Henry Balani, Head of Innovation at Accuity, discusses the emerging opportunities for trade finance in the Asia Pacific region, as well as the challenges and complexities of trading on the global stage.
Trade is flourishing in Asia Pacific. According to the UN Conference on Trade and Development (UNCTAD):
“World merchandise exports more than tripled over the last two decades and reached USD18 trillion in 2012, with a quarter of that trade comprising exports among developing countries – so-called ‘South-South’ trade – which reached a record USD4.7 trillion. The share of South-South trade in total world exports has doubled over the last 20 years to over 25 per cent.”
Existing industries are expanding and diversifying and new ones are emerging all the time. This means greater opportunities for Western banks to enter these regions, develop relationships and capitalize on these rapidly growing markets. Local banks are also vying for their share of the action.
So, it’s boom time for trade finance in Asia Pacific. However, North American and European banks have encountered quite a few difficulties in establishing themselves in the area. There are various reasons for this. Firstly, across the region, which comprises almost 50 different countries, there is a whole host of different legal systems to contend with. Some countries, such as Hong Kong and Singapore, have westernized legal systems due to their colonial past. Other countries, such as China and Thailand, have their own unique systems. What does this mean for Western banks? It means they have to accommodate, understand and negotiate these different legal systems, their vagaries, restrictions and complexities.
These difficulties are by no means insurmountable, but different legal systems can present a real challenge when attempting to establish contracts. In India, for example, Western businesses often get entangled in complications that draw the whole process out. If this happens when timings are tight – when trying to invest in a competitive piece of real estate, for example – and it takes too long to get a contract signed, sometimes the investment doesn’t happen and the opportunity is lost.
Some countries make stipulations that conflict with a western bank’s preferred way of conducting business. Or worse still, that conflict with legal requirements. For example, when opening up a real estate business in Dubai, a foreign company cannot set up a local business without a sponsor. So, a local person or group would have a certain level of ownership in the corporation and require payment.
Cultural nuances and language issues need to be considered. Misunderstandings can easily arise, with a person’s words or actions being misinterpreted. Banks need to be mindful of this and do all they can to minimize the chances of this happening by preparing representatives for local customs as best they can.
Stumbling blocks such as these can be just stumbling blocks that make the whole process protracted, frustrating and potentially more expensive, but an agreement is finally reached. However, they can also thwart proceedings to the extent that a deal is not reached or it takes so long that the opportunity is missed and the bank has to pull out.
So there is a delicate line to be trod between respecting local best practice and modus operandi and what is best practice for a Western bank. The two are not always mutually conducive and can sometimes put a halt to proceedings altogether or put western banks at a competitive disadvantage to their local counterparts. For example, in the UK there is the UK Bribery Act. In the US, there is the Foreign Corrupt Practices Act. These both have stipulations about how to facilitate payments that would be considered a bribe and what is legal. However, a company in the Middle East wouldn’t have those types of restrictions, which can make it easier for local businesses to do business with local financiers.
Likewise, sanctions compliance presents further challenges to banks, restricting what businesses and industries they can operate in and with. Again, local Asian banks do not face the same restrictions, giving them a competitive edge over their Western counterparts.
Regulation generally can be a major headache for Western companies. Before sealing any deals, Western banks have to follow due diligence and find out essential information about their potential customers – no easy task in many of these countries. In the UK, say, there are databases such as Companies House that provide the necessary information. The equivalent does not exist in many of the Asian regions, so due diligence is more time consuming and costly.
Liquidity requirements have also made it much more challenging for Western banks to proceed as easily with trade finance in Asia Pacific as they would like. Since the 2008 financial crisis, banks have been required to have a high percentage of capital reserve on their books, with the result that they cannot lend as freely as they once could.
This has a twofold impact. Firstly, they may not be able to lend money as easily or the high sums that are sometimes required. Secondly, Asian banks do not have the same liquidity requirements, which again puts them at a competitive advantage.
Plus, Western banks like and need to know a lot about what their customers do. There is a high degree of volatility in the Asia Pacific region. It’s a growing market and local businesses are less risk averse than established Western businesses. They are willing to try new things, switch to new products or new streams of revenue. This can be a challenge for foreign investors.
That’s the situation with regards to Western banks. What’s the situation for local banks and investors? As they are not governed by the same restrictions facing Western banks – sanctions, regulations, liquidity, etc – they can invest more quickly and easily. This means they may be able to offer more competitive rates than their Western competitors. They also have local knowledge, experience and contacts.
There are plenty of innovators and local banks across the Asia Pacific region that are ready and willing to invest. It’s also where a lot of exciting, new generation technology is taking root. Unencumbered by legacy infrastructure, unlike Western banks, local operators are able to innovate and pass on that innovation to customers. Mobile payments, P2P platforms, micro-payments – local innovators are well placed to take advantage of these technologies, capture the markets and leapfrog over what Western banks can and do offer.
However, it’s not all plain sailing for local investors – they need to improve their visibility in these emerging markets and achieve credibility on the global stage. They need to get contracts and businesses up and running quickly and then push forward to make ventures successful. They need increased STP in order to provide competitive technology and their dependency on trade – Asian countries have a much higher dependency on trade than Western countries – makes them vulnerable.
Local banks and investors also come up against some of the problems facing Western banks. If they are trading using US dollars, then they encounter US requirements around risks, regulation and compliance. Just as Western banks have to accommodate local best practice when trading in other regions, those in other regions that are trading on the global stage, have to accommodate global best practice.