A powerful catalyst for transaction banking

9 December 2013

There is a significant opportunity to develop transaction banking in Russia and the CEE region, and trade finance is one of the key areas ripe for progress. Future Banking speaks to Rudolf Putz, deputy director of the European Bank for Reconstruction and Development, about how it builds trade finance capability as a solid first rung on a ladder that leads to a broader range of services.

The European Bank for Reconstruction and Development (EBRD) has proven to be an invaluable partner for local banks in developing economies by bringing its expertise, experience and industry connections to bear on the development of new markets and services. As it targets transaction banking in Russia and the CIS region, it is working to equip smaller banks with the necessary skills to develop lucrative new lines of business.

In building transaction banking capability among local partner banks in such markets, the EBRD often focuses first on trade finance, in which Rudolf Putz, deputy director of the EBRD's Financial Institutions division, has specialist knowledge and which he believes is a vital step on the journey towards building other areas of business, including SME lending.

"One key area in transaction banking is trade finance, and we are trying to help CEE banks develop that capability," says Putz. "We are training them to build services around their clients' requirements, so the first step is to understand what those clients need. EBRD offers technical assistance after due diligence has been done, then we pay consultants out of development funds to help banks build out services.

"Consultants will spend months with our client banks to help find customers and develop a marketing programme for their services. They will help to build knowledge and skills around customers' needs, as well as helping banks get access to foreign funders. Trade finance is an important area, but we also work on areas like SME lending and investment in energy-efficient technologies."

Extending the range of services

The need to develop trade finance in the CEE region, particularly in smaller and less developed economies in the CIS and to some extent in southern Europe, stems from the fact that these countries did not previously benefit as much from foreign trade as their larger neighbours.

"In the states that were formerly part of the Soviet Union, for instance, everything was done by state-owned banks, so now there is a need to extend the range of services in the capital cities and also in the provinces," says Putz. "We need regional banks doing trade finance.

"Customs duties are lower than in the past in Eastern Europe, and the traditional barriers to trade are coming down. We are working in countries with big trade flows, like Russia, Ukraine and Kazakhstan, which export many commodities and import a lot of equipment. There is often a lot of exporting of heaving industry and natural resources, but everything else must be imported. We hope to encourage the export of more value-added goods."

Building a knowledge base

To build trade finance capability from scratch is not a simple task. The EBRD faces many challenges along the way, though it can draw on extensive experience gained in other markets and the knowledge held within the international banks it hopes will eventually partner with the local banks in Russia and the CIS.

On the one hand, the challenge is to bring the necessary expertise in trade finance to build the required skills, while on the other hand, it is to open up lines of funding for smaller local banks.

"In less advanced economies, there is a lack of knowledge about trade finance," explains Putz. "In bigger economies like Ukraine, which has a lot of knowledge in this area, the problem is a lack of funds. International banks are cautious about taking on the risk in such markets. In fact, many international banks have been leaving Ukraine because they are concerned about the future of the economy there, and they are also cutting back on lending abroad because of new capital requirements that make them focus their lending on their domestic markets.

"To increase the appeal of these markets to international banks, there must be critical mass. We need bigger banks with a trade finance customer base. In Russia, for example, foreign banks are keeping their lines open for state-owned banks, but there are fewer trade finance facilities for the smaller banks. So, EBRD focuses on smaller and mid-sized banks in order to build them up and create regular flows of trade finance."

Retaining skilled staff

Although the size of the task may be great, Putz believes it is possible to build successful trade finance business at a smaller bank in only one or two years. As the knowledge base grows, however, another sticky problem emerges in that maintaining the momentum of this process of growth requires that the skills remain in the local partner banks.

"To increase the appeal of these markets to international banks, there must be critical mass. We need bigger banks with a trade finance customer base."

"The biggest challenge is for these banks to retain the trained staff, who may be tempted to leave for bigger banks after they have been trained by EBRD," he remarks. "They may go to subsidiaries of foreign banks or to state-owned banks, which are bigger and can therefore pay more. So there must be a constant flow of knowledge-building activities."

As well as playing a vital role in building skills among partner banks, EBRD works hard to ensure that it raises standards. In a climate where international banks have a keen sensitivity to risk, particularly when it comes to investing in economies in which many parts of the banking sector are less than mature, it is essential to ensure that local banks operate to international standards.

For this reason, EBRD has a thorough and detailed process that governs the choice of partner banks in every jurisdiction.

"In each country, EBRD selects a limited number of partner banks, which have to meet strict selection criteria," notes Putz. "They must want to develop trade finance and show willingness to lend to the real economy, for example. We also look at the reputation of managers because governance is important. We emphasise reporting requirements, transparency and the sharing of information.

"Once a relationship is established, we encourage foreign correspondent banks to look at these local banks. EBRD acts as a bridge. Often it is the first institution to establish lines with banks in these jurisdictions, and we help our partner banks network with international banks. We bring knowledge of trade finance and of local jurisdictions, we analyse and monitor partner banks."

EBRD success stories

The EBRD's model of providing technical assistance and holding local partner banks up to international standards has worked well. Local banks that perform well get access to more funding, which creates a virtuous circle of performance and growth.

"Our experience has been positive," observes Putz. "Through our training and technical assistance in trade finance, some partner banks have already achieved the same level of performance as international correspondent banks."

The list of success stories is extensive, but in the CIS region and Russia, there are some examples that prove the value of focusing first on trade finance and then building out into other key lines of business.

"The EBRD’s model of providing technical assistance and holding local partner banks up to international standards has worked well."

Among the local banks that EBRD has helped develop to the point where they receive investment from international banks, Ukraine's Bank Aval is a prime example. With the assistance of EBRD, the bank rapidly became a leader in Ukraine's trade finance market and, in 2005, was acquired by Austria's Raiffeisen Bank. Since then, Raiffeisen Bank Aval has become one of the leading banks on the local market across a range of services. At the end of 2012, the bank had over three million customers and 825 branches in Ukraine, while its loans to customers amounted to €3.72 billion and customer deposits to €2.65 billion.

With investment and technical assistance from EBRD, Russia's third-largest locally owned private bank, Promsvyazbank, has also become a leader in trade finance, and the same can be said of the Bank of Georgia.

In Kazakhstan, EBRD is providing essential support for the trade finance capability of VTB Bank (Kazakhstan), a subsidiary of Bank VTB of Russia, through trade finance guarantee facilities that it hopes will underpin transactions with longer maturities. It has provided similar support to Sberbank Kazakhstan, also a subsidiary of a Russian bank. Indeed, it is the first foreign subsidiary of Sberbank to join the EBRD's Trade Facilitation Programme (TFP) as an issuing bank.

It is clear from such examples that trade finance plays a central role in fostering transaction banking in developing economies, and that EBRD is often the catalyst that brings the process to a successful conclusion.

Moscow International Business Centre, Russia.
Rudolf Putz is head of EBRD’s Trade Facilitation Programme.