Global corporate funding: on the right path
Has the financial crisis beckoned in a new and improved financial era?
Undoubtedly, it has been a rocky road with global recession, increased government deficits and major global banks facing bankruptcy – all significant hardships along the way. What is more, the introduction of new and more comprehensive banking regulation – particularly Basel III – has forced global banks to prioritize their lending. The result? A focus on core clients and specific business areas, which has left thousands of businesses without the funding they need.
Asia, in particular, has felt the brunt of international bank retrenchment, leaving many local corporates without the support of their traditional lending providers.
And yet, we have arrived at the other end of that road with a safer and more diverse financial landscape. The introduction of new and more comprehensive regulations on global banks has streamlined the banking system; safeguarding businesses around the globe and reducing the risk of another crisis. But, not only that, the crisis has also encouraged a greater diversity of funding providers – with non-bank financial institutions, such as specialist financiers, stepping up to meet this funding gap.
The funding gap
Regulation introduced since the crisis, in particular the capital adequacy requirements under Basel III, has lead banks to prioritize certain business areas and clients for funding. Many corporates are therefore finding their traditional credit lines cut, or at least extremely damaged – with those particularly affected being the smallest or those perceived to be the most risky (often those domiciled in “emerging markets”). This is a significant issue not just for those individual companies affected, but for global growth as a whole.
Certainly, with many banks prioritizing larger corporates and core clients, small-to-medium-sized enterprises (SMEs) are now struggling to access funding to continue their expansion. Yet SMEs, being drivers of innovation and vital for a country’s economic growth, account for around 90 percent of businesses globally and represent more than 50% of employment worldwide – according to the International Finance Corporation (IFC). In this case, a lack of funding is a clear impediment to global growth.
Yet, it is not just small companies that are feeling the fall-out. As government pressure compels global banks to focus their lending domestically, emerging market companies – of all sizes – are also feeling the effect. It is these companies, however, that are experiencing the highest levels of growth, which again requires significant financial resource.
Funding is even more difficult to obtain for those companies engaged in international trade. Despite the low risk associated with trade finance (as recently proved by the ICC Trade Register report), it is disproportionately penalised under Basel III. As such, it has become less attractive business for many banks, leaving many trade companies, regardless of size, unfunded.
Asia feels the squeeze
The funding gap has therefore been particularly felt in Asia – given its “emerging market” status and focus on trade.
Indeed, as a south-south trading hub, Asia today contributes one fourth of world trade in goods. Half of Asia's exports are accounted for by intra-regional trade, while inter-regional trade has also grown, with Europe (18.4%) and North America (21.4%) becoming the two largest destinations for Asian exports.
Yet many international banks are reassessing the economic sense of lending to trading companies in Asia – especially in those markets considered the most risky. Indeed, earlier this year a major British bank announced its plans to drastically scale back its business operations in the region to focus on UK lending.
It is a concerning trend – and one that may lead many companies, and perhaps even whole countries, to be cut off from the international banking system.
Indeed, the WTO recently highlighted the issue; stating that a lack of capacity in the international financial sector is limiting the ability of Asian corporates to access vital trade funding. A recent survey amongst Asian banks by the Asian Development Bank puts the value of this unmet trade finance demand at around $800 billion.
Arise the alternatives
If global trade is not to be hit, corporates clearly require an alternative funding source. Of course, regional banks can take on some of the surplus demand left behind – China’s banks, for instance, have made significant efforts to step up lending to support the country’s flagging economy. Elsewhere, Malaysian and Singaporean banks have also been actively expanding their operations in recent years into other regional markets such as Thailand and Indonesia.
Yet, although regional lenders are making moves to expand in Asia, they are restricted by their limited lending capacity, whilst also being subject to the same banking regulations as global banks.
Specialist financiers are therefore coming to the aid of corporates unable to acquire traditional global bank funding. Their uniqueness lies in their flexibility – partly helped by the fact that they are not as restricted as global banks by regulation – which allows them to construct tailored financing solutions that meet their clients’ exact needs. Indeed, this proposition has meant that even corporates able to access funding from global banks often look to specialist financiers to provide a more bespoke solution.
Larger specialist financiers, such as Falcon Group, are able to combine this tailored approach with a worldwide reach. Operating throughout Asia-Pacific, the Middle East, Europe, Africa, North and Latin America, Falcon provides a genuine alternative to bank financing on a truly global stage.
Diversifying the financial landscape
Not necessarily competitive, but rather collaborative, both global and regional banks are working with specialist financiers to combine their vast resources and capabilities with specialist flexibility.
This collaboration – and the general emergence of specialist financiers – has therefore produced a financial landscape that is not only more diverse and more creative, but also offers an enlarged scope of comprehensive funding solutions for corporates, wherever they may be. The ultimate result: a safer and more varied financial landscape offering businesses the best of both worlds – specialist flexibility and sophisticated resources.
Today, corporates – large and small – therefore can fund themselves from lenders able to offer them financial solutions that are sophisticated, innovative and better suited to their exact needs. Unquestionably, the financial crisis unbound an era of innovation and diversity in the world of finance – one where opportunities abound.
Will Nagle is CEO and Andrew Church, regional head Asia of specialist financier Falcon Group.