Improving the SMEs Access to Trade Finance DRAFT
in the OIC Member States
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2.9. Capacity: A Common Challenge in Trade Finance
Trade finance, as banking and finance in general, is challenged by capacity constraints,
including limitations on the amount of capital and balance sheet capacity that banks – even
top-tier trade finance banks – are prepared to deploy in support of trade finance activity.
The reasons for this relate to regulatory pressure linked to capital adequacy, as well as to the
realities of internal (bank) competition for capital resources among many lines of business,
most of which generate relatively high returns in comparison to trade finance.
Prior to the latest round of updates to the Basel Accords, certain instruments of trade finance
might have required zero capital to be held in reserve against such transactions, or perhaps
20% of the amount of capital deployed in other types of trade finance transactions. Post-Basel
II, the capital reserve required was increased to as much as 100% of the amount deployed in
support of trade finance. In concrete terms, a transaction worth €200,000 might have been
approved with zero reserve booked against it, or perhaps €40,000 in reserve (capital) held by
the bank against that transaction. Post-Basel II, it is conceivable that a bank would have been
expected to match the value of a transaction Euro-for-Euro, needing to hold a full €200,000 in
reserve. This reality makes trade finance at least five times more expensive from a capital
perspective, than was previously the case, with the effect that senior bankers will look far
more critically at the modest returns generated by trade finance, absent the capital cost
advantage that existed until relatively recently.
The global context of risk aversion and scarcity of finance increase the importance of
resource-pooling and co-financing between the existing providers of trade finance, and
the mobilization of public-sector actors in order to counteract the reduction of private
sector finance.
Source: Trade Financing and Regional Financial Institutions from a South-South
Perspective, UNCTAD 2012
This increased cost of capital leads to reduced capacity to support trade activity, and by
extension, makes it less likely that SMEs and emerging markets will access the trade financing
support necessary to enable international activity. This is an area where policy and advocacy,
including from international organizations, can only benefit the broader objectives of trade
facilitation and collaboration.
In addition to capital-related capacity issues, it is a global reality today that trade finance
expertise is in demand, but in inadequate supply as senior practitioners retire and a next
generation fails to be attracted to this domain.
There are several initiatives related to training and the development of professional skills in
trade finance (eBsi Ireland, FITT Canada, CITF UK, COFIT Malta and CDCS, USA). Several of
these programs have been in existence for some years; however, there is clear need to
motivate further interest in the domain of trade finance, within banking and more broadly in
industry. Capacity development and technical assistance programs by the various
international institutions (IFC, ADB, EBRD and others) also contribute importantly to these
efforts, particularly in the context of developing and emerging markets financial services.