The hidden world of trade finance is huge but poorly understood. A revolution could unlock trillions in fresh capital
of the week thousands of visitors flow through Istanbul’s fragrant Spice Bazaar. They are a varied collection, local shoppers mingling with camera-wielding tourists. So are the products on offer. While many delicacies on display are Turkish-grown, one trader gets his berries from Iran, his walnuts from Chile and almonds from California. Another, asked if she went all the way to China to buy her jasmine tea, says wryly: “Of course not. Importers ship it here.
The work is as unspeakably tedious—thousands of small, similar deals—as it is steady. Annual returns on trade-finance instruments have an average volatility of less than 0.30%, compared with 4.44% for investment-grade bonds. Four-fifths of global transactions are processed by just ten banks, mostly in London, New York or Singapore. Borrowers rarely switch providers. Graduates would rather work on initial public offerings or multi-billion mergers. Business cards change, but not the cast.
In response, banks have retreated. The top ten earned 19% of their transaction-banking revenue from trade finance last year, down from 27% in 2010, according to Coalition, a data provider. The Asian Development Bank reckons $1.5trn of financing proposals were rejected in 2018. “Country risk” was cited as a reason by 52% of banks. Nearly half of applications by small firms got nowhere. As supply chains move from China to poorer countries, rejections could rise to $2.
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