Basel 3 has had a significant impact on the availability of trade finance in Africa, a situation exacerbated by many international banks opting to de-risk their portfolios.
Initially, Basel 3 placed stringent capital and liquidity requirements on banks operating in the trade finance arena. However, representations by industry bodies such as the International Chambers of Commerce (ICC) resulted in some relaxation of the measures. But the regulations still impact negatively on trade financiers who point out that the liquidity and capital requirements fail to take fully into account the nature of trade finance, in particular that it is short term, asset backed and that there are a number of risk mitigation strategies that can be employed to ensure the successful conclusion of the deal.
Adie du Plessis, CEO of Bravura, says experience has shown that the bad debt rate in properly managed trade finance portfolios is extremely low, particularly when compared to other types of lending.
“The number of loan claims that become irrecoverable is small. However, the amount of capital that banks need to allocate to trade finance transactions is so high at the moment,” Du Plessis says.
“It appears that not all the European banks are sufficiently capitalised and this means that most of these institutions will reserve their capital for other lines of business.”
The situation remains onerous for banks and there is no sign of any positive news likely to come from Basel 4.
THERE ARE LOBBYING GROUPS ATTEMPTING TO RESOLVE AND DISSOLVE THE TRADE FINANCE BARRIERS.
Du Plessis says risk mitigation is a key component of any viable trade finance deal and there are numerous techniques that can be used to offset risks including, for example, political risk.
“There are a number of export credit agencies, the International Finance Corporation and credit guarantee insurance. You insure the risk and this is often not taken into account when people consider the risk associated with trade finance.
“Another concern is that a company’s credit rating cannot be higher or better than the level of country’s sovereign ceiling. The sovereign ceiling for some of the countries in Africa is not all that favourable and the company ends up with a rating on its deal that is the same or worse than the rating of its host country, despite that fact that the deal itself is low risk,” Du Plessis says.
Banks participating in trade finance also need to take into account concentration risk. In other words, the banks will look at their overall exposure to a particular country.
“These are some reasons why the funding available for a specific transaction may be limited,” Du Plessis says.
He says there are a number of lobbying groups attempting to resolve and dissolve the trade finance barriers.
“We all hope that Basel 4 will take into account the arguments being put forward and relax the Basel 4 trade finance requirements still further. In the meantime funders have to work within the existing parameters.”