The Asian Development Bank (ADB) has highlighted the negative impacts of the reliance on letters of credit (L/Cs) by small- and medium-sized enterprises (SMEs) in the region.

The ADB's annual Trade Finance Gaps, Growth and Jobs survey asked firms to detail their experiences with trade finance.

Rejection rate

The survey found that SMEs expect more than half (52 per cent) of their proposals to finance trade transactions to be rejected by banks.

This high percentage of rejections is of particular concern considering 76 per cent of all L/Cs worldwide originate in the region.

Negative impacts

The regional reliance on L/Cs impacts on SMEs in two ways according to ADB.

First, as the highest-risk segment of businesses in any country, the ADB concludes that SMEs will continue to be dependent on L/Cs, which rank as one of the most expensive of transaction types.

Second, the ADB says that access is unlikely to expand without intervention as banks report rising regulatory costs related to know-your-customer procedures for new clients and due diligence on correspondent banks. Moreover, 93 per cent of banks expect regulatory requirements to increase.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.