Trade Finance in Asia and the Pacific

Article | 8 November 2012

Through its Trade Finance Program (TFP), ADB supports trade in the most challenging Asian markets. TFP Head Steven Beck explains why the Programme, which reached a turnover of $11.27 billion from January 2009 to September 2012, is key to the region's economic growth and jobs creation.

What is the Trade Finance Program (TFP) about and what is its significance to Asia and the Pacific?

The TFP seeks to fill private sector market gaps for trade finance. This is done by providing guarantees and loans to support trade, focusing on the most challenging markets where the gaps for trade finance are proportionally largest. These gaps are getting larger because of the deleveraging that is taking place globally along with tougher regulations that require higher capital reserves being introduced in several countries. This is diverting resources that would otherwise be available to support trade.

In addition to filling market gaps, our aim is to promote more private sector support for trade finance in challenging markets to the point when our work will eventually become redundant and the TFP may no longer be required. We do this by crowding in the private sector as much as possible. Just in 2011 alone, TFP mobilized $2.4 billion in cofinancing - private sector capital - from partner banks and insurance companies. We anticipate the mobilization figure to be approximately 15% higher for 2012.

How has the response to the TFP been?

The program supports many small and medium-sized enterprises (SMEs). About half of the portfolio supports intra-region trade, while around 40% of the portfolio's transactions support trade among ADB members.

It has received very positive response and has won four industry awards. The program charges market rates, it's profitable and focuses on the most challenging markets. The TFP has been growing by more than 30% in the first eight months of 2012 compared to the same time last year, and we expect to do well over 3,000 transactions within this year. For 2012, we anticipate supporting approximately $4 billion in trade, which is up from last year's $3.5 billion.

TFP's support for trade transactions translates into real economic growth and jobs, which is important, especially in an environment where growth has been anemic and job creation has declined and/or is not keeping pace with growing numbers of people wanting to join the work force.

The program supports many small and medium-sized enterprises (SMEs). About half of the portfolio supports intra-region trade, while around 40% of the portfolio's transactions support trade among ADB members.

But beyond the transactions, knowledge dissemination is a very important part of what we do. It results in real, measurable and tangible examples of the private sector financial institutions being more active supporting trade in challenging markets.

What kind of knowledge sharing initiatives has the TFP introduced?

TFP holds monthly calls with many of its partner banks and it's partly through this channel that we are able to share our experience and knowledge in markets when the private sector generally has limited experience and exposure. Beyond the AAA-rated guarantees TFP provides partner banks, this information helps close the knowledge gap and enables financial institutions to develop comfort levels and contacts in 'frontier' markets.

Importantly, we created the ICC (International Chamber of Commerce) ADB Trade Finance Default Register, where we accumulated the first ever statistics on default and loss rates for trade finance transactions. This is proving to be an invaluable tool. For example, we were able to show that the loss rates for trade finance - the risk profile in this business - are extremely low.

This is the kind of information that helps encourage financial institutions, even when country ratings are low or the banking system is perceived to be weak, to assume trade finance risks in 'frontier' markets. In addition to the private sector using the Register's information, ADB and ICC have also presented it do the Basel authorities to encourage more appropriate regulatory treatment for trade finance. The private sector and regulators can then see that the risk profile, as we've been able to demonstrate statistically, empirically is very low.

How do you foresee the TFP moving forward?

We really want to focus on three areas:

First is to expand to Myanmar and the Pacific by July next year.

Second, we want to put even more focus on this knowledge dissemination element because we see real tangible results coming out of this effort.

Third, we want to enhance TFP's support for South-South trade, specifically between Latin-America and Asia, and Africa and Asia. To that end, TFP has been working closely with the Inter-American Development Bank and is in the process of helping the African Development Bank establish its own trade finance program.