Oval Dialogue on Trade Finance in Emerging Markets

February 25, 2015 London
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The world economy and trade has been grappling with the aftermath of the 2008 financial crisis. It is only recently that there has been a modest trade growth of 4.7%. Nevertheless this growth remains below the 20-year average 5.3% and is a result of diminished import demand in developed economies coupled with moderate import growth in developing economies. Although, developed countries are better equipped to withstand the paralyzing effects of financial crises, developing economies on the other may suffer a more significant socio-economic decline.

To this extent, institutions both private and public must look towards exploring measures, which may be implemented to boost global trade and allow the developing economies to cope with the turbulences of financial downturns. In this regard, there is empirical evidence available to suggest that trade finance affects both export and import volumes positively. However, there is a need to evaluate the various forms of trade financing that are currently available to stakeholder institutions and assess ways in which it can be diversified and strengthened to provide the much needed export impetus to developing countries in particular, and boost to global trade in general whilst withstanding times of economic turmoil. Although trade finance is generally regarded as a necessary tool for global trade, there is limited understanding of the processes outside the community of trade finance providers. Recently, there has been a clamour for introducing structural changes within the trade circuit with the objective of increasing non-bank participation, thereby making the market more resilient. However, there remain significant potential risks that would come with such a move.

Given this backdrop coupled with scarcity of trade finance that is available for developing and low-income countries since the Asian Financial crisis, there is a burgeoning requirement to re-establish networks of stakeholders involved in the market to tackle the challenge of diminishing trade flows.

Oval Observer Foundation is delighted to convene a Dialogue on Trade Financing for Emerging Markets in collaboration with Trade Out of Poverty. The Dialogue aims to share perspectives on the impact of trade finance during recent bouts of liquidity crunch in the global markets and what structural changes must be introduced to make this market more resilient. The underlying theme of the Dialogue is to exchange and consolidate ideas on how the trade finance market can be made more robust for sustaining steady trade flows and helping developing economies in adapting to the volatility of global markets, and international trade.

Key Themes

  • New trade finance tools for increasing and diversifying export base
  • Enhancement of data sets to assess the impact of trade finance. Rethinking market intelligence
  • Enabling competition and entry to a wide pool of actual and potential providers
  • Mark Arthur :: Senior Manager,Ghana International Bank

    Mark Arthur is the Senior Manager of the International Trade Finance Team at Ghana International Bank (GHIB). GHIB focuses on four key areas: correspondent and corporate banking; treasury services; international trade finance; and transaction services. Its operations are geared to supporting the economies of Ghana in particular and the continent of Africa in general.

  • Robin Gwynn:: Business Consultant on Africa

    Robin Gwynn is a former senior British diplomat specialising in Africa, with 25 years’ track record in policy-making, negotiating and operational delivery at the heart of government in the UK and overseas. He is now working in the private sector as an advisor on strategic and commercial opportunity and risk in Africa, including with Lonrho. During his diplomatic career he was appointed twice to represent the UK as a London-based Special Envoy – leading UK efforts on behalf of climate vulnerable countries, and working for peace between Sudan and South Sudan. His last roles in government were as FCO Additional Director for Africa, and carrying out a Review for UKTI of Commercial opportunities on the continent. He is familiar with the wider operations of Government and international work including in the EU and UN. He has lived and worked in Kenya, Ghana and Nigeria, and is a strong advocate of the positive impact that business can have in Africa.

  • Brian Strugess:: Managing Editor, World Economics

    Brian Sturgess is the Managing Editor of World Economics, www.worldeconomics.com a part-time consulting position he has held since 2009. His responsibilities for World Economics include commissioning, reviewing, editing and copy-editing articles for publication in the quarterly journal and writing articles for the website. He has just completed a six month assignment as an editorial consultant to the Islamic Development Bank in Jeddah which involved editing the 2013 (1434H) Annual Report and writing a booklet and an ebook commemorating the 40th anniversary of the Bank’s existence He has been a lecturer in economics at the University of Nottingham, at City University Business School in London and at BPP University Business College and he has published widely in books, academic articles and in the press on various areas of industrial economics, macroeconomics, banking, finance and economic data. He has been a Visiting Professor at the University of Erlangen-Nurnberg. He spent nearly 20 years working as an equities investment analyst at County Natwest, Barclays Bank, Baring Securities and ING, but he has also worked as consultant with a number of merchant banks and media companies, including the BBC, the Telegraph Group, the World Advertising Research Center, Tyne-Tees Television.

