs have “relatively un-diversified sources of finance” and that “60% of firms report that once the transaction is rejected, the trade fails.” Reasons for rejection include additional collateral required, low profit margins and know-your-customer (KYC) concerns.
The group identified securitisation of trade finance assets in certain niche markets as one part of the solution and Schmand said that there needed to be “continuous dialogue” among interested parties and reminded delegates of the need for global rules so that technological advances such as blockchain could fulfil their potential.
As explained in flow’s article ‘Emerging technology revolution’ (September 2017), blockchain/distributed ledger technology is being leveraged in a product formerly known as Digital Trade Chain, and now relaunched as we.trade. This is a platform that can connect all parties involved in a trade transaction (buyer, buyer’s bank, seller, seller’s bank and transporter), that is accessible from any connected device and can be used for managing, tracking and securing domestic and international trade transactions. Deutsche Bank is one of eight banks in the consortium developing we.trade, along with IBM.
Crucially, this aims to simplify domestic as well as cross-border commerce from SMEs by enabling authorised SME clients to initiate transactions on a paperless and secure basis, and track the transaction at each stage of the transaction lifecycle through to point of settlement/payment online and via mobile devices.
Global Head Trade Finance and Chairman of ICC Banking Commission
Head of Trade and Supply Chain Finance, Asian Development Bank
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