DRAFT Improving the SMEs Access to Trade Finance
in the OIC Member States
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The work of the Basel Committee in aiming to assure the robustness and financial health of
banks is critical to the health of the international system, however, the treatment of trade
finance by the Basel Committee has been inequitable, inappropriate and inconsistent with the
quality of trade finance activity and the trade asset class.
At its core, the intent of Basel II and Basel III is to ensure that banks maintain adequate levels
of capital reserve in support of the lending and other activities undertaken by said banks, with
the intent (perhaps distilled to over-simplified levels) that higher-risk activities require higher
levels of capital reserve, and consequently, that such activities become more expensive to
undertake.
The current situation is such that reserve requirements imposed on trade finance businesses
do not reflect the negligible loan default and loss history that has thus far been demonstrated
by industry through the ICC Trade Finance Default Register. The consequence is that banks’
capacity to apply capital to support trade finance is restricted, and in the end, trade finance
risks becoming more expensive as a result of unnecessarily stringent capital reserve
requirements. Standard Chartered Bank has estimated that trade financing cost could increase
by as much as 37% or more, as a direct result of the mismatch between the (very high) quality
of trade finance assets, and the capital adequacy requirements proposed by the Basel
Committee, which may be largely supported and implemented by national regulators.
The cause of this current situation includes ineffectual engagement and advocacy by trade
financiers to the Basel Committee as the capital adequacy requirements were being defined;
while the industry is now engaging more effectively, and has had marginal success in reversing
one or two provisions in the latest Basel Accords, there is much to be done, and the advocacy
must now extend into national regulatory bodies and into the political and policy sphere.
A policy framework around trade finance must look at this type of unintended, adverse
regulatory impact, and must balance such impact against the adverse consequences for
economic value-creation, recovery and growth.
1.8.4. Anti-Money laundering, Boycott and Due Diligence
Additionally, banks are subject to increasingly rigid and costly regulatory demands around
monitoring and prevention of money laundering activity, terrorism finance, the use of trade
mechanisms to funnel monies to persons or nations under boycott, and the need for banks to
undertake significant due diligence (Know your Client, or KYC) activity relative to their own
client, but also, to their client’s trading partner, potentially located around the world.
These regulatory requirements exist for obvious reasons; it bears mention nonetheless, that
banks are subject to such regulatory demands, while non-bank entities are often not subject to
such requirements, and, the application of such requirements can vary significantly across
jurisdictions, and therefore can create an unbalanced, competitively skewed environment.