Financial Supply Chain

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Forging New Links? A Research Review of Progress in the International Supply Chain Finance Market We are delighted to present an in-depth research review of progress in the international supply chain finance market, featuring expert analysis by Phillip Kerle, CEO of Demica.

Forging New Links?

A Research Review of Progress in the International Supply Chain Finance Market

by Phillip Kerle, Chief Executive Officer, Demica

As relationship business lending by banks continues to contract in many parts of the world, companies are looking for alternative financing tools. Particularly hard hit have been SMEs, even in rapid growth BRIC economies, who find it difficult to raise affordable credit. Larger corporations, sitting at the head of supply chains, while largely untouched by the credit squeeze, are concerned about volatility in their supply chains. They wish to avoid disruption resulting from financial difficulties amongst essential suppliers. As a result, recent years have witnessed a rise in the take-up of Supply Chain Finance (SCF) schemes, where larger corporations with access to more liquidity than they need seek to pass that benefit through to their smaller suppliers.

Demica has been tracking this market since 2010, researching emerging trends with the banking and corporate communities. This latest research report seeks broadly to scale current and predicted SCF market growth rates, the status of SCF alongside other trade finance products, along with opinion on obstacles and potential accelerant factors for this market to 2020.

Current growth rates

Surveyed respondents have all experienced growth in their SCF business in recent years, with international banks in particular reporting significant growth rates. On a conservative estimate, annual growth rate of SCF averages between 30% and 40% in the last two years for global banks. One respondent from a multinational bank reported an increase in the number of their SCF programmes, along with an annual growth rate of 50% in the last three years.

A similarly positive growth trend has been confirmed by another commentator whose financial institution has registered a 35% annual increase in SCF assets in the last two and a half years. Another banking professional from a global bank even reported a 100% annual growth rate in the previous three years. Banks in continental Europe are also seeing a heightened level of supplier finance activities with one Dutch banker describing the growth of SCF at his bank in recent years as exponential. In comparison to 2012, his institution has already witnessed a 60% to 70% increase in the number of programmes in the first four months of 2013. His German peer from another major bank also confirmed a positive double digit growth rate.

The glut of activities in the SCF market is equally observed by multinational banks in Asia. According to one bank respondent from Asia Pacific, the growth of SCF has accelerated in recent years - a claim supported by the 300% year-on-year revenues growth of SCF over the past 12 months at his bank. He attributed this significant increase to the bank’s renewed focus on supplier financing and reprioritisation of its customer base. Another commentator from a Japanese bank predicted a double digit growth rate for at least the next four or five years.

Figure 2

Even though the majority of the respondents have witnessed burgeoning growth of SCF, it must be noted that this rapid advancement needs to be seen in conjunction with the relatively early stage of development of SCF as a widespread and standard banking product. In some markets, SCF has just started to take root, as highlighted by a Swedish banker who said significant growth has only begun to take place in his domestic market over the last couple of years. Encouraged by the swelling ranks of institutions offering supplier financing to corporate customers, one Irish banker noted his bank has only recently made a foray into the SCF market. In Africa, SCF is still in its infancy, noted a financier in the region. According to him, a few international banks are marketing SCF in South Africa, but their scope of activities is rather limited, which is why his bank is currently developing the product for the African market.

Even though virtually all interviewed respondents whose banks are active in the SCF arena have seen growth, the magnitude of growth experienced by our qualitative sample of domestically focused banks is much lower. One commentator from a regional German bank indicated a growth of close to 5% in recent years. Another financier from a regional bank active in North America reported a tremendous increase in demand for SCF solutions after the credit crunch. However, as the bank could not grow as fast as the rising demand, its overall growth rate was only around 6%.

According to respondent opinion, growth of SCF is the most prominent in the US, followed by Europe, in particular the UK and Germany. Other European countries highlighted include Italy, France, the Netherlands, Ireland and Denmark. An increased level of activities in central Europe including Poland, the Czech Republic and Croatia is also reported, with Eastern Europe considered to have huge growth potential.

In Asia, strong growth momentum is witnessed in India and China, but also Malaysia and the Philippines. Highest growth of SCF in industry sectors is said to originate from retail, manufacturing (especially heavy industry), consumer goods, automotive, agriculture as well as chemicals and pharmaceuticals. The energy sector, as observed by one respondent, is also beginning to make increasing use of SCF.

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