The banks are here to stay in trade finance

In recent times Singapore has become an important global hub for commodity trading and by extension, commodity trade finance. For the uninitiated, trade finance does very much what it says on the tin.

At its most basic level it helps mitigate supply and payment risks for buyers and sellers (respectively) of commodities such as oil and metals by having a trusted third party cover the trade cycle funding gap.

Traditionally of course this has been an activity dominated by banks and certainly this has been the case in my sector, which as CFO of Trafigura, is commodity trade finance.

However, over the last few years there has been an enormous amount of discussion about bank disintermediation in the sector. Newspapers abound with such stories (particularly if they can squeeze the term ‘shadow-banking’ into the title somewhere).

In reality though, the impact of bank disintermediation on commodity trade finance has been fundamentally limited.

It is true that there have been a lot of initiatives by non-bank players, with funds being set up to provide institutional investors with access to trade finance assets. We have made a foray into this area with our Commodity Trade Finance fund through our subsidiary Galena Asset Management.

These initiatives are working well both for investors and the firms running them, however in truth these funds, even when taken collectively, are limited in size and not sufficient to have a major impact in the market.

Moreover with the current low or even negative interest rates, there is tremendous liquidity available to banks to finance “plain-vanilla” traditional Trade Finance activities.

Part of the problem for these alternative funds has been matching the perceptions of institutional investors with the realities of commodity trade finance. There is a lack of understanding as to what constitutes trade finance and how it works.

As commodities are often sourced from far-flung areas of the globe it is hard to package these funds in a palatable form for institutional investors, despite the fact that the actual risk is much lower than is perceived by non-specialists.

If banks have remained dominant in traditional trade finance, then they have somewhat retrenched when it comes to more complex structured trade finance products. In part this is a result of the increased regulatory burden on banks, which has created an environment where they are increasingly forced to focus on their home market.

So we have indeed seen the banks retreating from certain structured trade finance activities and regions of the world but it is wrong to suggest that they have been completely disintermediated.

What does all this mean for Singapore?

While western banks are still regrouping from the crisis, Singaporean and other Asian banks have fared better and have increasingly focussed on enhancing their commodity trade finance expertise. They now face less competition in their own backyard and are able to take up market share and grow their footprint, making for a very interesting and dynamic regional market.

One thing is for sure: the banks are here to stay.

Pierre Lorinet is among the speakers who will be sharing their experience at the upcoming ICC Annual Banking Meeting.

ICC Banking Commission Annual Meeting
Raffles City Convention Centre, Singapore
20-23 April 2015

Click here to register.