Trade Finance Boost Could Add $55 Billion a Year to Vietnam’s Exports

DNHN - A report by the International Finance Corporation (IFC) and the World Trade Organisation (WTO) has found that increasing access to domestic trade finance could boost Vietnam’s imports and exports by $55 billion a year.

The workshop on Scaling Up Trade Finance in Vietnam was jointly held by IFC and WTO in Hanoi on February 22 to discuss opportunities to expand trade finance for Vietnamese businesses, helping domestic manufacturers and traders increase their international trade with better support from banks.

Only 21% of the total trade value is covered by trade finance

According to the newly-released report “Trade Finance in the Mekong Region” by IFC and WTO, improving access to affordable trade finance could increase Vietnam’s imports and exports by 6% and 9%, respectively. This translates into a potential increase in the total value of merchandise trade of over $55 billion per year.

Speaking at the workshop, Mr Thomas Jacobs, IFC country manager for Vietnam, Cambodia, and Laos, said that the study found that domestic trade finance in Vietnam is not only shallow but also expensive, fragmented, and limited to basic products.

In 2022, banks in Vietnam provided trade finance for only 21% of the country’s total import-export turnover of $731 billion. Notably, banks mostly support domestic companies engaged in regional trade rather than large multinationals engaged in global trade.

Many subsidiaries of multinationals in high-growth, high-value sectors such as electronics and garments rely less on trade finance intermediated by domestic banks.

“As domestic trade finance in Vietnam is currently focused on domestic producers, scaling up trade finance would not only enhance the competitiveness of Vietnamese exporters and importers, but more importantly, boost manufacturing, increase integration into global supply chains, and spread the benefits of trade more evenly among domestic producers,” said Jacobs.

Marc Auboin, a WTO expert, said that in developed countries, the rate of trade finance use is up to 60%, while in developing countries, including Vietnam, the financial support for this area is only about 20%. Domestic financial groups need to provide more support for domestic trade to develop more strongly.

According to import-export enterprises, high collateral requirements and complex appraisal procedures are among the main reasons why they do not seek support from banks. On the supply side, in 2022, Vietnamese banks rejected an average of 12% of trade finance applications – mostly from small and medium-sized enterprises (SMEs), equivalent to about $20.3 billion in unmet demand. The reasons for rejection were said to be a lack of collateral and high credit risk.

Improving financial transparency to attract funding

The Asian Development Bank (ADB) estimates that the gap between supply and demand for trade finance in emerging and developing economies is around $2.5 trillion. This gap is largest for micro, small, and medium-sized enterprises (MSMEs) and women-owned businesses, which are more likely to be denied trade finance than male-owned businesses. However, many viable trade transactions may also be denied financing.

The report recommends developing new instruments such as supply chain finance and innovative digital services to reduce costs and improve accessibility. To do this, it is necessary to improve the legal framework to address collateral requirements, digital transactions, central bank regulations, and accountability frameworks. The report also proposes raising awareness among SMEs and domestic suppliers about how to access trade finance.

Commenting on solutions to increase trade finance in Vietnam in the coming time, Mr Nguyen Quoc Hung, vice chairman and general secretary of the Vietnam Bank Association, said that banks do not discriminate between customers and all want to serve businesses to expand their customer base. However, the problem is that small and medium-sized enterprises in Vietnam still do not meet the requirements of banks, leading to high credit risk, and banks are hesitant to provide trade finance to these businesses.

Therefore, to improve this situation, businesses need to improve their ability to meet the conditions of banks and credit institutions by increasing transparency in financial reporting, and corporate governance, and creating trust for banks in lending activities.

In addition, the state also needs to soon complete the legal framework for trade finance activities. He expressed his hope that the new Law on Credit Institutions recently passed by the National Assembly will open up more opportunities, and he also expects the government and the State Bank of Vietnam to soon issue decrees and circulars guiding this law to create conditions for trade finance activities to develop strongly in the coming time.

Representing the banking business community, Mr Dinh Ngoc Dung, deputy director in charge of the Corporate Banking Division of SHB Bank, said that trade finance for the supply chain will benefit all parties, optimising the participation of parties in the purchase and sale of goods, and providing products and services.

However, the challenge of governance capacity and information transparency of enterprises is still limited, so this is a major challenge for banks in expanding trade finance activities. In addition, to expand this activity, banks will also have to invest a significant amount of money in digitalisation and technology, while it takes a long time to recover capital in supply chain finance.

However, the SHB Bank representative also expressed his hope: “Together with the efforts of IFC, businesses, and relevant parties, I believe that with the positive signs in the recent past, this supply chain financing activity will develop strongly in Vietnam in the coming time.”

Ha My