Trade finance is harder to access today than it was a decade ago, weighing on businesses of commodity operators and traders as banks are less willing to lend, a new report said.

 

Bank-led trade finance has roughly halved from an estimated US$14 trillion at its peak before the global financial crisis in 2008, to near US$7 trillion, law firm Clyde & Co said. “Most traders rely on a patchwork of solutions for their funding needs,” the firm  adds.

 

But banks particularly in Asia and the Middle East are starting to fill some of the funding gap by increasing their share of financing for commodity trading – a natural consequence of markets continuing to shift from West to East.

 

The London-based legal firm said this trend, which reflects the growing regionalization in the provision of commodity finance and the influence of international development institutions, may result in larger emerging market banks gaining market share as many continue to consolidate their trade finance offerings. Dubai in particular is aiming to become a major global trade hub to rival Switzerland which provides up to 80% of financing for commodities trading worldwide.

 

The survey involving commodity producers and traders revealed that banks are not willing to lend because of heavy compliance burden as a result of international regulations such as Basel III’s capital adequacy requirement and know-your-customer.

 

From providing up to 80% of the financing for the trading of commodities worldwide, banks have scaled right back to around 50%, the company said citing the Bank for International Settlements.

 

For finance options, respondents of the survey said that they can currently access receivables financing and open accounts. Less than half of respondents are getting access to pre-export structured trade financing, once prevalent in the market.

 

Clyde & Co says there exists a mismatch between the offering from banks and the product sought by the market. Although banks are paying out promptly and in full on bills of lading, other instruments seem to be lagging behind in terms of bank performance, the study notes.

 

Under 40% of respondents are now exploring alternative finance options. In most cased this is because they have no other way to fun transactions or have no formal credit lines. Other respondents said they found alternative financiers better, cheaper and more readily available and less risk averse.