What you need to know about ADB's trade facilitation program

Asia Development Bank(ADB)'s latest news shows that its Trade Facilitation Program ( TFP) will increase trade volume of USD 1.2 billion among some difficult member countries due to the cooperation with OFID. It will stick to the traditional LC or banks' guarantee as trade facilitation tools to assist SMEs in emerging countries .

Trade Facilitation Program , a product using LC and guarantee to promoting trade among commercial banks, was initiated by European Bank of Reconstruction and Development (EBRD)whose mission is to assist its 29 member countries to quickly develop their economies in order to not falling back to communism after the collapse of Soviet Union in 1991.

The program couldn't be too important compared to other fundamental projects finance products within the development bank. Therefore the level of several USD billions after launching among its members countries especially in the area of Eastern Europe was considered as a success.

In fact,it was not popular at all vis-a-vis the volume of global trade.

The worst part of it was that the program was copied by many other development banks including ADB without too many amendments while the terms of global trade have drastically changed from LC to non-LC term in the last two decades.

It is an era of Open Account which makes SMEs become more and more difficult to obtain trade finance. Especially in Asia where most of the export businesses are conducted on a non-LC basis. Among ADB's member countries ,export volumes of China, Korea, Hong Kong, Taiwan, Japan together are exceeding USD 4 trillion last year. An estimation of 70% or higher (Taiwan alone is 85%) are conducted on a non-LC basis nowadays.

The reason why buyers don't use Letter of Credit as often as used to be is attributing to the inventions of communication techniques which make the relationship between sellers and buyers become closer. Another factor, among other things, is to save banks charges and to push the financing pressures downward to the end suppliers. It is especially common in electronic industry.

Since large companies normally are well -serviced by many financial institutions including credit insurance companies, the problem is not serious. In fact, some of them are taking advantage of it.

As a result, the so called supply chain finance is needed badly by the suppliers ,many of which are SMEs. They are facing difficulties in dealing with credit insurance companies and factoring companies to solve the issue of credit risk of Account Receivable and other things such as trade disputes, high interest cost, and difficult to obtain buyers' credit information...etc.

From my understanding, currently EBRD is studying factoring services to grapple with the issue while World Bank is dealing with credit insurance companies for sharing trade risks. But all are still in the primitive stage.

We believe that ADB should be able to focus on how to develop a solution within its member countries to share credit information and to manage documentation flow of trade and payment records in order to reduce trade risk in the long run. With the cooperation of credit insurance companies and the modern cloud technology, it is not too difficult to generate an efficient mechanism of trade among members countries.

Hopefully,with the platform of TFP under ADB and its 200 association banks, barriers of trade in the region will be further mitigated.