Research Papers on Trade Finance by Brian Sturgess

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The Oval Observer Foundation [Foundation] offers a strategic engagement and action platform for economic, social, and political issues related to emerging markets and high growth nations. In pursuance of its mandate, the Foundation explores trade and finance issues in the emerging economies as two of its core thematic research fields. Given the centrality of trade finance in economic discourse and the accessibility problems faced by emerging markets, the Foundation convened a dialogue on Trade Financing for Emerging Markets in collaboration with Trade Out of Poverty [TOP]. The dialogue was chaired by the Rt. Hon. Peter Lilley MP, founder of TOP and a former UK Secretary of State for Trade and Industry. The lead discussants for the dialogue were Mark Arthur (Senior Manager,Ghana International Bank), Robin Gwynn (Business Consultant on Africa) and Brian Sturgess (Managing Editor,World Economics). The participants at the discussion included academics, legal, economic, financial and industry experts. The dialogue was held as African nations prepare their 10-year review of progress towards the African Union’s “Agenda 2016” with its strong focus on trade issues. Sanmit Ahuja, Vice-Chairman of the Foundation, introduced the event.

The key problems identified by the participants included the following:

  • Withdrawal of Major Banks:Since the global recession, international financial institutions have steadily withdrawn from emerging and non-core markets. Given the higher capital adequacy requirements for trade finance products, this market has been particularly affected. More stringent regulation imposes a heavy burden. This is compounded by the limited capacity of local banks or private sector institutions to fill the financing gaps at a national or regional level, particularly given a lack of the necessary manpower and skills to deal with compliance and manage the regulatory burden.
  • Problems of Scale: Many emerging economies, particularly Africa, are characterised by a lack of bankable scale (98% of African farmers own no more than 3 hectares) and a proliferation of informal and un-banked enterprises which lack the skillset required to produce business plans, approach banks, regulators and government agencies.
  • Awareness and Institutions:There is no overall understanding among potential investors or those seeking trade finance of the range of funding instruments available in Africa and elsewhere. There is a lack of progress among smaller countries and international assistance for them in setting up corrective institutional frameworks. At the same time, bilateral and multilateral agencies have a role to play in supporting commercial banks and encouraging them to create new trade flows.
  • Intra-Africa Trade:The bulk of African exports go to markets outside the continent. Enhancing intra-African trade would add significantly to growth and job-creation but progress is slow. Lack of trade infrastructure, particularly in transport, lengthy and inefficient border-crossing procedures and facilities and regulation compound this. The African Union’s policy of regional and pan-African integration has taken hold and removed many of the institutional barriers to cross-border trade in some regions, but elsewhere progress has slowed.
  • Product development:It was observed that value addition at a local level through developing manufacturing and processing activities is hampered by inadequate capacity, infrastructure and access to investment.

The dialogue witnessed the consideration of measures capable of solving, ameliorating or circumventing the principal problem areas. Various ideas, views, thoughts and suggestions were brought to the table leading to a constructive deliberation on the key problems. To address the issue of economies of scale, it was suggested that aggregations of small farmers into trading units large enough to attract and benefit from trade finance should be encouraged. To solve the problem related to standards, the idea of establishment of ISO-style standards for co-operatives for enabling the ease of access to finance was floated. The establishment of inland ports which allow goods to be cleared for export closer to production areas and further up the supply chain, upcountry warehouse storage with proper stock management and quality controls, and commodity exchanges where goods can be standardized and transparent pricing established, thereby allowing farmers to deliver smaller quantities of goods and cut out intermediary traders was suggested with regard to addressing the internal infrastructural challenges.

The role of Islamic financing in the area of trade finance was highlighted. Trade finance fits into Islamic Banking Code and offers important potential. Up to 60% of the Islamic Development Bank’s current committed resources are in trade finance, mostly channeled through governments. Islamic institutions are currently faced with a serious asset/liability problem globally because of the lack of liquid instruments for their short term cash management. With regard to technology solutions, it was suggested that developing a more systematic method for mobile telephone payments would add value to current practice.Recent trends in IT and mobile technology have lowered the barriers to trade finance, notably mobile finance and remote monitoring of stock using IT solutions.Trade finance is one of the sectors negatively affected by a massive deficit in trade data, most of that which is available is not in value-added form. The participants felt that there is an urgent need for more and better surveys. National governments need to bolster their statistics departments to meet this need but it is also an area in which the international institutions can provide more support. The various trade finance tools for export diversification and deeper financial inclusion as suggested by the participants included usage of short term loans to help liquidity, standardisation of TF contracts, use of barriers to protect infant industries, creation of a positive FDI environment, use of lessons of microcredit (impact of empowering at a local level), supply-chain finance, Model of Shared Interest (providing advance finance), local TF being as important as international TF, crowd-funding and the provision of a bigger role for development banks.

Mr. Sanmit Ahuja concluded the event by thanking the participants and invited them to share further ideas, views and thoughts on how trade finance can be made more available and accessible to emerging economies, particularly the African trading community. He also gave an overview of the Foundation’s core thematic areas focusing on trade and finance.

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