Funding for Trade

This chapter highlights the growing concern over the lack of capital available from the world’s banks to support more trade and looks at some of the reactions taking place. With a specific focus on some of the options emerging for better SME funding, it looks at how new initiatives may place an increasing role in the next decade, especially in emerging markets.

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With world trade increasing six times in the last 25 years and looking set to reach $85 trillion by 2025, conventional methods of payment and the currencies in which deals are done could weaken or largely disappear.

While the total sum of all the money in the world is $69 trillion, only around one tenth is held in cash, with the vast majority of transactions taking place using electronic data, says the Future of Trade Report.

The advantages of digital money are that it is cheaper than cash, more easily traceable and less vulnerable to corruption. It can also be used in countries where the banking sector is less developed.

Using phone networks and secure payment schemes has led to the growth of services like Vodaphone’s M-Pesa which now has nearly 20 million users worldwide.

It may be too soon, though, to speak of the end of cash, which remains portable, widely accepted, reliable - and untraceable.

What currencies will dominate in the future is another question. Even if the dollar loses its prominence, experts believe companies and individuals may pick from a basket of currencies depending on what suits their needs at the time.

Banks will still play a pivotal role in trade, even if small business owners, in particular, remain wary after experiencing difficulties with borrowing during the last financial crisis.

The importance of SMEs - they represent around 99 per cent of all non-financial companies in Europe - means they will drive alternatives to banks when it comes to raising money, including peer to peer networks and crowd funding.

Banks also face the challenge of digital currencies, with some countries, like Denmark, already moving to a cashless society while companies like Amazon and Google developing their own financial services.

Funding major infrastructure projects remains heavily dependent on China, which has an estimated $4 trillion in sovereign wealth funds. Chinese growth may slow, but its importance as an investor will not diminish.

Beijing is using its wealth to fund trade initiatives like the One Road, One Belt project which seeks to add $2.5 trillion to economies along its route. Containers from China can now travel to Germany in just 14 days, compared with 60 by sea.

This all points to a new phase of globalisation and new models for payment, funding and even both regional and international trade.

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For the last 12 months DMCC, the authority on trade, enterprise and commodities in Dubai, has teamed up with FutureAgenda on an odyssey to discover the future of global trade. We gathered industry leaders, academics and experts in five key cities to discuss how global trade will change in the next decade and how it will drive the global economy into the next phase of growth.

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Funding of Trade – Gary Dugan

Digital Cash is Harder to Burn

There are multiple benefits to digital money not least that it is cheaper than cash to handle which by most estimates, costs society as much as 1.5% of GDP; it has low administration costs, reduced security costs and is traceable thus reducing the risk of loss of funds from corruption (e.g. according to a recent McKinsey report, it is estimated that 75-80 percent of the $22 billion in benefits of shifting India’s government payments to electronic would come from reducing leakage of funds in government transfer schemes ending up in the wrong hands).

Widespread adoption of digital money and connectivity has significantly increased the amount of trade taking place in emerging economies. Small businesses have benefited from the growth of mobile and fixed line networks underpinned by maturing technology standards and protocols such as credit and debit card payment schemes. Increased connectivity is also at the core of efforts to increase financial inclusion through digital money, where a lack of bank and cash infrastructure and ability of individuals to authenticate their credentials is traditionally cited as an underlying challenge. Vodafone’s M-Pesa solution, first launched in partnership with Safaricom in Kenya demonstrates how connectivity can assist in leapfrogging traditional cash based infrastructure and create an environment where businesses can flourish. Launched in 2007 there are now 19.9 million active users of M-Pesa worldwide.

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Alternatives Unblocking the Finance Chain

At the same time, as money is changing in order for wider trade to flourish, there is a growing need for new forms of social interaction and ability to communicate across cultures. This may well emerge first around new, high growth trading routes. Many are looking for new mediums of exchange: As such some believe that, rather than the dependence on the USD, we may see growth in alternative currencies and money networks, and the first state issued fiat digital currency’s. Momentum behind the former is already clear with 9 major global banks already signed up to the Open Ledger Partnership (Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, JPMorgan, State Street, Royal Bank of Scotland, and UBS), a partnership to draw up industry standards and protocols for using the block-chain in banking, initiated by R3 and overseen by the not-for-profit Linux Foundation. Few expect much clarity on which will be the dominant currency any time soon as companies, like individuals, will increasingly choose to use a basket of different options for trading dependent on their needs. While government backed official currencies will certainly still have a place, the rise of digital systems based on Block-chain platforms are seen to have an alternative set of benefits. As de-dollarisation takes place, we will likely see the emergence of a host of new trading currencies but there will inevitably be concern about viable alternatives. The digital, open source, IP sharing economy plays by different rules and agreements. As such, new trading options can quickly be designed, trialed, improved and scaled without the need for regulation.

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The banking industry faces many challenges over the next decade in order to serve the needs of this fantastic growth ahead of us in terms of global trade. Unfortunately we start on a bad note that the world financial crisis has really crimped the scale of the banking industry.

Gary Dugan
CIO
Emirates NBD

Key Facts

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500%
IMF data shows trade grew six-fold from 1980 to 2015 while GDP doubled

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$22bn
The value of benefits from shifting India's state payments to electronic

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99%
Proportion of all non-financial companies that are small or medium sized

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$6bn
The rapidly growing value of the alternative funding market in the United Kingdom

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Corporate debt in emerging markets has increased five-fold in the decade to 2014

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The value of Chinese investment overseas at its peak in 2013

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Our Partners for Future of Trade

Download the Whitepaper

For the last 12 months DMCC, the authority on trade, enterprise and commodities in Dubai, has teamed up with FutureAgenda on an odyssey to discover the future of global trade. We gathered industry leaders, academics and experts in five key cities to discuss how global trade will change in the next decade and how it will drive the global economy into the next phase of growth.

Download pdf

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