AS the World Trade Organisation (WTO) reaffirmed commitment to its Aid for Trade initiative at its 2017 Global Review in Geneva this month, the outlook for global trade over the next two years is indeed mixed.
WTO is forecasting that global trade will expand by 2.4 per cent this year and between 2.1 to four per cent next year, reflecting the continued uncertainty and risks associated with a stuttering global economy underpinned by low commodity prices, albeit slightly improving this year, which in turn has had a dampening effect on trade finance.
Trade and SMEs (small- and medium-sized enterprises) are regarded as the backbone of any self-respecting economy. Trade is a significant determinant and function of sustainable development. Not surprisingly, the theme of WTO’s Geneva gathering was “Promoting Trade, Inclusiveness and Connectivity for Sustainable Development”.
According to WTO director-general Roberto Azevêdo, the world trade body disbursed US$300 billion (RM1.28 trillion) in Aid for Trade support to developing countries in Africa and Asia since 2006.
Trade, he maintained, “has the potential to strengthen global growth if the movement of goods and supply of services across borders remains largely unfettered. However, if policymakers attempt to address job losses at home with severe restrictions on imports, trade cannot help boost growth and may even constitute a drag on the recovery”.
Trade in itself is not a panacea to a country’s economy, but if structured properly in terms of enabling legal, regulatory, financing and settlement architecture and capturing digital and e-commerce opportunities, then it can unleash tremendous possibilities for the real economy, GDP growth and poverty alleviation.
Connectivity remains a fundamental challenge, as we were recently so rudely reminded by United States President Donald Trump, when he unceremoniously dumped the US out of the Trans-Pacific Partnership (TPP) trade deal.
But, consider also the 57-member Organisation for Islamic Conference (OIC). Its total trade last year amounted to a staggering US$3,062.4 billion, comprising US$1,414.3 billion in exports and US$1,648.1 billion in imports. Yet, intra-OIC trade — that is the trade connectivity of Muslim countries — amounted to a mere 19.3 per cent.
The Islamic Development Bank (IDB) has set a target to increase this figure to 25 per cent by 2025, but in the light of the WTO forecast for world trade, this may prove to be challenging.
Indeed, the IDB this month signed a US$2 billion agreement with the African Development Bank to boost funding of trade and development of the 21 member countries common to both over the next five years, and its trade fund, the International Islamic Trade Finance Corporation signed a partnership agreement with the International Finance Corporation, the private sector funding arm of the World Bank Group, to boost trade cooperation in line with the UN’s Sustainable Development Goals.
In Malaysia, which has a well-established export/import trading culture, Bank Negara Malaysia (BNM) Governor Muhammed Ibrahim in its latest Financial Stability Report stressed that “there is significant growth potential for trade finance facilitation to support the multi-billion dollar halal export industry which can be seen through the increasing participation of SMEs in the halal economy, initiated by the government, to meet the strong demand for halal products and services globally”. Currently, it represents only 3.4 per cent of total trade, and less than a third of overall trade finance from the banking system.
He wants Malaysia’s Islamic finance industry to boost trade finance to increase largely untapped business opportunities using technological capture. BNM is keen for Syariah-compliant trade financing to support 10 per cent of total trade in the next three years and is currently consulting the industry on a broad range of trade finance and connectivity initiatives, including the integration and digitalisation of trade finance, e-commerce, and enhancing the availability of trade credit takaful as a risk mitigant.
Malaysia’s Islamic finance industry has assets under management totalling RM742 billion last year, and is regarded as the most advanced in the world in its architecture and diversity in terms of products and services. BNM wants the industry to leverage this pole position and to account for 40 per cent of total financing in Malaysia by 2020.
In Turkey, participation (Islamic) banks such as Kuveyt Turk and Albaraka Turk Participation Banks, have traditionally directed financing towards trade and SME finance, which comprise over 40 per cent of their balance sheet, allowing them to innovate products such as the Barakat Card for small farmers thus facilitating e-commerce and trade finance.
Turkey, like Malaysia, also has a robust Credit Information Bureau at the Turkish Central Bank, which has a regularly updated database of SMEs and medium-sized exporters complete with credit history thus further mitigating risks.
Turkish Islamic banks regularly raise funds through Murabaha syndications, often in multi-currency tranches reflecting the diversity of Turkish trade composition, to finance SMEs, trade and leasing. More recently, they have also raised funds through international and local currency sukuk issuances to finance their balance sheet activities include trade finance of clients. The Turkish Export Import Bank, the state-owned export credit agency, which has a capital of over US$1 billion, too provides vital guarantees and other support to Turkish exporters.
Only a few decades ago in the 1980s, it was Malaysia who pioneered the Bilateral Payments Arrangement (BPA) whereby it settled its country-to-country trade and other accounts at the respective central banks through designated local bank consortia on either side, thus, bypassing expensive correspondent banking through London, Frankfurt and New York. The BPA had an Islamic Iran Model and a conventional Chile Model, named after the two countries the arrangement was first signed with.
I remember Tan Sri Nor Mohamed Yakcop, then adviser to then BNM Governor Tan Sri
Jaffar Hussein, scuttling between bunkers to negotiate the BPA with Iranian counterparts in the heat of the Iran-Iraq War. A similar attempt to introduce a Multilateral Payments Arrangement had the International Monetary Fund up in arms threatening Malaysia with a breach of terms of membership. The rest is history!
Mushtak Parker is an independent London-based economist and writer.