This report aims to quantify the potential impact of legal reform to enable the use of the so-called “transferable records” on Commonwealth trade. “Transferable records” are paper-based documents or instruments used in domestic or international trade and trade finance such as bills of lading, bills of exchange, promissory notes, warehouse receipts, guarantees and standby letters of credit. Since the beginnings of trade between individuals, companies and nations, these records have been manual; there are an estimated 4 billion paper-based documents that are being processed at any one point in time around the world according to the International Chamber of Commerce (ICC).
The Model Law on Electronic Transferrable Records (MLETR) aims to enable “the legal use of transferable records both domestically and across borders”.3 It is the United Nations Commission on International Trade (UNCITRAL)’s legal framework for enabling digital transferable records in law across the UN membership. The goal is to facilitate trade speeding up processing and transmission times, making them more secure, automated and usable in multiple settings.
Clearly, anything that makes the process of processing documents more quickly is to be welcomed. Estimates vary on how long it takes to process manual documents, but, according to the Boston Consulting Group (BCG), 60 per cent of businesses and 61 per cent of banks see paper documentation as a major pain point in trade finance.4 Similarly, the ICC UK survey of 55 international banks suggested that processing documents took on average per trade finance deal around 19 days, or just under 4 weeks, but that trade finance solutions, such as receivables finance, letters of credit and working capital solutions, take more than 4 weeks to process.
More than this, a quick calculation serves to point out the importance of this market in total trade terms: if globally there are 4 billion transactions on average per year,6 if global trade was worth around US$21.6 billion in 2019 and if there are an average of 15 documents per transaction,7 then on average in 2019 the cost per transaction could be estimated at around US$81,000. The consequence is that any transaction worth less than that value makes a loss for bank. As many exporters are smaller, especially across emerging markets and in Island economies, this very simple estimation shows why they are excluded from trade finance.
So the imperative for change is apparent generally and not just across the Commonwealth. Quite without the impact of the Covid pandemic and the need to accelerate the recovery from it, there would have been a business case. Technology is moving quickly and, as will be illustrated in this report, there is evidence that the appetite for digital and technology- based solutions in the public discourse is there. The challenge now is to harness this momentum with a political will to implement legal reform.
Aims & Objectives
The purpose of this report is to undertake a quantitative analysis of adopting paperless trade documentation to national and regional economies across the Commonwealth, focusing on Less Developed Countries (LDCs) and Small Island Developing States (SIDS) in Africa, Asia, the Caribbean and the Pacific Islands. For this reason, the “larger” and/or more developed trading economies such as the UK, Australia, New Zealand, Singapore, Canada and South Africa have been treated separately in charts and not analysed in detail.
The specific objectives of the research have been to:
- provide an overview of the current challenges facing Commonwealth nations in implementing paperless trade by means of qualitative desk research, discourse analysis and semi-structured in-depth interviews;
- assess the current state of trade across the Commonwealth and prospects for growth post-pandemic with a specific focus on less developed economies and island economies in Africa, Asia, the Caribbean and the Pacific;
- understand the specific costs that exporters face by means of interpolation from published data on the costs of exporting from the World Bank’s Ease of Doing Business Survey10 focused specifically on the costs of exporting;
- assess how those costs can be reduced through implementation of paperless trade and broader digitisation processes – for example, at borders through Single Windows and in payments and trade finance through MLETR alignment – using the estimations from documentary research meta-analysis, discourse analysis and estimates from interviews of potential cost reductions as a result of streamlined processes;
- assess the impact on trade of (a) the reduction in costs for businesses, (b) the reduction in costs for banks and (c) the increase in revenues for businesses and (d) the increase in revenues for banks from new market creation. These estimates are derived similarly from the ICC survey of 55 international banks based in London and the documentary, discourse and interview research conducted above. They provide the coefficients for trade growth, which are applied to the trade forecasting methodology described in the Appendix.
The research sought to answer four questions:
- Are there any barriers to the implementation of paperless trade across the Commonwealth nations?
- What are the current biggest challenges facing Commonwealth nations in trade terms?
- What are the costs faced by Commonwealth LDCs and SIDS currently?
- How can these costs be reduced across Commonwealth nations?
- How can these costs be reduced across Commonwealth nations?
The approach taken in this research seeks to address a number of methodological challenges inherent to quantifying what is intrinsically unknowable prior to implementation. These are:
- lack of direct data on the size of the digital trade finance market anywhere, still less the Commonwealth LDCs and SIDS;
- Bill of Lading data is limited to goods data and therefore not giving a full picture of Commonwealth international businesses;
- little or no quantitative research into the role of digitisation in enabling SME trade finance growth or trade growth therefore limited scope for deriving an appropriate methodology from the literature.
Background: MLETR terminology as used in this research
MLETR is the Model Law to enable Electronic Transferable Records in trade: that is, a legal framework provided by the UNCITRAL which has been adopted by the International Chamber of Commerce (ICC) Digital Standards Initiative (DSI) to provide the support to governments and businesses to speed up the process of digital trade adoption.
This is the process of moving from paper-based trade documentation to electronic trade documentation. Technology exists to replace paper, through the use of digital technologies such as blockchain or cloud-based solutions, includingmachine learning and artificial intelligence. It is seen as having four primary advantages:
- Increasing access to finance: either through bank-based or through Fintech-based solutions it enables trade finance “assets” (financial documents such as Bills of Lading, Bills of Exchange or Promissory Notes) to be made available or “distributed” across banks, institutional investors or non-bank trade finance providers (such as invoice finance or supply chain finance providers).
- Reducing costs: Digital documentation simply speeds up the processing time. If everything is manual, then estimates by the ICC, and highlighted above, suggest that it can take more than 4 weeks to process the documentation before awarding finance to a particular transaction or project. This is a burden for the SME and for the trade finance provider.
- Reducing the risk of fraud: the main sources of fraud in current systems is multiple uses of one document for financing purposes, the lack of transparency in the trade system, which means that documents can potentially be used for financial or insurance purposes that are not genuine or not the original, and the misallocation of product codes to avoid taxation or identification as a dual-use good.
- Creating global standards: there are currently no common standards in global trade outside of Customs and Excise frameworks, dual-use goods and prohibited trade, and increasingly sustainable financial disclosures (SFD). The process of digitisation has not only the capacity to accelerate the process of standardisation in global trade but is also a pre-requisite of the digitisation process itself in order to avoid further complexity.
Average pre-border and border costs for Commonwealth countries (2019)
This report was prepared under the overall guidance of Paulo Kautoke, Senior Director, Trade, Ocean and Natural Resources, Commonwealth Secretariat.
The project was led by Kirk Haywood, Head, Commonwealth Connectivity Agenda Section, and Niels Strazdins, Trade Specialist, Commonwealth Connectivity Agenda Section. It was drafted by Rebecca Harding, CEO of Coriolis Technologies.