Legal gaps should be filled to boost trade finance in Vietnam: experts

Vietnam needs to fill legal gaps to ramp up trade finance that is vital to importers as well as exporters in expanding international trade, experts say.

There remains huge potential to boost trade finance in the country, with domestic banks supporting just 21% of the country's total merchandise trade of $731 billion in 2022; the funds representing 22% of the country’s total banking assets. These numbers are low compared to developed country levels of 60-80%, according to a study carried out by the International Finance Corporation (IFC) and the World Trade Organization (WTO).

High collateral requirements and onerous application processes are the main factors that dishearten importers and exporters from seeking local banks’ support.

Meanwhile, on the supply side, Vietnamese banks rejected an average of 12% of trade finance requests, mainly from small and medium enterprises, accounting for around $20.3 billion in unmet demand in 2022, mainly due to a lack of collateral and high credit risk, the study found.

Explaining the reasons for this, Nguyen Quoc Hung, vice chairman and general secretary of the Vietnam Banking Association, said at a panel discussion organized by the IFC in Hanoi Thursday that large businesses have wider access to trade finance thanks to their financial strength, credibility, stable business plans and a better ecosystem.

Meanwhile, small and medium enterprises (SMEs) find it harder to access trade finance due to weak transparency and governance. Furthermore, guarantees and the legal corridor for SMEs to get trade finance are more limited, Hung said.

The IFC-WTO study recommends developing instruments like supply chain finance and innovative digital offerings to reduce costs and improve access. This would, in turn, require stronger regulatory frameworks that address collateral requirements, digital transactions, central bank conditions and accountability frameworks.

Other measures include broadening the local customer base for trade finance and improving banks’ agility, risk management capacity and international relationships.

Nathalie Louat, director of the IFC’s Global Trade & Supply Chain department, called for increased participation of enterprises central to the supply chain in banks’ trade finance activities.

The IFC will work with the State Bank of Vietnam and relevant authorities to propose solutions for risk sharing in trade finance offered by banks, Louat said.

Tran Long, deputy general director of state-controlled BIDV, attributed limited trade finance for SMEs in Vietnam, based on invoices and contracts, to credit risk and a lack of transparency in financial statements.

Vietnam’s banking regulations stipulate that trade finance products, including document discounting and payment support, are managed like credit lines. This limits banks' ability to provide trade finance tools to enterprises, he said.

Long suggested that SMEs improve legal compliance and corporate governance to meet loan conditions.

He said there remains much work to be done to complete legal corridors for trade finance, including encouraging banks to provide more diverse credit products that are popular in developed countries.

On the banks’ side, Long recommended diversifying and introducing advanced trade finance products without credit rating requirements that are based on advanced methods such as cash flow and invoice financing. He also called on banks to enhance communication so that firms understand better the common trade finance products offered in the market

Other measures include coordinating with fintech and insurance companies to introduce technology and encourage multiple connections between businesses, customs authorities, shipping lines and banks to make trade finance activities more transparent and shorten transaction time.