ADB: Strict bank rules put a drag on business

Banks’ strict anti-money laundering and know-your-client (KYC) requirements are putting a drag on trade as well as small- and mediumsized enterprises (SME), the Asian Development Bank (ADB) revealed.

In a statement, the Manila-based lender said that the inability of financial institutions to provide loans to buyers and sellers of goods across the region is due to the cost and complexity of compliance with banking regulations.

According to the ADB briefer, 90 percent of surveyed banks cited that anti-money laundering and KYC rules as impediments to their ability to expand trade finance, especially for small businesses.

Likewise, Basel III banking regulations, which set liquidity requirements for bank finance, are also cited by 77 percent of respondents as a major barrier to finance new trade.

“The growth of the trade finance gap in 2015 continues to be a drag on trade, and small- and medium-sized enterprises are the most affected,” Steven Beck, ADB’s Trade Finance Program head said.

In 2015, ADB said that the inability of financial institutions to provide $1.6 trillion in support to buyers and sellers of goods across countries resulted in forgone growth and job creation.

Of that amount, developing Asia’s share stood at $692 billion.

The survey covered 337 banks in 114 countries and 791 firms in 96 nations.

“The survey shows that both globally and nationally, regulators and policymakers should increase support for trade finance through smarter banking regulations, more transparent and comprehensive credit ratings systems, and capacity building for local banks,” Beck said.

The report noted that SMEs face the greatest obstacles in accessing affordable trade financing.

Globally, 57 percent of trade finance requests by SMEs were rejected, against just 10 percent for multinational companies. High rejection rates lead many firms to turn to inefficient informal financing.

Financial technology, or Fintech, can help bridge the financing gap for businesses left out of trade finance, according to the briefer.

But awareness of digital finance by small businesses remains low, with 70 percent of responding companies indicating that they are unfamiliar with these tools. Among firms that were familiar with digital finance, peer-to-peer lending had the strongest uptake rates in developing countries.

Since 2009, ADB’s Trade Finance Program has supported more than 8,200 SMEs across the region, with about 11,800 transactions valued at over $23.6 billion, in sectors ranging from commodities and capital goods, to medical supplies and consumer goods.