ISLAMABAD: A new survey on banks and companies carried out by the Asian Development Bank (ADB) reveals that 80 per cent of banks have cited the anti-money laundering and ‘know your client’ requirements as continuing the top impediment in banking operation.

The impediment refers to the regulatory requirements banks need to put in place to counter money laundering, terrorism finance, and to ensure that sanctioned parties and markets are not supported, says the survey released on Wednesday.

The role of banks has shifted in recent years from the need to identify and report to a more active role of avoidance and prevention, survey notes. Unlike traditional risk indicators, the channels through which anti-money laundering and ‘know your client’ requirements affect access to trade finance are less obvious.

Subsequent questions suggest that this impediment is not always directly related to a client or country engaging in illegal activities, but rather the cost of conducting due diligence on transactions against the revenue to be gained, especially for transactions supporting SMEs based in markets where limited infrastructure, lack of trusted data and constraints linked to information and communication technology make the conduct of such investigations expensive and risky.

Banks highlighted the rising costs and complexity in complying with regulatory requirements to prevent financial crimes, including money laundering and terrorism finance, as a top impediment to trade finance, partly due to the lack of clarity on their implementation.

The study found that small and medium-sized enterprises (SMEs) were consistently underserved by financial institutions and faced the highest rejection rates for trade finance.

Companies noted that higher prices for trade finance accelerated in the second half of 2014. With compliance measures expected to tighten further, the study notes that this will put more pressure on economies already experiencing gaps in access to financing, with SMEs particularly affected, it says.

Banks report that the reasons that gaps in trade finance persist are tied largely to risk appetite. Of the top five impediments to trade finance, three were directly related to high risk — low country credit ratings, bank’s low credit rating and low company credit ratings.

Stating that the global trade finance gap stands at $1.4 trillion, $693bn of which is in developing Asia, the study observed gaps have become more concerted while availability of trade finance has improved.

Published in Dawn, November 5th, 2015

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