Despite the attention Asia-Pacific’s trade flows are receiving from local, regional and global transaction banks, small and medium-sized enterprises (SMEs) and large local companies can still find it hard to access the right kind of trade financing at the right kind of prices. Some of the more local and regional banks may not be willing to offer customised structures to smaller clients due to the cost involved. Others may lack an SME business altogether, and focus instead on their high-margin multinational corporation (MNC) clientele.
This has left a lucrative gap in the market for smaller and nimbler independent trade finance specialists with the risk appetite and capacity to customise structured cross-border solutions for local companies. Falcon Group, one such independent trade specialist trade services provider, exploits the gap left by banks with customised solutions often structured around commodities and intermediate and consumer goods flows. These structures help companies eliminate buyer, credit, supplier, performance, country and expropriation risk, as well as shipment and commodity risk, said Davy Kurniadi, Falcon’s regional manager of Asia.
“If you connect the two dots you will see that the gap is getting wider and wider. On one hand we have accelerating south-south [emerging market] trade, and on the other hand we have the large banks only growing at a constant rate,” said Kurniadi. According to the World Trade Organisation, Asian exports rose by about 23% and imports by around 22% on a year-on-year in December 2010. Even strengthening bank trade finance services do not go deep enough to keep pace with growth like this.
Falcon was originally established in Dubai in 1996, setting up its regional head office in Jakarta in 2007. It now also has a presence in Malaysia, Singapore, Thailand, mainland China and Macau, as well as London and Sao Paulo, and generated pre-tax profits of $23 million during fiscal year 2010. Not a mammoth company perhaps, but its size gives it an edge nonetheless. “Our size is a big advantage. It allows us more room to manoeuvre quickly, freely and be very flexible compared to the large financiers in the market,” said Kurniadi, a veteran with 18 years of corporate and transaction banking experience at several international banks.
And there is still plenty of potential business among local companies, even if globally-banked MNCs are not a target market. Indonesia alone has as many as 50 million SMEs, including those from the agricultural sector. Though the majority are small entities, the country’s medium and large-sized firms are adding to the huge domestic, intra-Asian and intra-regional trade routes. This is a development mirrored around the rest of the region, and many of these firms need risk-mitigating cross-border structured trade finance services.
Who is going to provide these services? Many local, regional and international banks are beefing up their fee-generating regional trade finance businesses, which are regarded as safe, short term and self-liquidating. But Kurniadi is adamant that independent players do not need to feed off these banks’ unwanted leftovers. “Despite having to deal with their own domestic challenges, I think the supermarket financiers [global banks] do want to get as large a slice of pie as possible from the emerging markets,” he said. “But we are in a very good position to take advantage of this gap.”
As with all trade finance, there is a risk in banking some of these companies, though Falcon carefully identifies prospective clients in the countries in which it operates before extending any credit. “We are not an organisation that operates an open door policy,” Kurniadi explained, adding that Falcon also recruits experienced trade finance professionals who know the market and can quickly establish a high level of confidence with the client.
So rather than compete with global trade finance banks, Falcon’s additional source of finance for emerging market firms complements bank business models. Indeed, independent financiers are all the more essential as liquidity tightens and interest rates rise and the demand for trade finance increases. “I wouldn’t say the big institutions are reluctant to customise, but it would be very costly and tedious for them to offer very specific customisation and is something that does not appear to suit their business model.”
The global banks may also find themselves hindered by the impact of Basel III, which might actually help independent trade financiers. This will especially be the case if Basel III discourages larger regional and global banks from extending trade finance beyond a select market segment thanks to higher capital requirements. Despite progress made by opponents to encourage the Basel Committee to review the effects of Basel III on trade finance, banks will have to manage their expectations regarding any likely revisions.
Even in a best case scenario, Kurniadi believes that trade finance will become more capital intensive for financial institutions, widening the gap in the market and offering greater opportunities to firms like Falcon. “Yes, the large institutions will still exist, but with the new challenges they may shy away from the trade finance market,” said Kurniadi. “Will they leave the market? I don’t know, but my guess is they probably will not. But will they be stepping on the trade finance gas pedal? I do not think so.”
Catering for Asia-Pacific’s trade flows is not a zero-sum game for trade financiers, and trade finance is not just required by the largest local players and MNCs, but by a broader section of the region’s economy than many banks are prepared to countenance. In situations like this, it is firms such as Falcon that will take up this slack and ensure that trade finance is extended to more of the region’s companies.
This story was first published in the Trade Finance Yearbook supplement to the April 2011 issue of FinanceAsia magazine.