After the turmoil that shook the commodity trade finance universe in 2020, a period of introspection has gradually given way to the fundamentals which are laying the foundations for a new era with greater robustness.
In addition to the disrupted trade dynamics due to COVID, the crisis revealed instances of fraud and embedded bad practices deviating from the basics of trade financing. If the crisis revealed weaknesses, in its wake has also come the desire to refocus on what lies at the very heart of the commodity trade finance industry.
Hence, while some lenders are still healing their wounds, banks are taking a proactive approach overall to adapt the pre-existing model. What is at stake is accommodating the USD 12 trillion market in commodities exchanged and consumed annually around the world. Between the necessity to cut risk exposure and the need to continue to finance commodity trading, trade finance banks have taken a whole series of steps, in a “back to basics” stance. Rather than a mere broad-based sector de-risking, lenders have further reinforced their risk assessments and securities over borrowers, and are putting increasing emphasis on the transition towards greater sustainability.
This means, first and foremost, a more rigorous approach to the transactional self-liquidating financing principles that have always constituted the foundations of modern trade finance, including: strict Know Your Customer and Know Your Deal due diligence, enhanced collateral monitoring practices, the detection of potentially duplicate trades, stronger guarantees, and privileging borrowers with fully transparent accounts, regulation and corporate governance. At the same time, the two main commodity trade finance hubs, Geneva and Singapore, have worked on codes of best conduct aimed at enhancing transparency as well as promoting sustainable credit flows. These standards are not new, but restating them was needed to align market players with the principles that must guide the industry and world trade as a whole. This has come with a higher level of standardisation in a sector characterised by the atomisation of its supply chain. It explains the recent acceleration in blockchain investments made by banks, which have, for instance, increased their use of digital platforms to help managing operational risks. Another cornerstone of this ‘new era’ is simply to prioritise experience. If bankers need to be generalists in terms of their wider technical knowhow, they also need to be specialists in their knowledge of the industry. Continuous training and connectivity to the market are essential. A trade finance banker is financing the real economy with complex risk elements and needs to be “there on the ground”.
The description of this new framework which has emerged from the ashes of the recent crisis would not be complete without highlighting the evolution that most trade finance banks and commodities players are conducting towards more sustainability. This transition started well ahead of the crisis, but has been further amplified since. Integrating more environmental, social, and governance criteria in the credit analysis process is becoming an important part of financing decisions.
Looking ahead, the crisis was a necessary wake-up call for an industry which will continue to adapt and stand by its customers. While the dead wood has been trimmed, the roots of the tree remain strong.
