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Private funds set to benefit from trade finance drought – report

A series of problems have driven banks away from financing global trade.

Banks are pulling out of trade finance in response to the covid-19 pandemic, which could offer opportunities for investors, according to a report from Bfinance.

Until recently, just 15 banks were responsible for more than 90 percent of trade finance transactions. However, in August ABN Amro announced it was halting new trade finance loans, following similar moves by BNP Paribas and Société Générale to pull back from the market.

Covid-19 has had a huge impact on commodity markets and global trade, but trade finance has also suffered other problems. A key reason for ABN Amro’s decision to suspend new loans was a wave of scandals relating to fraudulent activity by high-profile traders, according to Bfinance. Troubles in oil markets have further exacerbated the pressures on banks in the trade finance market.

However, for institutional investors, the market could offer a solution to long-term low interest rates due to its short-dated, asset-backed and yield-generating profile, the report said.

A survey of bankers found 72 percent believe there is a shortage in servicing of trade finance needs globally, with particular problems in financing trade in Asia and Western Europe. Bfinance said this means well-placed institutional investors and asset managers will have an opportunity to acquire high-quality borrower relationships and be able to acquire higher yields than they could prior to the pandemic.

“The scope of new opportunities is likely to be considerable: small and medium-sized borrowers or those without investment grade status are likely to be particularly affected by the more constrained climate, but large, highly rated firms will also be changing and diversifying their bank and non-bank trade finance relationships,” the report said.