Banks play a vital role in global trade. However, an existing gap persists in fulfilling the demand for trade finance transactions, predominantly in developing countries with high credit and country risks. These risks can be hedged with credit risk mitigants (CRMs). This study aims to identify and analyse the barriers preventing banks from using CRMs. Employing a qualitative research approach, data were collected through semi-structured, in-depth interviews with trade finance bankers from various regions. Our study shows that, despite the availability, banks do not always use CRMs efficiently. The findings reveal a comprehensive set of factors influencing the decision to decline trade financing requests, categorised into three groups: regulatory, organisational and individual constraints. The implications of our research suggest that by managing CRMs more effectively, banks could approve more transactions, helping to close the trade finance gap. This study offers substantial contributions to the existing trade finance literature. It holds significant implications for financial institutions and a diverse spectrum of stakeholders, including exporters, importers, development banks, export credit agencies, insurance companies and policymakers. Additionally, it underscores the need for harmonised global policies to ensure consistent regulatory frameworks and facilitate smoother trade finance transactions worldwide.
Policy implications
- Policymakers should work toward harmonising global banking regulations to ensure that using CRMs provides consistent capital and credit relief benefits across all jurisdictions.
- Policymakers and the banking industry should collaborate to establish centralised KYC repositories to reduce compliance costs and streamline due diligence processes.
- Banks should develop standardised procedures for assessing and applying CRMs, ensuring consistency and transparency. Additionally, they should invest in IT infrastructure to facilitate the efficient registration, tracking and monitoring of CRMs.
- Banks should implement internal accounting systems that accurately track CRM-backed transactions, ensuring their financial benefits are properly reflected in each department's performance metrics.
- Promote public-public partnerships between banks, ECAs, insurance companies, MDBs, and regulatory bodies to create a comprehensive international dataset for trade finance and CRMs.
- Policymakers and industry associations should increase investments in learning and development programmes for trade finance bankers and bank management.
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