Coastline newsletter / 2012 edition

ISSUE 44 Jun2012

ICC releases latest in series of Global Trade Finance Surveys

By Gary Collyer

The ICC has released its latest survey titled "Rethinking Trade and Finance".

 

This Survey will be a very useful tool for both policymakers and senior executives in financial institutions worldwide, enabling them to better understand the broad challenges that must be tackled to ensure that trade finance continues to play a vital role in the financing of global trade.

Content

A free copy of the full Survey results can be downloaded here.

In addition to the results of the survey, the publication also includes contributions from:

  • The World Trade Organization
  • The World Bank
  • Heads of Trade, including Kah Chye Tan (Barclays), Daniel Cotti (JPMorgan Chase), John Ahearn (Citibank) and Daniel Schmand (Deutsche Bank)
  • SWIFT
  • Multilateral Development Banks
  • International Monetary Fund
  • The Berne Union

One of the main focuses of the survey, for which hopefully you will have contributed your own figures and thoughts, was the state of the trade finance market in 2011. In a number of respects, the survey draws comparisons with the events of 2010.

Although you may download a copy of the report using the above link, and review it in its entirety, this newsletter provides a snapshot of the results that were obtained.

Survey contributions

ICC surveys continue to grow from year to year with the number of respondents. For this survey, 229 banks responded and they were located in 110 countries. Unlike previous years where the vast majority of respondents were employed by the larger trade finance banks (e.g., 55% of respondents to the 2011 survey were from trade finance banks with 300+ employees), the 2012 survey indicated that 49% of respondents were from banks with less than 50 employees. Due to this dramatic change to the background of the respondents, the responses received to this latest survey create some difficulty in drawing any true like-for-like comparisons between 2010 and 2011 data. Therefore, the data should be understood as a snapshot for 2011 and a clear indication that problems still widely persist.

Product information and volume trends

When reviewing the data, you should bear in mind that the respondents are mainly located in departments where letters of credit, collections and guarantees are the primary products handled. These products only account, by most estimates, for around 15% of world trade.

That said, on both the export and import side commercial letters of credit were the most common form of settlement with 44% of the volume handled. When looking at trends between 2010 and 2011, increases in product volumes (for both export and import commercial letters of credit, standby letters of credit, guarantees and collections) outpaced decreases by a ratio of at least 2:1 with the exception of import guarantees where the ratio was more 3:1.

A positive sign was an increase in availability of trade finance, by way of credit lines for corporates and Financial Institutions. Banks increasing corporate credit lines did so at a rate of 3:1 when compared to those indicating a decrease. Where decreases were reported, a more stringent credit criterion being applied was the main reason.

The value of trade finance activity grew for 80% of the respondents. At the same time, 69% indicated an increased demand for requests for confirmation under letters of credit. It is not known the basis for this demand i.e., whether it was driven by market conditions, the importing countries involved or as a result of policies invoked by the corporate beneficiary to secure their exports.

The 2012 survey includes for the first time a full year's statistics from the SWIFT Watch Value Analyser. The US Dollar was the currency used in some 83% of the MT700 messages that were sent. The average value of a letter of credit for 2011 was USD603,000. The Asia-Pacific region has the highest volume of import and export letter of credits but a lower average value - USD561,000 for imports and USD435,000 for exports. Europe non-Eurozone has the highest average for exports (USD1,850,000) and imports (USD1,456,000).

The statistics provided by SWIFT also showed that in 2011:

(i) the volume of MT700 messages declined by 2.5% over 2010 levels;

(ii) trade traffic (messages) as a whole declined by 2.23% compared with a 5.81% increase in 2010 (compared with 2009 data);

(iii) 55% of exports from Asia-Pacific remained within that region;

(iv) 42% of exports from the Middle East remained within that region;

(v) for North America, 50% of their volume was MT4 messages and 50% MT7 messages. Compare this with Asia-Pacific with 90% MT7 and 10% MT4; and

(vi) for countries that send more than 120,000 MT4 and MT7 messages in a year, Romania is the country with the highest growth on both the export and import side (34% on import - sent messages and 37% on export - received messages).

Transactional issues and potential areas of concern to respondents

Refusals under letters of credit continue to be at a high level with 49% of respondents indicating an increase over 2010 levels. As we all know, not every discrepancy is a true or valid discrepancy, and the level of so-called spurious discrepancies continues to climb with 91% of respondents indicating either no change over 2010 levels or an increase (31% indicated an increase). A positive sign, and maybe one demonstrating that more care is being taken over the data content of documents, prior to their presentation, is that 55% of respondents indicated that they had experienced a decrease in the percentage of documents refused on first presentation. However, there is still a lot that can be done to reduce this even further.

Claims under guarantees appear to be on the rise with 57% indicating that they had seen an increase in the number of demands for payment.

The issue of court injunctions and fraud allegations has been with us for many years but in times of financial crisis each one seems to take on an increased significance. In most cases, prevention i.e., suitable and appropriate conditions expressed in a letter of credit is better than cure (the issuance of a court order after shipment has occurred and often after presentation has been made to a nominated bank). The cure may not always gain the expected result if the nominated bank has previously honoured or negotiated under the letter of credit. The survey results highlight that respondents are seeing both the level of court injunctions and fraud allegations decreasing over 2010 levels by 70% and 62% respectively. But the level of those showing an increase demonstrates that this issue will not go away or reduce significantly any time soon.

Conclusions

Only 21% of respondents indicated that they had seen a need to change their risk criteria in 2011. The level of losses experienced by banks, when comparing trade finance products to general banking facilities, continues to remain low with 96% reporting that their losses were either the same or less than those for other banking facilities. These figures continue to demonstrate the low risk associated with trade finance, a clear message that the ICC has championed in each of the surveys it has issued.

The messages from the World Bank, IMF and the MDB’s, in conjunction with the survey results, demonstrate that there is still much to be done and that 2011 was not as good a year as many had hoped for. The messages of expectation for 2012 are fairly positive but only time will tell.

 

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